PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT ATTORNEY-CLIENT COMMUNICATION
CALDERWOOD & HARKNESS LLP Internal Memorandum
TO: Douglas Fairchild, Responsible Partner, Real Estate — Calderwood & Harkness LLP Priya Dasgupta, Chief Financial Officer — Ironhaven Data Centers LLC
CC: Marcus Thorne, Chief Executive Officer — Ironhaven Data Centers LLC Cynthia Ho, Lead Associate, Real Estate — Calderwood & Harkness LLP Robert Fielding, CPA, Engagement Partner — Fielding & Associates, CPAs
FROM: Sylvia Hartwell, Specialist Partner, Tax — Calderwood & Harkness LLP
DATE: September __, 2025
RE: Cost Segregation Study — Scope and Timing Recommendation for Stonebridge Data Center Campus
MATTER NO.: 1043-00002
CLIENT: Ironhaven Data Centers LLC ("IHDC")
PROJECT: Stonebridge Data Center Campus, Loudoun County, Virginia
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I. Executive Summary
This memorandum recommends that Ironhaven Data Centers LLC ("IHDC") commission a comprehensive cost segregation study for the Stonebridge Data Center Campus (the "Campus" or "Project") upon or shortly after construction commencement. The Notice to Proceed ("NTP") target date under the Engineering, Procurement, and Construction ("EPC") Agreement with Titan-McAllister Construction Group, LLC is currently November 1, 2025. A cost segregation study initiated contemporaneously with construction commencement will produce the most robust, defensible analysis and will position IHDC and its equity sponsor, Ridgeline Capital Partners Fund IV, LP ("Ridgeline Fund IV"), to realize substantial present-value tax benefits in connection with the depreciation of the Campus.
The proposed study will analyze the Project's $600,000,000 total project budget, with particular focus on the EPC hard costs subject to the Guaranteed Maximum Price ("GMP") of $412,000,000, the power infrastructure costs of approximately $61,000,000, and applicable portions of the $14,200,000 in site work, entitlement, and soft costs. The study's objective is to identify building components and site improvements that are eligible for accelerated depreciation under recovery periods shorter than the default 39-year nonresidential real property classification prescribed by Section 168(c) of the Internal Revenue Code.
Based on industry benchmarks for mission-critical data center facilities and the specific scope and configuration of the Stonebridge Campus, we estimate that approximately $45,000,000 of costs currently classified under the default 39-year recovery period can be reclassified to 5-year, 7-year, and 15-year depreciable property categories. This reclassification would generate significant acceleration of depreciation deductions, including eligibility for 40% bonus depreciation under Section 168(k) for property placed in service in calendar year 2027. The resulting accelerated deductions flow through the pass-through entity structure — from Stonebridge Campus Holdings LLC through IHDC and RCP Digital Holdings LLC to Ridgeline Fund IV and ultimately to its limited partners — producing meaningful present-value tax savings that substantially exceed the anticipated cost of the study itself.
Effective coordination with Fielding & Associates, CPAs — the firm responsible for tax compliance and audit services for IHDC, with Robert Fielding serving as engagement partner — will be essential to ensure seamless implementation of the study's findings in the partnership tax returns for Stonebridge Campus Holdings LLC and the downstream pass-through entities. This memorandum sets forth the background, scope, estimated benefit, timing, and recommended next steps for the engagement.
II. Project Background
A. Project Overview
The Stonebridge Data Center Campus is a ground-up development of a 96-megawatt ("MW") critical IT load data center campus to be constructed across approximately 81.4 acres situated at the intersection of Belmont Ridge Road and Stonebridge Boulevard in unincorporated Loudoun County, Virginia 20148. The site comprises two contiguous parcels: the 62.0-acre Stonebridge Parcel and the 19.4-acre Meridian Parcel. Loudoun County remains one of the most active and densely concentrated data center markets in the world, and the Stonebridge Campus is positioned to serve hyperscale and enterprise colocation demand in the Northern Virginia corridor.
The total project budget is $600,000,000. The Campus will consist of the following principal components:
• Four data center buildings (designated Buildings A through D), each approximately 120,000 square feet of shell and core space, designed to support 24 MW of critical IT load per building. The aggregate gross floor area across the four buildings will be approximately 480,000 square feet, with a combined critical IT capacity of 96 MW.
• Central utility plant ("CUP") serving the campus-wide chilled water and mechanical infrastructure requirements, designed for modular expansion aligned with the phased delivery of Buildings A through D.
• Site civil work, including mass grading, stormwater management facilities, paving, curbing, sidewalks, landscaping, perimeter fencing, and site lighting.
• Structured parking facilities to accommodate campus operational staff, tenant personnel, and visitor requirements in accordance with Loudoun County zoning and proffer conditions.
• Dedicated 230kV/34.5kV electrical substation to be constructed on the Meridian Parcel. The substation will be owned and operated by Vantage Power Cooperative ("VPC") upon completion of construction, with IHDC contributing to certain line extension and interconnection costs.
• 2N diesel generator backup configuration for each of the four buildings, providing fully redundant standby power in accordance with the Harborview Corporation Tier III design standards targeted for the Campus.
The Campus has been designed to achieve a Power Usage Effectiveness ("PUE") target of 1.30 or better at full build-out, reflecting the efficiency of the chilled water cooling architecture and the electrical distribution topology. The buildings are designed as multi-tenant wholesale colocation facilities, with each building capable of supporting two to four tenants depending on power density and space requirements.
B. Budget Breakdown Relevant to Cost Segregation
An understanding of the Project's budget composition is essential to defining the scope of the cost segregation study. The following summarizes the principal budget categories and their relevance to the analysis:
Land Acquisition — $77,900,000. This amount reflects the purchase price for the two parcels comprising the Campus site: $58,500,000 for the Stonebridge Parcel and $19,400,000 for the Meridian Parcel. Land is not depreciable property under the Internal Revenue Code and is excluded from the cost segregation study. However, certain land improvements (as distinguished from the land itself) are depreciable over 15 years and will be captured in the study to the extent they are included in other budget line items.
