BOE: Solar “Partnership Flips” Do not Trigger Property Tax Reassessment

S.B. 267 excludes partnership flip transactions from a “change in ownership” that would trigger a reassessment of property taxes.

The California Board of Equalization (BOE) recently issued a letter to county assessors clarifying the exclusion of solar projects from property tax reassessments after a “partnership flip transaction.” While solar property has been excluded from the definition of “new construction” that triggers a reassessment of property taxes, S.B. 267, passed in 2021, provided that a “partnership flip” financing arrangement is excluded from a “change in ownership” that triggers a reassessment. Most solar energy projects use flip transactions, and this clarification gives solar project developers assurance that the exclusion for solar projects will be available.

Partnership Flip Transactions

A partnership flip transaction enables projects that receive production tax credits to finance a project through a tax equity investor and then transfer the property to the project developer after a target yield is achieved. Under S.B. 267, a “partnership flip transaction” must meet three requirements:

1. A developer of an active solar energy system and one or more unrelated parties enter into the financing arrangement;

2. as part of the initial transfer, the unrelated party or parties agree to provide a capital contribution, or a series of contributions, to a partnership or limited liability company in exchange for, on a cumulative basis, an interest in a majority of the tax attributes, such as federal tax credits, depreciation, and a majority of either, or both, the capital and profits of the entity; and

3. the unrelated party or parties receive the tax attributes until the party or parties achieve a preestablished yield or until after a preestablished period of time, at which time the tax attributes are reduced, and the developer obtains a majority of both the capital and profit interests of the partnership or limited liability company.

Solar Projects and Proposition 13

California property tax laws classify solar projects as real property. California’s Proposition 13 limits real property taxes to 1% of a property’s market value and limits assessments to no more than 2%. New construction or a change in ownership, however, triggers a reassessment. Section 73 of the California Revenue and Taxation Code excludes the construction or addition of any active solar energy system from the definition of “newly constructed” through the 2023-24 fiscal year. The law does not provide solar properties with an exclusion for a change in ownership.

Under California law, a change in ownership occurs when a person obtains more than 50% of the capital and more than 50% of the profits of a partnership or LLC, and it was unclear whether a partnership flip would be considered a “change in ownership.” Some county assessors have argued that a partnership flip constitutes a change in ownership under California law and triggers a property reassessment. The Assembly has already clarified the legislature's intent to preserve the solar exclusion in this type of transaction and previous BOE guidance on the issue. Senate Bill 267 provides that solar energy projects that change ownership as a result of a partnership flip transaction do not lose the property tax exclusion.

New Exception under Section 64.1

Under Section 64(a), a transfer of ownership interests in a legal entity is not generally considered a change in ownership of the legal entity’s real property. However, under Section 64(c)(1), if any person or entity obtains control of more than 50 percent of a legal entity, all real property owned by that legal entity is subject to reassessment.

S.B. 267 added Section 64.1, which provides an exception to this change in control provision for a legal entity that owns an active solar energy system pursuant to a partnership flip transaction. The exception provides that neither an initial transfer of a capital and profits interest in the legal entity, nor any subsequent change in the allocation of the capital and profits of the legal entity among the members, constitutes a transfer of control of, or of a majority interest in, the legal entity. Any other real property owned by the legal entity is deemed to undergo a change in ownership and subject to reassessment.

The exclusion is limited to the “initial transfer,” which is defined as a transfer or series of transfers of an interest in a partnership or limited liability company used to own the active solar energy system and that commence prior to the date that the active solar energy system is placed in service for federal income tax purposes. The exception does not apply to more than one partnership flip transaction with respect to any portion of an active solar energy system.