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
secured by certain renewable energy assets are qualifying real estate assets—which would necessitate a finding that the underlying renewable energy assets themselves are “real estate assets”—but the exact nature of the assets covered by the ruling isn’t clear from the description in the SEC filings.
3. A foreign investor would generally be subject to regular federal income tax on income and gains associated with the renewable energy assets. Thus, a non-corporate investor would currently pay tax at a maximum rate of 39.6 percent on operating income and 20 percent on capital (sale) gains. A corporate investor would pay tax at a maximum rate of 35 percent on both operating income and capital (sale) gains and, in addition, would pay a 30-percent branch profits tax on the amount remaining after the imposition of the 35-percent tax. Thus, the effective tax rate for a foreign corporate investor that is subject both to the regular federal income tax and to the branch profits tax is approximately 55 percent. The U.S. tax rates imposed on foreign investors may be reduced by tax treaties.
4. Foreign governments and sovereign wealth funds investing through a REIT structure may be eligible for additional tax exemptions that reduce their tax on both operating income and exit gain to 0 percent. A discussion of those exemptions is beyond the scope of this article.
5. Although an unregulated utility can certainly also sell its renewable energy project without continuing to operate that project through a leaseback or otherwise, the utility is likely to desire to continue to operate the project. This article thus focuses on structures that accommodate that desire.
6. The REIT may own all, or any portion, of the TRS’s stock. Placing the non-REITable components of a Facility in a TRS allows the REIT to gain indirect economic exposure to those components, which it wouldn’t have if those components were owned by an unregulated utility. Such a structure would, however, require careful monitoring to ensure compliance with the REIT rules.
7. It should be remembered that stock of a TRS isn’t a real estate asset and thus must be added to all other non-real estate assets when testing a REIT’s compliance with the 75-percent REIT asset test.