Note To Readers: We have been following this development in “match-making” which, we believe, will open an entire new avenue of financing ‘green power’ (including wind and geothermal) Power Agreements. How soon will the IRS ruling have an impact in the marketplace? Good question. However, with the ‘flow through’ tax structure of a REIT providing broader access to investors and markets … “the Sun’s the limit”! Cheers! – BWH –
A solar power facility in Chicago, Illinois. (Image credit: Getty Images North America via @daylife)
Tom Konrad, Contributor
- Will solar photovoltaics (PV) be considered real property for purposes of Real Estate Investment Trust (REIT) ownership?
- Will revenue from power purchase agreements (PPAs) with utilities be considered rents?
These are both important, because in order to qualify for their special tax status, REITs must receive 75% of its gross income from IRS-defined “rents” on “real property.” The IRS has substantial leeway to determine what qualifies as both “rent” ans as “real property,” hence the need for a ruling to clarify matters.
As I discussed, the IRS issues rulings in response to either a taxpayer request (this is a “private letter ruling”) or in response to a request from a government official (a “revenue ruling.”) My sources told me that a revenue ruling is generally considered preferable because the chances of an outcome that would allow REITs more freedom to own and derive revenue from PV are higher if there is a government official behind the request. A revenue ruling also has the advantage that it is immediately applicable to all taxpayers, while a private letter ruling is only binding on the requesting taxpayer and the IRS. In practice, however, private letter rulings set precedents which other taxpayers and tax attorneys can reasonably expect to have broader application.
When I wrote the article, I knew there were rumors that a revenue ruling might be requested soon, but not if any taxpayers had yet requested private letter rulings. Private letter rulings are, after all, private between the taxpayer and the IRS. The only way to learn about a taxpayer’s request is if the taxpayer makes it public.
The Renewable Energy Trust Capital, Inc. (RET), a San Francisco, CA based mission-driven company founded in 2011 to “facilitate the transition to a clean and sustainable economy,” is requesting a private letter ruling, andannounced the fact in late September. I spoke to RET’s CFO, Christian Fong, CFA about RET’s request. I was interested in both the timing of the request, and and RET’s motivations and plans.
Fong stated that RET filed its request over the summer, but emphasized that the request is a process, in which there is considerable back-and-forth between the IRS and RET.
Why not wait for a revenue ruling?
Fong stated that the “industry lacks clarity” on REIT ownership of PV. He says it’s necessary that someone ask the question so that the industry can “move forward one way or another.”
What RET plans to do with their ruling
Although Fong said nothing to imply it, it’s also possible that RET is interested in gaining a first mover advantage. RET has gathered venture capital, which they intend to use to form a REIT or REITs. Those REITs will buy PV assets which will be maintained by RET’s strategic partner, True South Renewables. The REIT will then be listed on a stock exchange and sold to individual investors. Since Solar REITs will be a new asset class which I expect to be attractive to income investors, the first listed solar REITs will probably sell for a premium, allowing the first movers to make larger profits for creating the first solar REITs than the organizers of subsequent REITs. That potential profit is not a bad thing, however, but rather compensation for the effort of going ahead and working through the process with the IRS.
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Has the IRS received any other requests?
Because the only way the public is likely to find out about a private letter ruling request is if the taxpayer behind the request announces it, it is quite possible that there are other requests in process. However, as Joshua L. Sturtevant, and associate with Distributed Sun of Washington, DC told me in my interview with him for my previous article, the IRS will likely want to deal with this issue only once. Hence, we can expect that the service has consolidated the ruling requests it has received to date, and will most likely issue the rulings together.
What it will mean for the industry
Fong says RET’s intent is to show investors that solar is “not vaporware.” Solar PV is a solid asset that generates real cash flows for investors. RET is clearly ready to create and list one of the first (if not the first) solar REITs as soon as the IRS issues a ruling that allows solar REITs in any form. Such REITs will be a boon for green income investors, and probably bring even grater benefits to solar developers, who currently have relatively limited and expensive sources of capital to use developing PV projects.