Entitlements, Proffers & Soft Costs — $14,200,000. This line item encompasses a range of expenditures, including estimated proffer payments to Loudoun County of approximately $2,400,000, consulting fees, legal fees, architectural and engineering design fees, permit and inspection fees, and other pre-development and development-period costs. Portions of these costs are depreciable and may be allocated to the construction basis of the buildings, the central utility plant, the site improvements, or other depreciable assets. The proffer payments, however, are likely non-depreciable, as they represent the cost of obtaining governmental approvals rather than the cost of constructing or improving depreciable property. The cost segregation study will analyze the depreciable portion of these soft costs.
EPC Hard Costs (GMP) — $412,000,000. This is the primary focus of the cost segregation study. The GMP under the EPC Agreement with Titan-McAllister Construction Group, LLC covers the construction of all four data center buildings, the central utility plant, site civil work, and structured parking. The per-building GMP allocation is approximately $103,000,000 per building. On a per-square-foot basis (GMP only), this equates to approximately $858.33 per square foot. On a per-MW basis, the GMP cost is approximately $4,291,667 per MW of critical IT load. These metrics are consistent with market benchmarks for Tier III data center construction in the Northern Virginia market, reflecting the high-quality mechanical and electrical infrastructure required for mission-critical facilities. The GMP encompasses structural components (which default to 39-year recovery), as well as a significant quantity of specialized mechanical and electrical systems, raised flooring, fire suppression systems, and other components that are strong candidates for reclassification to shorter recovery periods.
Power Infrastructure — $61,000,000. This category includes IHDC's line extension contribution of $18,500,000 to VPC for the construction of the dedicated 230kV/34.5kV substation and associated transmission infrastructure on the Meridian Parcel, as well as switchgear, internal electrical distribution equipment, bus duct systems, and power distribution units ("PDUs"). The cost segregation study will analyze the portions of this budget that are allocable to personal property (Section 1245 property) or land improvements (15-year recovery period). A threshold question exists regarding the depreciability of the $18,500,000 line extension contribution: because the substation and associated transmission infrastructure will be owned by VPC rather than by IHDC or Stonebridge Campus Holdings LLC upon completion, these costs may not give rise to depreciable basis for IHDC. This issue requires separate analysis and is flagged in Section IV.A below.
Contingency & Reserves — $34,900,000. This amount has been budgeted to cover cost overruns, change orders, and unforeseen conditions. As contingency funds are drawn and applied to specific construction activities, the resulting expenditures will be allocated to the appropriate depreciable category (building, personal property, or land improvement) in accordance with their nature. The cost segregation study will incorporate contingency expenditures as they are deployed during the construction period.
C. Construction Timeline
The following timeline governs the construction and delivery of the Campus and is directly relevant to the cost segregation study schedule and the placed-in-service analysis for depreciation purposes:
The EPC contractor for the Project is Titan-McAllister Construction Group, LLC, a nationally recognized data center construction firm. The staggered substantial completion dates for Building A (August 2027) and Buildings B through D (November 2027) will result in different placed-in-service dates for the individual buildings, which has implications for the applicable bonus depreciation percentages, as discussed in Section V.B below. All four buildings are expected to achieve substantial completion within calendar year 2027, which is significant because the bonus depreciation percentage for property placed in service in 2027 is 40%, compared to only 20% for property placed in service in 2028.
D. Entity and Ownership Structure
The pass-through entity structure through which the Stonebridge Campus will be held is critical to understanding the flow of depreciation deductions and the identity of the ultimate tax beneficiaries of the cost segregation study. The structure is as follows:
Stonebridge Campus Holdings LLC is a Virginia single-purpose borrower entity that is expected to be formed in Q4 2025 in connection with the closing of the construction loan. It will serve as the direct owner of the Campus parcels and the borrower under the $390,000,000 construction loan from Summit National Bank, N.A. (as Administrative Agent), Cascade Commercial Lending Corp., and Harborview Trust Company (collectively, the "Construction Lenders"). As the direct owner of the depreciable real and personal property constituting the Campus, Stonebridge Campus Holdings LLC will be the entity at which depreciation deductions are first computed.
Stonebridge Campus Holdings LLC is (or will be) wholly owned by Ironhaven Data Centers LLC ("IHDC"), a Delaware limited liability company (EIN 84-3291057). IHDC serves as the operating platform entity for the Ridgeline Capital Partners digital infrastructure investment strategy and manages the development, construction, leasing, and operations of the Campus.
IHDC is held 92% by RCP Digital Holdings LLC, a Delaware limited liability company that serves as the holding vehicle through which Ridgeline Capital Partners' equity investment in IHDC is structured, and 8% by Ironhaven Management Incentive Pool LLC, a management profits-interest vehicle established for the benefit of IHDC's management team. The 8% interest held by the Management Incentive Pool is a profits interest subject to distribution thresholds and is not expected to receive material depreciation allocations in the early years of the Project.
RCP Digital Holdings LLC is wholly owned by Ridgeline Capital Partners Fund IV, LP ("Ridgeline Fund IV"), a Delaware limited partnership with approximately $3.8 billion in committed capital. The general partner of Ridgeline Fund IV is Ridgeline Capital Management LLC, with Julian Hargrove serving as managing partner.
