The S-REIT: An Investment-Driven Solution to Solar Development Problems

Author:  Sturtevant, JL
Organization:  GW Law School
Report Date: 
2011
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Summary: 

This paper explores the feasiblity of extending the Real Estate Investment Trust (REIT) model to solar projects. Just as REITs have spurred investment into commercial real estate, Solar-REITS (S-REITs) could open up solar projects to small investors, increasing capital flows into solar energy markets. The income requirements of traditional REITs may mean that solar entities will not qualify without being granted safe harbor status legislatively as has been done for healthcare-REITs. S-REITs would complement, not replace, other incentives. Legislative changes to federal tax credits would be necessary because S-REITs would be unable to use tax credits fully under exisiting law.  

Key Take-Aways: 
  • The REIT model is particularly suitable to solar photovoltaics (PV) because they produce dependable output independent of future fuel prices or carbon regulatory regimes.
  • While the organizational, asset, and distribution requirements of tradtional REITs are clear and expected to be compatible with solar, the income requirements may disqualify solar without a legislative change providing safe harbor status.
  • Under a traditional REIT structure, an entity must earn 75 percent of its income from rents from real property.  It is unclear whether income from a Power Purchasing Agreement (PPA) would qualify.
  • Granting safe harbor status for solar legislatively makes intuitive sense since healthcare-REITs allow a significant portion of hospital income to qualify that otherwise would not as rents from real property.
  • S-REITs are not a replacement to other federal tax incentives (e.g. accelerated depreciation and ITC), which would have to be modified or extended legislatively to work in conjunction with S-REITs.
  • Although other federal incentives could have a phase-out period of 10-15 years, the S-REITs should be permanent.
Key Facts: 
  • The lack of certainty for the extension of the solar Investment Tax Credit (ITC) stifled new development before its renewal in 2008.
  • Even after the extension to 2016, the ITC did not sufficiently address the needs of investors.
  • 75 percent of assets for traditional REITs must be real estate assets, cash instruments, or government securities.
  • The Internal Revenue Service sent a private ruling letter on MArch 13, 2007, that held that income gained from a solar array would qualify as revenue for Section 856 purposes.
  • Current law would not allow REITs to take full advantage of federal tax credits
  • The initial REIT concept to spur solar energy investment was recommended by Ken Zweibel, former Director of the GW Solar Institute.