Structuring Partnership Financings To Avoid HLBV Losses

Structuring options can be used by tax investors to mitigate post-flip GAAP (generally accepted accounting principles) losses calculated by the Hypothetical Liquidation at Book Value (HLBV) accounting method for flipping partnerships. In some circumstances, these GAAP losses can dramatically affect the reported earnings for publicly traded companies and influence investment decisions in renewable energy projects. Project-level debt can exacerbate the effects on GAAP earnings, making structuring choices and other HLBV related loss mitigation strategies all the more important.

Structuring a Post-Flip Investor Yield

Book losses, which appear to be an accounting issue, may really be a business issue that needs to be mitigated at the negotiation table. The post-flip GAAP loss may indicate an economic exposure for investors that can affect how they view the investment opportunity, especially if the investment generates a material GAAP loss for a publicly traded entity. Adding a second yield-based flip into the partnership financing structure can mitigate this exposure without impacting the economics associated with the base case scenario used to set sharing terms.

Take, for example, a deal with a 10% after-tax flip yield. Assume further that at full term in the base case scenario, the tax investor realizes an 11% after-tax yield. If a second flip based on an 11% after-tax yield is added, then the base economics remain unchanged and the HLBV post-flip loss problem is mitigated (see HLBV Earnings Patterns section below for additional details).

This added protection to the tax investor may be considered a reasonable deal point during structuring, assuming that the liquidation losses are an unintended consequence of the base case structuring. In addition, the developer may be able to obtain a larger share of ownership after the second flip than was expected in the single-flip case.

Tracking and Accounting to Reflect Reality

The post-flip loss to tax investors is a key concern, but other erratic HLBV earnings behavior may also be an issue for both investors and sponsors. Different tracking and accounting tactics may also be possible that make HLBV earnings results behave more realistically. For example, one can limit recognition of HLBV earnings to not exceed the flip yield and accrue PTC’s on a monthly basis. These and other options should be explored for feasibility as well as the possibility of alternative accounting methods, such as International Financial Reporting Standards (IFRS).

HLBV Earnings Patterns

The HLBV methodology can produce erratic and sometimes surprising income patterns for tax investors. Looking at earnings patterns over time, one may find positive earnings for many years and then a large post flip loss wiping out earnings from the previous couple of years. There may also be other periods of unexpected losses as well. The challenge in assessing these patterns relies upon understanding that special allocations to achieve the flip yield are present during liquidation that do not occur during the base case and the total liquidation yield can be impacted as a result. Though this does not explain all HLBV patterns, it clarifies a key area of concern.

As discussed above, losses for the tax investor can be recognized just after the actual flip occurs. This reversal of earnings can be a consequence of the interaction of the flip yield in liquidation where the tax investors flip yield is protected by special allocations but not the full term yield.

The issue starts with the deferred gain / loss (i.e., the embedded tax position) as of the flip. It is particularly acute in leveraged cases where there is significant minimum gain. The post-flip loss or reversal in earnings in this case is caused by the manner in which the flip yield was protected from deferred gain in liquidation prior to the actual flip, versus the full term yield not being protected after the actual flip occurs.

Protection for the flip yield occurs when the flip is triggered by liquidation (hypothetical or actual) and allocations (e.g., liquidation cash, gain to the flip yield) are made to eliminate the deferred gain to achieve the flip yield. In other words, there is more protection to achieve the flip yield when the flip is triggered by liquidation. This is sensible because the deferred gain of the base case flip is “protected” by the years of residual interest available to cover the deferred gain. (Note: This is also why leveraged cases require a larger post-flip share.)

Thus, once the actual flip has been triggered in the base outcome, the flip yield protection during the liquidation (HLBV) scenario present in the previous periods is no longer applicable, the full term yield is exposed to deferred gain and earnings take a nose dive in response. Introducing a second yield based flip restores protection against deferred gain and mitigates the drop in earnings.

Further consider the two yields calculated for each period of booking under HLBV before the flip occurs in the base outcome: the flip yield and the total yield realized in the hypothetical liquidation.  The flip yield is protected, but the total yield varies from one HLBV period to another, often dropping as the term increases. Initial earnings are based on the higher yield that is not sustained in subsequent periods. If the drop is large enough from one period to another, or sustained over enough periods, this can also lead to losses being reflected in HLBV results.


HLBV generated GAAP losses and fluctuating earnings patterns can dramatically affect publicly traded companies and influence investment decisions. Structuring in a 2nd yield based flip is an innovative option that provides protection against investor losses post-flip while not changing the base economics of the deal. Other tracking and accounting options should also be explored to further assist in smoothing earnings throughout the project’s life. Regardless of the strategy or tactic it is important to check with legal, tax and accounting counsel on the acceptability and reasonableness of any alternatives considered.

Dennis Moritz has been a principal with Advantage for Anaylsts since its founding in 2004. His experience in financial analysis and modeling covers over 20 years in structuring partnerships, leases and other forms of financing for power projects and asset finance. He can be reached at

The Authors do not represent or warrant the accuracy, adequacy, timeliness, completeness or fitness for any particular purpose of the information provided in connection with this article, which is provided as is. The Authors do not provide tax, legal, or accounting advice and recommend that readers retain the services of a counsel to render opinions on specific transactions.

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