The significance of this pass-through structure for cost segregation purposes is straightforward: depreciation deductions computed at the Stonebridge Campus Holdings LLC level flow through the chain of pass-through entities — from Stonebridge Campus Holdings LLC to IHDC, from IHDC to RCP Digital Holdings LLC (as to 92% of the allocable share), and from RCP Digital Holdings LLC to Ridgeline Fund IV — and are ultimately reported on the Schedule K-1s issued to Ridgeline Fund IV's limited partners. The limited partners of Ridgeline Fund IV, which include institutional investors, family offices, and high-net-worth individuals, will realize the present-value tax benefit of the accelerated depreciation deductions. Accordingly, the cost segregation study inures to the benefit of a broad base of investors with varying marginal tax rates, though the benefit is most pronounced for investors in the highest marginal tax brackets.
III. What Is a Cost Segregation Study?
A cost segregation study is an engineering-based analysis of the construction costs of a building or other real property improvement, conducted for the purpose of identifying individual building components and site improvements that qualify for depreciation over recovery periods shorter than the default period applicable to the building as a whole. Cost segregation is a well-established tax planning technique that has been recognized by the Internal Revenue Service as a legitimate method of accelerating depreciation deductions, provided the study is conducted in accordance with applicable standards and the reclassifications are supported by sound engineering analysis.
Default Treatment. Under Section 168(c) of the Internal Revenue Code, nonresidential real property — which encompasses the structural shell and certain permanently affixed building systems of a commercial building such as a data center — is classified as Section 1250 property and is depreciable over a 39-year recovery period using the straight-line method. If no cost segregation study is performed, the entire depreciable cost of the building (exclusive of land) is typically depreciated over this 39-year period. For a project with a depreciable basis in the hundreds of millions of dollars, this default treatment results in relatively modest annual depreciation deductions that do not reflect the shorter economic useful life of many of the building's constituent components.
Reclassification. A properly conducted cost segregation study reclassifies eligible components from the default 39-year category into shorter recovery period categories, including the following:
• 5-year property (Section 1245 property). This category encompasses certain electrical systems, special-purpose mechanical systems, telecommunications infrastructure, and other components that are considered tangible personal property rather than structural components of the building. In the data center context, this category is particularly significant because data centers contain a high concentration of specialized electrical and mechanical equipment. Eligible 5-year property in a data center facility typically includes electrical distribution systems (including power distribution units, internal switchgear, and bus duct systems), specialized HVAC and cooling systems (including computer room air conditioning and computer room air handling units, chilled water piping serving IT loads, and in-row cooling systems), raised access flooring, uninterruptible power supply ("UPS") systems, fire suppression systems (including pre-action sprinkler and clean-agent suppression systems), and certain building security and access control systems.
• 7-year property (Section 1245 property). This category includes certain furniture, fixtures, and equipment, as well as specialized security systems, movable partitions, and other items with a somewhat longer useful life than 5-year property but that nonetheless do not constitute structural building components. In a data center, 7-year property may include certain specialized telecommunications wiring and cabling infrastructure, movable interior partitions, and other fixtures and equipment that are not permanently affixed to the building structure.
• 15-year property (Section 1250 land improvements). This category encompasses improvements to the land that are separate from the building itself, including parking lots and parking lot surfaces, sidewalks, landscaping, site lighting, fencing, stormwater management facilities (including detention and retention ponds, underground stormwater systems, and bio-retention areas), site drainage systems, curbing, and exterior utility runs (including underground conduit, piping, and electrical runs from the building to the property line or to site utility infrastructure). These items are depreciable over 15 years using the 150% declining balance method.
IRS Guidance. The Internal Revenue Service has published detailed guidance on the conduct and evaluation of cost segregation studies, most notably in the IRS Audit Techniques Guide for Cost Segregation, which was most recently revised in 2022. The Audit Techniques Guide sets forth the IRS's expectations regarding study methodology, documentation standards, and the qualifications of the professionals conducting the study. The IRS has expressly acknowledged that cost segregation is a legitimate tax planning tool when properly conducted and has not sought to prohibit or restrict the practice. However, the IRS has emphasized that a detailed engineering approach — in which individual building components are identified, quantified, and classified based on engineering analysis — is the preferred methodology and produces the most defensible results.
Data center facilities are particularly well-suited to cost segregation because of the unusually high proportion of specialized mechanical, electrical, and plumbing ("MEP") systems relative to the structural building shell. In a typical office building, the ratio of reclassifiable personal property to total building cost may be in the range of 10% to 15%. In a data center, this ratio is often significantly higher — frequently in the range of 15% to 25% or more — because of the density and specialization of the electrical distribution, cooling, and power backup systems that are integral to the facility's mission-critical function.
IV. Scope of the Recommended Study
A. Assets and Costs to Be Analyzed
We recommend that the cost segregation study encompass the following categories of assets and expenditures:
All four data center buildings (Buildings A through D). Each building represents approximately 120,000 square feet of shell and core space designed to support 24 MW of critical IT load. The study will analyze the structural components (shell, foundation, structural steel, roof, exterior walls, and interior partitions) as well as all building systems, including mechanical, electrical, plumbing, fire protection, and telecommunications infrastructure. The specialized nature of data center MEP systems — including redundant electrical distribution architectures, precision cooling systems, and robust fire suppression — means that a substantial portion of each building's cost is expected to be eligible for reclassification from 39-year property to 5-year or 7-year property.
Central utility plant. The CUP houses campus-wide chilled water generation and distribution equipment, including chillers, cooling towers, pumps, heat exchangers, and associated piping and controls. The CUP structure itself (shell, foundation, and structural components) is 39-year property, but the mechanical equipment within the CUP is expected to be largely reclassifiable to 5-year property as special-purpose equipment not considered a structural component of the building.
Structured parking facilities. The parking structures will be analyzed to determine the extent to which components qualify as 15-year land improvements (parking surfaces, striping, signage, lighting) or 39-year nonresidential real property (the structural components of the parking structure itself, if structured rather than surface parking).
Site civil work. Grading, paving, stormwater management facilities, underground utilities, curbing, sidewalks, landscaping, perimeter fencing, and site lighting are expected to qualify as 15-year land improvements. The cost segregation study will identify and quantify each component of the site civil work to ensure proper classification.
