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Renewable Energy Partnership Exit Considerations

Published by Jessica Ricks on Monday, January 8, 2024

Journal Cover January 2024   Download PDF

Most renewable energy partnership deals are structured to contemplate the exit of the tax credit investor member at the end of the tax credit compliance period or five years after the last facility in each fund is placed in service. An investor will typically exit from a structure after this point both to ensure there is no risk of tax credit recapture and to maximize its return on investment. There are several key points sponsors and investors should keep in mind as projects reach the end of their compliance periods.

Exit Options

At a deal’s inception, the operating agreement will usually delineate the exit options for the partnership. Two of the most common strategies are purchase options and withdrawal options. 

Purchase Option

After the end of the compliance period, many managing members will have the option to purchase the investor member’s interest in the fund. The determination of the price of the purchase option (purchase price) can vary from deal to deal but will usually be defined in an entity’s operating agreement or other agreement that may be executed at the initial closing of the transaction.

One of the most common elements of determining the purchase price is the fair market value of the investor member’s interest in the partnership as determined by a qualified appraiser. 

In addition to the fair market value of the investor’s interest, the purchase price definition may include any amount of unpaid priority return or other investor claims as defined in the relevant agreement as of the date of purchase. Some operating agreements may call for the purchase price to equal the greater of either the unpaid priority return or the fair market value of the investor’s interest. Others still may require a comparison between a pre-defined percentage of the investor member’s initial capital contribution to the partnership and the fair market value.

Withdrawal Option

Many deals are structured to incorporate a withdrawal option for the investor. These deals give the investor the option to voluntarily withdraw from the partnership with the right to receive a defined amount of cash from the managing member at the date of withdrawal. The investor may also be given the explicit right to sell (put) its membership interest in the partnership to the managing member for a price defined in the operating agreement. Like the price associated with a purchase option, the put amount is also commonly determined based on the fair market value of the investor’s interest but can vary across deals. 


The periods within which either the purchase or withdrawal options can be exercised typically begin at the end of the compliance period and can end anywhere between 90 days and 24 months thereafter. Certain investors may require a specific return on their investment or a number of periods of profit before exit may occur as well. Sponsors and investors should consult their entity’s operating agreement for their specific applicable period.

Tax Compliance Considerations

Once the investor member has exited from a partnership, the partnership will become a disregarded entity if the managing member is the only remaining member. This will require a final tax return to be filed as of the date of exit. After the date of exit, the disregarded entity needs to be incorporated into the managing member’s tax return as a wholly owned subsidiary. Sponsors should notify their tax advisors as soon as an exit occurs to be sure any required short period tax returns can be filed timely to avoid late filing penalties. 

Additionally, if either partner has assumed a deficit restoration obligation to cure negative basis in the partnership, that partner will be required to contribute enough cash to restore any remaining deficit in their tax capital account at the time of exit.

Capital Gains and Tax Liabilities

Both partners will also need to assess any gain they may be required to recognize. Because any assets of the partnership will be deemed distributed to the partner remaining in the structure in accordance with Revenue Ruling 99-6, that partner must recognize gain to the extent that any cash or receivables distributed exceed the partner’s adjusted basis of interest immediately before the transaction. The exiting partner will also need to consider the amount and characterization of the gain required to be recognized and the related taxes owed in connection with the 
sale of its membership interest. 


Both investor and managing members should be aware of their responsibilities at the time of an exit, including the ability to procure the cash needed for a purchase or withdrawal option as well as make estimated tax payments as necessary. Proper tax planning and consideration of the specific requirements in each deal’s structure are imperative to ensuring a smooth exit for all involved. 

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