Technical Qualifications for Treating Photovoltaic Assets as Real Property by Real Estate Investment Trusts (REITs)

Abstract

NOTICEThis report was prepared as an account of work sponsored by an agency of the United States government. Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States government or any agency thereof. Printed on paper containing at least 50% wastepaper, including 10% post consumer waste. 1 AcknowledgementsThe authors thank the U.S. DOE sponsorship and direction of this work, especially Jaime Carlson and Richard Kauffman. In addition, we appreciate the critical reviews of the following individuals, which greatly improved and informed the work:• Robert Margolis, NREL• Thomas Jenkin, NREL ContextOne of the requirements for solar electricity 1 to achieve broad adoption and cost competitiveness with traditional forms of energy generation in the United States is widely accessible and low cost financial capital. The Department of Energy's SunShot goals, which would result in solar energy contributing to 14% of the nation's total electricity production by 2030, would require approximately $250 billion of solar electric generation deployment (DOE 2012). Currently, solar electric generation projects are primarily financed by institutions deploying private capital, which often require a high return on their investment. As a result, there has been a growing interest in financial policies and structures that would help migrate financing of renewable energy projects from private sources of capital to public capital markets (Mendelsohn 2012).One investment vehicle that has been discussed by legal and financial experts in the project finance community to accomplish this is a real estate investment trust (REIT). While REITs have historically provided capital for buildings, they have recently been used to help finance other types of property, such as cellular towers and transmission lines. The purpose of this study is to examine the fundamental physical, functional, and operational characteristics of a photovoltaic (PV) system in the context of the characteristics of "real" property as defined by the tax code, to help determine whether REITs can own PV systems. The solar market has treated PV as "personal" property for federal and state tax purposes. If the IRS were to classify PV as "real" property, it would likely have implications on existing market structures. This work has been reviewed and informed by real estate, tax and project finance attorneys as well as...

Master Limited Partnerships and Real Estate Investment Trusts: Opportunities and Potential Complications for Renewable Energy

“…Sources: Feldman et al (2012), and NAREIT 2013However, land, buildings and certain improvements to such real estate are still the most common REIT assets, as well as other assets clearly related to bona fide real estate such as certain qualified real estate mortgages. Though the IRS has over the years substantially expanded the list of qualified REIT activity, the focus has nonetheless remained on traditional assets.…”

“…8 While renewable energy technology has been interpreted as equipment (personal property) under some provisions of the Code, some technologies, such as solar, 9 share the same traits as some assets that qualify as real property under the REIT provisions. 10 For more information on this topic, refer to NREL's report, "The Technical Qualifications for Treating Photovoltaic Assets as Real Property by Real Estate Investment Trusts" (Feldman et al 2012). The definition of real property for REIT purposes is frequently interpreted by the IRS.…”