Portions of the power infrastructure ($61,000,000). The study will analyze the switchgear, internal electrical distribution systems, bus duct, and power distribution units included within this budget category. These components are strong candidates for 5-year personal property classification. However, the $18,500,000 line extension contribution to VPC and the substation-related infrastructure that will be owned by VPC upon completion present a separate and more complex question. Because VPC — not IHDC or Stonebridge Campus Holdings LLC — will hold title to the substation and associated transmission infrastructure, IHDC may not have depreciable basis in these assets. The line extension contribution may instead be treated as a capital expenditure that is amortizable over the term of the service agreement with VPC, or it may be treated as a non-depreciable cost of obtaining utility service. This issue requires separate legal and tax analysis beyond the scope of the cost segregation study itself, and we will address it in a supplemental memorandum. For purposes of the cost segregation study, the VPC-owned substation infrastructure should be excluded from the study's scope pending resolution of this question.
Backup power systems. The 2N diesel generator systems for each building, including generators, fuel storage tanks, transfer switches, and associated controls, are included within the EPC GMP and will be analyzed as part of the building-level cost segregation. Diesel generators serving a data center facility are generally classified as 5-year personal property.
Soft costs allocable to construction. Certain soft costs within the $14,200,000 Entitlements & Soft Costs line item are capitalizable to the cost basis of the depreciable assets and should be included in the study. These include architectural and engineering design fees (to the extent allocable to depreciable improvements), permit and inspection fees, and construction-period interest required to be capitalized under Section 263A of the Internal Revenue Code (the Uniform Capitalization or "UNICAP" rules). The allocation of soft costs between depreciable and non-depreciable categories, and among the various recovery period classes, should be coordinated between the cost segregation firm and Fielding & Associates.
B. Methodology
The cost segregation study should employ a detailed engineering approach, which is the methodology preferred by the IRS and which provides the strongest foundation for audit defense. The detailed engineering approach involves the following principal steps:
Review of EPC Agreement and GMP schedule/budget. The cost segregation firm will conduct a comprehensive review of the EPC Agreement between Stonebridge Campus Holdings LLC and Titan-McAllister Construction Group, LLC, with particular attention to Exhibit B (the GMP schedule and budget) and Exhibit A (the scope of work). The GMP schedule provides the per-building allocation of $103,000,000, which serves as the starting point for the cost segregation analysis. The firm will analyze the detailed line items within the GMP schedule to identify components eligible for reclassification.
On-site engineering inspection during and after construction. The cost segregation firm's engineers will conduct multiple site inspections during the 24-month construction period to observe the installation of building components and systems in place. Site inspections during construction are far more effective than post-construction inspections because they allow the engineers to observe components that will be concealed behind walls, above ceilings, or below floors upon completion. For example, the routing and installation of electrical conduit, piping, and ductwork can be observed and documented during the rough-in phase but is not visible after finishes are installed.
Analysis of architectural and engineering plans and specifications. The study will incorporate a detailed review of the design documents prepared by Lumen Ridge Engineering, PLLC (Carlos Esteban, PE, civil/site engineer) and the design-build documents prepared by the EPC contractor's engineering team. These documents provide the technical specifications and quantities for each building component and system, enabling the cost segregation firm to perform a thorough, component-by-component analysis.
Review of contractor pay applications, invoices, change orders, and as-built documentation. The cost segregation firm will review the monthly pay applications submitted by Titan-McAllister, as well as invoices from major subcontractors and suppliers, to verify the actual costs associated with specific building components. Change orders issued during construction will be analyzed to determine their impact on the cost segregation classifications. Upon completion of construction, the as-built documentation — including final drawings, equipment submittals, and testing and commissioning reports — will be used to reconcile the cost segregation analysis with the final, as-built condition of the Campus.
Application of the detailed engineering approach. As noted, the IRS Audit Techniques Guide identifies three principal methodologies for cost segregation: (1) the detailed engineering approach (also known as the detailed cost approach), (2) the sampling or modeling approach, and (3) the residual estimation approach. The detailed engineering approach is the most rigorous and produces the most defensible results. It involves a component-by-component analysis in which each building element is individually identified, its cost is determined (either from direct cost data or through engineering estimation), and it is classified to the appropriate recovery period based on its characteristics and function. The IRS has expressed a clear preference for this methodology, and we strongly recommend its use for the Stonebridge Campus study.
Coordination with Titan-McAllister Construction Group, LLC. The cost segregation firm will require access to Titan-McAllister's detailed cost breakdowns, subcontractor pricing, and construction documentation throughout the construction period. We recommend that the EPC Agreement administration procedures include provisions granting the cost segregation firm access to the construction site and to relevant cost data. Key contacts at Titan-McAllister include Raymond Okafor, President, and Michelle Tran, Senior Vice President, Data Center Programs, both of whom are familiar with cost segregation requirements for data center projects.
C. Excluded Items
The following categories of costs are excluded from the scope of the recommended cost segregation study:
Land cost ($77,900,000). Land is not depreciable property under the Internal Revenue Code and is excluded from the study. However, improvements to the land (as distinguished from the land itself) are depreciable over 15 years and are included in the study as described above.
VPC-owned substation infrastructure. The 230kV/34.5kV substation and associated transmission infrastructure to be constructed on the Meridian Parcel will be owned by Vantage Power Cooperative upon completion. Because IHDC and Stonebridge Campus Holdings LLC will not hold title to these assets, they are excluded from the cost segregation study. The treatment of the $18,500,000 line extension contribution to VPC is a separate question, as noted in Section IV.A above.
Tenant IT equipment. Information technology equipment (servers, storage, networking equipment, and related infrastructure) installed by future tenants of the Campus in their respective data halls will be owned by the tenants and is not property of IHDC or Stonebridge Campus Holdings LLC. Such equipment is excluded from the cost segregation study.
