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
facility not purchased by the REIT (non-REITable assets) would continue to be owned either the unregulated utility or would be purchased by a TRS of the REIT. 6 Figures 2 and 3 ( Download a pdf of Figures 1 through 7 here ) illustrate the landlord model with and without a TRS, respectively.
If a TRS isn’t used, the REIT would lease the REITable assets to the unregulated utility, and the unregulated utility would use those leased assets, together with any non-REITable assets that it already owns, to produce and sell energy to a buyer (commonly referred to as an “offtaker”). Alternatively, if a TRS is used to hold the non-REITable assets, the REIT and the TRS would jointly lease their respective assets to the unregulated utility, which would use the leased assets to produce and sell energy to an offtaker. In either case, the rents payable by the unregulated utility to the REIT may be contingent on the unregulated utility’s gross income from the use of the leased assets.
As described above, it is possible, subject to limitations, for a REIT to own those components of a facility that aren’t treated as real property for purposes of the REIT rules. The REIT asset tests, for example, would allow up to 25 percent of the REIT’s assets to consist of a combination of personal property and securities. 7 In addition, the limited personal property exception would allow the REIT to own, and to lease to the unregulated utility, a significant amount of personal property without violating the REIT gross income tests. Specifically, if the value of the personal property components of a facility is less than 15 percent of the value of the facility as a whole, then all of the rental income received by a REIT upon a lease of the facility—even the portion of the rent attributable to the personal property—would be treated as qualifying “rents from real property” for purposes of both REIT gross income tests. If the personal property components exceed this 15-percent threshold, the REIT could nevertheless qualify for the limited personal property exception by causing the excess to be held through a TRS.
The lender model, which is illustrated in Figure 4 ( Download a pdf of Figures 1 through 7 here ) and would be used for traditional borrowers, is a traditional secured lending transaction under which the unregulated utility continues to own the renewable energy assets, and the REIT makes a mortgage loan to the unregulated utility secured by those assets. The REIT will receive mortgage interest payments, some of which may be contingent on the unregulated utility’s gross income. The unregulated utility would then sell energy to an offtaker.
As the name suggests, the hybrid landlord-lender model, which is illustrated in Figure 5 ( Download a pdf of Figures 1 through 7 here ), is a combination of the landlord model and the lender model and can therefore accommodate at the same time a sale-leaseback transaction and a traditional borrowing with respect to different assets. Under the hybrid landlord-lender model, the REIT will