Distribution utilities are well positioned to provide tax equity for renewable projects, but some state laws prevent it. Tapping the potential will require progressive leadership by utility...
Green REITs, MLPs, and Up-Cs
- as much as 55 percent to as little as 15 percent and the tax on exit from as much as 55 percent to as little as 0 percent. 4
- Retail U.S. Investors: REITs provide simplified tax reporting. For a retail U.S. investor, an investment in REIT stock enables a retail investor to enjoy simple and timely tax reporting, because a REIT reports dividend income to shareholders on Form 1099-DIV. By contrast, an investor in an MLP will receive a Form K-1 which, in addition to being significantly more complex and cumbersome than a Form 1099-DIV, often requires retail investors to obtain federal tax return filing extensions every year and to file tax returns in every state in which the MLP owns assets or conducts business. For this reason, many retail investors prefer REIT investments over MLP investments.
In many cases, the benefits conferred by REITs for tax-exempt, foreign, and U.S. retail investors will be worth the additional restrictions and accompanying administrative burden imposed on REITs.
Figure 1 provides a very general comparison of the key factors that should be considered in choosing between a REIT, an MLP, or an Up-C as the capital vehicle for a renewable energy project. Download a pdf of Figures 1 through 7 here .
Capital Raising Strategies: Sale-Leaseback vs. Borrowing
There are many different capital-raising strategies available to an unregulated utility, and this article will explore the two basic building blocks of those strategies: the sale-leaseback financing and the traditional secured borrowing. 5 Because, as described below, the different capital vehicles are not equally effective at accommodating different capital-raising transactions, an unregulated utility’s decision between a sale-leaseback financing and a traditional borrowing will inform its decision about which capital vehicle to use.
Besides the business and economic differences between being a non-owner tenant (as in a sale-leaseback structure) and an owner-borrower (as in a traditional borrowing structure), one practical consideration is worth mentioning here: borrowings are relatively simple, easy transactions, whereas sale-leasebacks can be more complicated and may require more creative tax planning. Thus, all else being equal, a taxpayer that has little appetite for complexity may prefer a traditional borrowing over a sale lease-back transaction. The right choice for any given renewable energy project will, however, depend on all the facts and circumstances.
REIT Operating Models
REITs can accommodate either a sale-leaseback or a traditional borrowing using one of three operating models: the landlord model, the lender model, and the hybrid landlord-lender model.
Under the landlord model, which would be used for sale-leaseback transactions, the REIT will typically buy from the unregulated utility (i) the gathering and transmission assets, (ii) the land underlying the facility, and (iii) any other components of the facility that may be owned by the REIT without jeopardizing its REIT status, including, for example, facility components that are treated as real estate assets ( e.g., wind towers and pads or solar racking structures) and, subject to the REIT rules, certain facility components that aren’t real estate assets (the assets described in clauses (i) through (iii), collectively, REITable assets). Any components of the