Proffer payments ($2,400,000 estimated). The proffer payments to Loudoun County represent the cost of obtaining governmental approval for the development entitlements and are likely non-depreciable. Proffers are generally treated as capital expenditures related to land rather than to depreciable improvements, and they do not give rise to depreciable basis. These payments are excluded from the cost segregation study.
V. Estimated Reclassification and Tax Benefit
A. Estimated Reclassification
Based on industry benchmarks for data center facilities, our experience with comparable mission-critical projects, and the specific scope and configuration of the Stonebridge Campus, we estimate that approximately $45,000,000 of the total depreciable basis in the Campus can be reclassified from the default 39-year nonresidential real property recovery period to shorter-lived property categories. This estimate is preliminary and will be refined by the cost segregation firm's detailed engineering analysis; however, it provides a reasonable basis for evaluating the expected magnitude of the benefit.
The estimated breakdown by recovery period is as follows:
5-year property — approximately $25,000,000. This is the largest component of the estimated reclassification and reflects the high concentration of specialized electrical and mechanical systems in data center facilities. The components expected to be reclassified to 5-year property include:
• Electrical distribution systems, including power distribution units (PDUs), switchgear internal to the buildings, and bus duct systems
• Specialized HVAC and cooling systems, including computer room air conditioning (CRAC) units, computer room air handling (CRAH) units, chilled water piping serving IT loads, and associated controls and sensors
• Raised access flooring systems
• Uninterruptible power supply (UPS) systems and associated battery infrastructure
• Fire suppression systems, including pre-action sprinkler systems and clean-agent fire suppression systems in data halls
• Backup diesel generator systems (generators, automatic transfer switches, fuel storage tanks, and associated controls)
• Building security and access control systems, including card readers, biometric scanners, man-traps, and security cameras
7-year property — approximately $5,000,000. This category includes items with a somewhat longer useful life that nonetheless qualify as tangible personal property rather than structural building components:
• Movable partitions and demountable wall systems
• Specialized telecommunications wiring and structured cabling infrastructure (to the extent not classified as 5-year property)
• Certain fixtures and equipment in network operations centers, offices, and common areas
15-year property — approximately $15,000,000. This category encompasses land improvements that are separate from the buildings:
• Parking lot surfaces, striping, and signage
• Site lighting (pole-mounted and bollard lighting)
• Landscaping and irrigation systems
• Perimeter fencing and security barriers
• Sidewalks and pedestrian pathways
• Stormwater management facilities, including detention and retention ponds, underground stormwater systems, and bio-retention areas
• Site drainage systems, including storm sewers and catch basins
• Curbing
• Exterior utility infrastructure, including underground conduit, piping, and electrical runs from the buildings to the property line
The aggregate estimated reclassification of $45,000,000 represents approximately 9.2% of the $487,300,000 in potentially depreciable project costs (total project budget of $600,000,000 less the $77,900,000 in non-depreciable land costs and the $34,900,000 in contingency and reserves, which are not yet allocated). This percentage is conservative relative to industry benchmarks for data center facilities, which often yield reclassification ratios in the range of 10% to 20% or higher, depending on the specificity of the cost data available and the design characteristics of the facility. The actual reclassification amount may exceed our preliminary estimate once the detailed engineering analysis is completed.
B. Bonus Depreciation Considerations
Under Section 168(k) of the Internal Revenue Code, bonus depreciation (also referred to as "additional first-year depreciation") is available for qualified property with a recovery period of 20 years or less. This provision allows a taxpayer to deduct a specified percentage of the cost of qualifying property in the first year the property is placed in service, in addition to the regular Modified Accelerated Cost Recovery System ("MACRS") depreciation on the remaining basis.
The Tax Cuts and Jobs Act of 2017 established 100% bonus depreciation for qualified property placed in service after September 27, 2017, and before January 1, 2023. Beginning in 2023, the bonus depreciation percentage began a phase-down of 20 percentage points per year. The current phase-down schedule is as follows:
The relevant placed-in-service dates for the Stonebridge Campus fall in calendar year 2027 (Building A — August 1, 2027; Buildings B through D — November 1, 2027). Under the current statutory schedule, the bonus depreciation percentage for property placed in service in 2027 is 40%, and for property placed in service in 2028, the percentage drops to 20%.
The interaction of the bonus depreciation phase-down with the Stonebridge Campus construction timeline is as follows:
• Building A is expected to reach substantial completion on August 1, 2027. Assuming the building is placed in service in 2027 (which requires that the building be in a condition or state of readiness and availability for its specifically assigned function), the 5-year, 7-year, and 15-year property associated with Building A will be eligible for 40% bonus depreciation.
• Buildings B, C, and D are expected to reach substantial completion on November 1, 2027. If these buildings are placed in service before December 31, 2027, the reclassified property associated with these buildings will also be eligible for 40% bonus depreciation. This underscores the importance of achieving substantial completion of all four buildings within calendar year 2027, as any delay that pushes the placed-in-service date for one or more buildings into 2028 would reduce the applicable bonus depreciation percentage from 40% to 20%.
Applying the 40% bonus depreciation rate to the estimated $45,000,000 in reclassified property yields approximately $18,000,000 in first-year bonus depreciation deductions. This amount represents an immediate acceleration of $18,000,000 in deductions into the first tax year in which the buildings are placed in service (tax year 2027), compared to the approximately $1,153,846 per year that would be deductible under the default 39-year straight-line treatment.
In addition to the $18,000,000 in bonus depreciation, the remaining 60% of the reclassified basis ($27,000,000) will be depreciated under the regular MACRS schedules applicable to the respective recovery periods (5-year, 7-year, and 15-year), producing additional accelerated depreciation deductions in the first and subsequent years that exceed the straight-line deductions that would otherwise apply under the 39-year default treatment.
