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Project Flip Partnerships

  Investors in asset based financings seek to maximize the value of the project’s tax benefits. The simplest special allocation partnership structure contains a one-time change (“flip”) in partners’ tax allocation ratios, which is mirrored by corresponding changes in their distribution ratios.

    In a simple flip, the partners contribute capital 80/20, for example, and tax allocations and distributions are made 80/20. After taxable income cumulatively equals zero, subsequent taxable income might be allocated 10/90. After distributions equal capital contributions, subsequent distribution are allocated in the same (postflip) ratios. The flips in tax allocations and distributions do not necessarily occur at the same time. In this simple layering structure, the partners’ capital accounts will zero out upon liquidation, without any special adjustment. This structure has been used for decades.

    As blessed by the IRS in Rev. Proc. 2007-65 for wind energy transactions, project flip partnership structures typically deviate from the simple flip as follows.

   • To secure allocations of production tax credits, the tax-based investor is allocated 99% of tax items until the flip.

    • The other partner (typically the project developer) receives a priority return of its capital contribution from initial cash flow (the “cash sweep”); thereafter, the investor may receive all cash flow until the flip.

    • The flip occurs after the investor has met an agreed-upon after-tax return, and affects both taxable income and distributions beginning in the same period. It is not unusual for the developer’s postflip ratio to be 95%.

    • The partners’ capital contribution ratios may differ from the tax allocation and distribution ratios, as determined by the investor’s yield requirement.

    • Tax allocations are made as necessary to prevent (or limit) capital account deficits at the end of each year (and upon liquidation).

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