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Unpublished Paper
"Solar REITs": A New Tax Paradigm for Renewable Energy Financing
  • Richard A Grisel

The demand for renewable energy has never been higher. Regrettably, however, current financing methods and administrative programs have been inadequate to produce the necessary and sufficient market conditions to meet this demand.

One key to accessing lower cost capital—which in turn will help fill ever-increasing demand for renewable energy—is to move away from reliance on tax credits and tax equity financing models and attract a broader investor pool. Real estate investment trusts (REITs) have historically been a proven, effective capital-raising vehicle for various capital-intensive projects, such as buildings, transmission lines, and communication towers. Essentially, REITs are financial vehicles that allow a broad range of investors to pool their capital and capitalize on the tax benefits of real estate asset ownership, roughly analogous to mutual funds focusing on real estate investments. At least partially for these reasons, the current REIT market is robust, consisting of about 172 registered REITs with a combined market value of over $600 billion, dividends of around $29 billion, and an average return of 28% in 2012.

The REIT financing mechanism delivers the valuable benefits of eliminating entity level taxation, and an exit strategy for initial investors due to the liquidity of their REIT interest (i.e. cash out via sale of their interest to secondary investors). A further important benefit of REITs is that they provide a risk-spreading mechanism through ownership of a portfolio composed of diversified assets. All of this presents a lower risk profile, which can still attract sufficient investment despite yielding a lower rate of return, ultimately resulting a lower cost of capital for the developer. This attractive combination of single-level taxation, predictable income streams, liquidity, and lower cost of capital aligns perfectly with capital-intensive solar energy projects seeking precisely this lower-cost financing mechanism.

Unfortunately, however, the REIT structure has been unavailable to solar project developers under the tax code. Though there are many PLRs and revenue rulings suggesting that solar PV assets are excluded from the “real property” definition and instead classified as “assets accessory to the operation of a business,” their status of solar PV assets under the tax code remains uncertain. If the IRS were to re-classify PV as “real” property instead of “personal” property, it is likely have fundamental implications for large-scale solar project financing. Just as traditional REITs acquire building and other income-generating assets, so too could this new type of entity—a “Solar REIT”—own and operate income-generating solar assets.

This paper advances two main arguments. First, although REIT rulings strongly suggest that the IRS would classify solar PV as “assets accessory to the operation of a business,” they are not necessary findings: current concepts and rulings can, with some minor modifications and permissible alternative analyses, accommodate solar assets as REIT-qualifying “real property.” Second, alternatively, if the current REIT regime does bar the inclusion of solar assets, the IRS, the Treasury Department, or Congress should make this proposed change: it will not require any substantive upending of current tax law, and the practical benefits to the solar development community would be enormous.

Publication Date
Spring April 10, 2014
Citation Information
Richard A Grisel. ""Solar REITs": A New Tax Paradigm for Renewable Energy Financing" (2014)
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