The present-value tax benefit to Ridgeline Fund IV's investors depends on the applicable marginal tax rates of the individual limited partners. Assuming a blended federal marginal income tax rate of approximately 37% — which reflects the top ordinary income tax rate applicable to many of the fund's high-net-worth and institutional investors — the $18,000,000 in first-year bonus depreciation deductions generates approximately $6,660,000 in federal income tax savings in the first year alone. When combined with the ongoing acceleration of MACRS deductions on the remaining basis, the cumulative present-value benefit over the recovery periods is significant.
C. Comparison to Default 39-Year Treatment
The following comparison illustrates the magnitude of the depreciation acceleration achievable through cost segregation:
Without cost segregation: The $45,000,000 in potentially reclassifiable costs would be depreciated on a straight-line basis over 39 years as part of the default nonresidential real property classification. Annual depreciation would be approximately $1,153,846 per year (subject to mid-month convention adjustments in the first and last years). Over the first five years, cumulative depreciation on this $45,000,000 would be approximately $5,769,231.
With cost segregation and 40% bonus depreciation: Approximately $18,000,000 in bonus depreciation would be deductible in Year 1. The remaining $27,000,000 of reclassified basis would be depreciated under accelerated MACRS schedules (200% declining balance for 5-year and 7-year property; 150% declining balance for 15-year property). Over the first five years, cumulative depreciation on the reclassified $45,000,000 would substantially exceed the $5,769,231 that would be deductible under the default 39-year treatment — with the precise amount depending on the mix of 5-year, 7-year, and 15-year property in the final study.
The net present value ("NPV") benefit of the acceleration depends on the discount rate, investor tax profiles, and state tax treatment. Using a discount rate in the range of 7% to 9% (reflecting IHDC's and Ridgeline Fund IV's cost of capital) and the assumed 37% blended marginal federal tax rate, the estimated NPV benefit to the partnership structure from the cost segregation study is in the range of several million dollars. This benefit arises from the time value of money: receiving larger depreciation deductions in the early years — when the present value of each dollar of deduction is highest — and smaller deductions in later years produces a net present-value gain compared to the even straight-line deductions that would otherwise apply.
This NPV benefit is realized without any change in the total amount of depreciation over the life of the assets; cost segregation does not create additional deductions but rather accelerates deductions that would otherwise be taken over a longer period. The economic benefit is entirely a function of the time value of money.
VI. Timing Recommendation
A. When to Commission the Study
We recommend that IHDC engage the cost segregation firm upon or shortly after the issuance of the Notice to Proceed under the EPC Agreement (target NTP date: November 1, 2025). Early engagement — at or near the commencement of construction rather than after the buildings are completed — offers several important advantages:
Review of design documents at the outset. Engaging the cost segregation firm before construction begins (or in its very early stages) allows the firm's engineers to review the architectural and engineering design documents, the EPC Agreement, and the GMP budget schedule at the outset of the project. This early review enables the firm to identify the components and systems most likely to be reclassifiable and to develop a study plan tailored to the specific characteristics of the Stonebridge Campus. Issues or ambiguities in the cost data or design documents can be identified and resolved early, rather than after the construction is complete and the information is more difficult to obtain.
Site visits during construction. A prospective cost segregation study that includes site visits during the construction period is significantly more effective than a retrospective study conducted after the buildings are completed. During construction, the cost segregation firm's engineers can observe the installation of building components — including electrical conduit, piping, ductwork, structural connections, and other systems — that will be concealed behind walls, above ceilings, or below grade upon completion. Photographic documentation captured during construction provides powerful evidence in support of the study's classifications and is difficult or impossible to replicate after the fact.
Real-time access to cost data. Early engagement allows the cost segregation firm to coordinate with Titan-McAllister's construction team for real-time access to pay applications, subcontractor invoices, change orders, and other cost data as they are generated during the construction period. This contemporaneous access facilitates a more accurate and detailed allocation of costs to individual building components, which in turn supports more defensible classifications.
Contemporaneous documentation. The IRS places a premium on contemporaneous documentation in evaluating cost segregation studies. A study that is initiated at the commencement of construction and that incorporates documentation gathered throughout the construction period is inherently more credible and defensible than a "look-back" study prepared years after the fact. While the IRS does permit retroactive cost segregation studies (and even allows taxpayers to change their depreciation method for prior-year assets through an automatic change in accounting method under Revenue Procedure 2023-24), a prospective study begun at construction commencement is considered the gold standard.
B. Phased Approach
Given the 24-month construction timeline, we recommend that the cost segregation study be conducted in three phases:
Phase 1 (Q4 2025 – Q2 2026): Preliminary Analysis. During this initial phase, the cost segregation firm will review the design documents and specifications, the EPC Agreement (including Exhibit A — Scope of Work and Exhibit B — GMP Schedule), and the project budget. The firm will prepare a preliminary classification of building components and systems based on the design documents and will identify areas requiring further investigation during construction. This phase will also include an initial coordination meeting with Fielding & Associates, CPAs to discuss the study methodology, deliverable format, and integration with partnership tax return preparation.
Phase 2 (Q2 2026 – Q3 2027): Construction-Period Analysis. During the core construction period, the cost segregation firm's engineers will conduct multiple on-site inspections to observe the installation of building components and systems, capture photographic documentation, and verify the accuracy of the preliminary classifications prepared during Phase 1. The firm will also review contractor pay applications, subcontractor invoices, and change orders on a rolling basis to refine the cost allocations. Classifications will be updated and refined as actual construction progresses and as any design changes or value engineering modifications are implemented.
