Jan. 21 (Bloomberg) — A San Francisco startup may win
approval as soon as this month to become the first firm allowed
to raise money for solar-power projects as a REIT, the financing
vehicle used in $640 billion of U.S. property ventures.
Renewable Energy Trust Capital Inc., led by a former
Moody’s Investors Service chief executive officer, has asked tax
officials at the U.S. Internal Revenue Service to classify solar
farms as the type of “real property” that may be included in
real estate investment trusts, or REITs. A ruling is imminent,
according to Kelly Kogan, an attorney with Chadbourne & Parke
LLP, which advises financiers on REITs.
A favorable decision may open the U.S. photovoltaic power
industry to retail investors at a time when it needs about $6.9
billion a year. REITs, typically formed to develop commercial
property like shopping centers and warehouses, returned an
average 28 percent in 2012, data on 208 U.S. REITs compiled by
Bloomberg show. The format would offer tradable stakes while
cutting the cost of capital for developers, according to Felix
Mormann, a research fellow at Stanford University Law School’s
Steyer-Taylor Center for Energy Policy & Finance.
“REITs will significantly reduce the financing cost of
solar energy projects and with it, the overall cost of solar
electricity,” Mormann said. “They will bring the solar
industry a big step closer to subsidy independence.”
Standard REITs own and generally operate income-producing
property that pays investors dividends. While they’re marketed
as more stable than many investment classes, REITs fell along
with most equities in the last financial crisis.
Retail Investors
The 125-member Bloomberg Industries North American REITs
index, which excludes mortgage-related trusts, returned a
negative 47 percent during 2007 and 2008. That’s more than the
34 percent loss including dividends in the same period for the
1,611-member MSCI World Index of global equities.
The REIT format was authorized by Congress in 1960 to give
retail investors a way to get into commercial real estate. REITs
are required to pay at least 90 percent of their taxable income
to shareholders, according to the industry’s Washington-based
trade group Nareit.
Most are traded publicly and there were 172 REITs
registered with the Securities and Exchange Commission and
trading on U.S. exchanges at the end of last year, with a
combined market value of $603 billion, according to Nareit. The
market value of the 208 U.S. REITs tracked by Bloomberg is about
$640 billion, and their average dividend yield is 4.6 percent.
REITs owned about $850 billion in real estate, as of
December 31, according to Nareit. The market value of traded
equity REITs was about $332 million in 1971.
New Industries
The format has evolved to provide funding for other
industries including timber, data centers, mobile-phone towers,
power lines and natural gas pipelines. The common denominator is
that all are tangible assets that generate steady income over a
long period of time, and photovoltaic power plants fit that
mold, according to Renewable Energy Trust’s Chief Financial
Officer Christian Fong.
“Solar PV could be next,” Fong said. The company, founded
in 2011, is led by CEO John Bohn, who stepped down from the same
post at Moody’s in 1996. He’s also served as a commissioner with
the California Public Utilities Commission and CEO of the
Export-Import Bank of the United States.
A solar REIT would own and operate power plants that
convert sunlight into electricity, just as standard REITs
acquire buildings and other assets. Solar-energy REITs will make
it easier for mainstream investors to get involved in renewable-
energy generation, Fong said.
Congressional Support
“There’s no practical way for individuals to vote with
their dollars and invest in solar power generation,” Fong said
in an interview. “A solar REIT would, for the very first time,
give them a way to do that.”
The idea has the backing of at least 26 members of
Congress, including Senator Lisa Murkowski, an Alaska Republican
that’s ranking minority member of the Senate Committee on Energy
& Natural Resources.
“Minor changes to the federal tax code could provide the
renewable-energy industry access to large pools of low-cost
capital,” the lawmakers wrote in a letter to President Barack
Obama Dec. 12. They called on the Treasury Department to issue a
broad ruling approving the use of REITs for renewable energy.
Renewable Energy Trust asked the IRS at least four months
ago for a private letter ruling that would grant it permission
to become a REIT. It typically takes the IRS about four months
to six months to respond to such requests, Fong said.
Ruling Imminent
The IRS may issue its first decision on solar REITs this
month, according to Kogan, the Chadbourne & Parke attorney based
in Washington. That’s the only regulatory hurdle Renewable
Energy Trust will need to clear and a favorable ruling will
apply only to Fong’s company.
CleanREIT Partners LLC, another San Francisco-based company
pursuing solar REITs, submitted a similar request to the IRS
last year and later stopped the process while it pursued
additional capital, according to co-founder Bill Hilliard. He’s
now planning to form a REIT in Canada to invest in U.S. solar
assets, and may pursue an initial public offering on the Toronto
Stock Exchange in the third quarter, he said.
Conventional REITs typically pay dividends of about 3
percent to 4 percent, according to Hilliard. The first solar
REITs may pay more, as much as 6.5 percent to 7 percent, because
they are a new format with potentially new risks, he said.
Funding Needs
REITs paid out about $22 billion in dividends in 2011,
according to the Nareit group. That’s more than triple the
estimated $6.9 billion that U.S. solar developers will need
annually for photovoltaic projects through 2020, according to a
June report by Bloomberg New Energy Finance.
Most funding for solar projects comes from bank loans or
investors that purchase stakes, in part to obtain a share of a
30 percent federal investment tax credit that’s set to fall to
10 percent in 2017, an arrangement known as tax-equity
financing. This is an expensive form of capital, according to
Hilliard.
A key advantage of the REIT format is liquidity, Hilliard
said.
“Because of the way tax equity works, people are locked
into their investments for five-plus years,” he said. “They
demand a much higher return than if you had a publicly traded
stock that you could buy in the morning and sell in the
afternoon.”
This new investment format may become an option just when
it’s needed, Fong said.
Growth ‘Bottleneck’
“This industry desperately needs more capital,” he said
by telephone. “Financing has become the bottleneck to growth.”
Solar REITs would help resolve that issue, according to
Stefan Linder, an analyst with New Energy Finance.
“High financing costs are well recognized in the industry
as a barrier to growth,” Linder said. “Any structures that
allow a wider investor base to get involved, increases
liquidity, or lower taxes would be beneficial.”
The 30 percent tax credit may be a barrier to using REITs
for solar farms, said Timothy Kemper, national director of
CohnReznick LLP’s renewable energy industry practice. “It’s
going to be tough to compete against investors that are
utilizing tax incentives,” he said.
To contact the reporter on this story:
Andrew Herndon in San Francisco at
aherndon2@bloomberg.net
To contact the editor responsible for this story:
Reed Landberg at
landberg@bloomberg.net