Phase 3 (Q3–Q4 2027): Final Report. Upon substantial completion of Buildings A through D, the cost segregation firm will prepare and deliver its final report. This phase includes reconciliation of the preliminary classifications with the final as-built costs, incorporation of any change orders or cost adjustments, and finalization of the depreciation schedules for each recovery period category. The final report will include a detailed narrative, component-by-component classification tables, photographic documentation, and depreciation schedules formatted for integration with Fielding & Associates' tax return preparation process.
C. Coordination with Tax Return Filings
The tax year 2027 will be the first tax year in which material depreciation deductions arise for Stonebridge Campus Holdings LLC, assuming Building A is placed in service on or about August 1, 2027, and Buildings B through D are placed in service on or about November 1, 2027. The partnership tax return (Form 1065) for Stonebridge Campus Holdings LLC for tax year 2027 will be due on March 15, 2028, with a six-month extension available to September 15, 2028.
The final cost segregation report must be completed prior to the filing deadline for the 2027 partnership return (including extensions) to ensure that the reclassified depreciation deductions are properly reflected on the return. Given the November 1, 2027 substantial completion date for Buildings B through D, the Phase 3 final report should be targeted for delivery no later than Q1 2028, providing adequate lead time for Fielding & Associates to incorporate the study's findings into the 2027 tax return.
Coordination with Fielding & Associates, CPAs is essential in the following respects:
• Fielding provides tax and audit services to IHDC. Robert Fielding, the engagement partner, and his team are responsible for the preparation of the partnership tax returns for Stonebridge Campus Holdings LLC, IHDC, and the upstream pass-through entities. The cost segregation study's findings must be integrated into Fielding's depreciation schedules and Form 4562 (Depreciation and Amortization) for the 2027 tax year and subsequent years.
• Fielding will prepare the partnership returns for Stonebridge Campus Holdings LLC. The cost segregation firm should deliver its final report in a format that is compatible with Fielding's tax preparation software and depreciation tracking systems. This typically involves providing detailed asset listings with the following information for each reclassified component: description, cost, placed-in-service date, recovery period, depreciation method, and convention.
• Early communication regarding methodology and deliverables. We recommend scheduling a coordination meeting among Calderwood & Harkness, Fielding & Associates, and the selected cost segregation firm at the outset of the engagement (during Phase 1) to align on study methodology, documentation standards, and the format and content of the deliverables. This advance coordination will minimize the risk of miscommunication or incompatibility between the study's output and Fielding's return preparation process.
• Coordination on placed-in-service determinations. The determination of when each building (and its associated 5-year, 7-year, and 15-year property) is "placed in service" for depreciation purposes is a factual determination that can have significant tax consequences — particularly given the bonus depreciation phase-down and the importance of achieving placed-in-service status within calendar year 2027. The cost segregation firm, Fielding & Associates, and Calderwood & Harkness should coordinate on the placed-in-service analysis to ensure consistency across the cost segregation report, the depreciation schedules, and the tax returns.
VII. Selection of Cost Segregation Firm
We recommend that IHDC retain a nationally recognized, engineering-based cost segregation firm with specific experience in data center and mission-critical facility projects. The selection of an experienced, qualified firm is important not only for the quality of the analysis but also for the defensibility of the study in the event of an IRS examination.
The following qualifications should be considered in evaluating prospective firms:
• Professional staff. The firm should have licensed professional engineers and certified public accountants on staff (or available through affiliated professionals) who have specific experience conducting cost segregation studies for mission-critical data center facilities. The engineering staff should be familiar with the specialized MEP systems, power distribution architectures, and cooling technologies employed in modern data center construction.
• Track record of IRS examination sustainability. The firm should have a demonstrated track record of producing cost segregation studies that have withstood IRS scrutiny. References from prior data center clients whose studies have been examined by the IRS are particularly valuable.
• Familiarity with data center-specific components. Data centers present unique cost segregation opportunities and challenges that are not present in conventional commercial buildings. The selected firm should be thoroughly familiar with the classification of data center-specific components, including electrical distribution systems (medium-voltage switchgear, bus duct, PDUs, UPS systems), precision cooling systems (CRAC/CRAH units, chilled water systems, in-row cooling), raised access flooring, backup generator systems, fire suppression systems, and building management/monitoring systems.
• Ability to coordinate with Fielding & Associates and Calderwood & Harkness. The selected firm should be willing and able to work collaboratively with Fielding & Associates (as the tax return preparer) and Calderwood & Harkness (as tax counsel) on the study methodology, tax positions, and deliverable format. The firm should be responsive to questions and requests from both the accounting and legal teams throughout the engagement.
IHDC's insurance broker, Northgate Insurance Brokerage, LLC (William Keane), may be able to provide referrals based on the broker's experience with other data center clients. Similarly, Robert Fielding and his team at Fielding & Associates may have relationships with cost segregation firms based on their experience preparing returns for other clients who have commissioned such studies. Calderwood & Harkness's tax practice group can also provide referrals to firms that we have worked with on prior data center and real estate engagements.
The estimated fee for a cost segregation study of this scope and complexity typically ranges from $25,000 to $75,000, depending on the firm selected, the level of detail required, and the number of site visits conducted during the construction period. This fee is de minimis relative to the present-value tax benefits generated by the study, which are expected to be in the range of several million dollars. The cost of the study should be included as an expense within the Entitlements & Soft Costs line item ($14,200,000) of the Project budget.
VIII. State Tax Considerations
A. Virginia Conformity
The Commonwealth of Virginia generally conforms to the federal depreciation rules under the Internal Revenue Code, including the MACRS recovery periods and depreciation methods. However, Virginia has historically decoupled from certain provisions of the federal tax code, including, in prior years, the 100% bonus depreciation provisions enacted by the Tax Cuts and Jobs Act of 2017.
Virginia's treatment of the bonus depreciation phase-down for tax years 2027 and 2028 must be confirmed at the time the returns are filed, as the Virginia General Assembly may enact legislation modifying the state's conformity to the federal bonus depreciation provisions. In prior years, Virginia has required taxpayers to add back a portion of the federal bonus depreciation deduction on the Virginia return and has allowed a corresponding subtracted modification over subsequent years, effectively spreading the benefit of bonus depreciation over a longer period for Virginia income tax purposes. If this treatment continues to apply in 2027 and 2028, the state-level NPV benefit of the cost segregation study will be reduced relative to the federal benefit, because the accelerated deductions at the federal level will be partially deferred for Virginia purposes.
Fielding & Associates should monitor Virginia legislative and regulatory developments relating to bonus depreciation conformity and should factor the applicable Virginia rules into the depreciation schedules prepared for the partnership returns.
Additionally, the cost segregation analysis should be coordinated with the separate analysis of the Virginia Data Center Sales Tax Exemption under Virginia Code § 58.1-609.3(18). The sales tax exemption is available for data center equipment purchases made by qualifying data centers that meet certain minimum capital investment and job creation thresholds. The minimum capital investment threshold is $150,000,000 over five years. While the cost segregation study does not directly affect eligibility for the sales tax exemption, the two analyses share overlapping cost data — the classification of items as personal property versus real property may be relevant to both analyses — and coordination between the cost segregation firm and the sales tax exemption analysis team will ensure consistency and avoid duplicative effort.
B. Loudoun County Equipment Tax
Separately from the federal and state income tax considerations, Loudoun County imposes a data center equipment tax at a rate of $1.25 per $100 of assessed value. This equipment tax applies to computer equipment and peripherals installed in data center facilities in the County and is assessed by the Loudoun County Commissioner of Revenue.
The equipment tax is a local personal property tax that is assessed separately from the federal cost segregation study, and the cost segregation study does not directly determine the items subject to the equipment tax. However, there is a potential intersection between the cost segregation analysis and the Loudoun County equipment tax assessment:
The cost segregation study's classification of certain building components as personal property (Section 1245 property) for federal income tax purposes may have implications for Loudoun County's assessment of which items constitute "computer equipment and peripherals" subject to the local equipment tax versus real property improvements that are assessed through the Commissioner of Revenue's real property assessment process. While the federal tax classification is not controlling for purposes of the local equipment tax, the County's assessors may look to the federal classification as one data point in determining the appropriate treatment of borderline items. Conversely, certain items classified as personal property for federal cost segregation purposes (such as electrical distribution equipment and cooling systems) may not constitute "computer equipment and peripherals" under the Loudoun County equipment tax ordinance.
We recommend coordinating the cost segregation analysis with the parallel analysis on Loudoun County equipment tax treatment, which will be addressed in a separate memorandum. The goal of this coordination is to ensure that the federal and local tax positions are internally consistent and that IHDC is not exposed to the risk of an item being classified as personal property for both the federal equipment tax and the local equipment tax simultaneously, which could result in adverse consequences if the classifications are inconsistent.
IX. Interaction with Construction Loan and Capital Structure
The cost segregation study has several points of interaction with the Project's capital structure and construction financing that should be noted:
Capitalized construction-period interest under Section 263A. The $390,000,000 construction loan from Summit National Bank, N.A. (as Administrative Agent), Cascade Commercial Lending Corp., and Harborview Trust Company bears interest at SOFR plus 285 basis points. During the construction draw period (up to 36 months), interest on the construction loan will be capitalized rather than paid currently. Under the Uniform Capitalization rules of Section 263A of the Internal Revenue Code (the "UNICAP rules"), a portion of this construction-period interest may be required to be capitalized to the cost basis of the buildings and other self-constructed assets. To the extent that capitalized interest increases the depreciable basis of the Campus, it may also increase the amount of basis available for reclassification through the cost segregation study. The cost segregation firm should coordinate with Fielding & Associates on the UNICAP interest capitalization calculation to ensure that the cost segregation analysis reflects the full depreciable basis, including any capitalized interest.
Equity contribution and basis considerations. The equity contribution to the Project is $210,000,000, representing 35% of the total project costs. This equity is contributed by Ridgeline Fund IV through the chain of pass-through entities (Ridgeline Fund IV → RCP Digital Holdings LLC → IHDC → Stonebridge Campus Holdings LLC). The cost segregation study benefits flow through this same chain of entities and are ultimately realized by Ridgeline Fund IV's limited partners in the form of accelerated depreciation deductions on their Schedule K-1s. The present-value tax benefit of the cost segregation study is therefore a direct enhancement to the after-tax returns realized by Ridgeline Fund IV's limited partners on their equity investment in the Project.
Minimum equity contribution and timing of basis. Under the construction loan facility, IHDC is required to contribute a minimum equity amount of $52,500,000 (representing 25% of the total $210,000,000 equity commitment) before the first construction loan draw. The timing of equity contributions relative to the commencement of construction may affect the timing at which depreciable basis in the property is established for depreciation purposes, although in practice the placed-in-service date (rather than the date of equity contribution) is the controlling date for the commencement of depreciation. Nonetheless, the cost segregation firm and Fielding & Associates should be aware of the equity contribution schedule and its potential relevance to the basis and depreciation analysis.
X. Documentation and Audit Defense
The cost segregation study should be conducted in strict accordance with the standards and best practices set forth in the IRS Audit Techniques Guide for Cost Segregation (2022 revision). Adherence to these standards is essential to ensure that the study's reclassifications are defensible in the event of an IRS examination of the Stonebridge Campus Holdings LLC or IHDC partnership returns.
All reclassifications in the study must be supported by the following categories of documentation:
Detailed engineering analysis tied to specific construction components. Each reclassified component must be individually identified and described, with a clear explanation of why it qualifies for the shorter recovery period to which it has been assigned. The engineering analysis should reference the applicable provisions of the Internal Revenue Code, Treasury Regulations, and IRS guidance (including the Audit Techniques Guide) supporting each classification. The analysis should disting