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Green REITs, MLPs, and Up-Cs

the C corporation. The basic use of an operating partnership to effect a tax-free acquisition in an Up-C structure is illustrated in Figure 7. It should be noted that a REIT can use the same operating partnership structure to acquired appreciated assets on a tax-free basis. The REIT version of an Up-C structure—the so-called UPREIT structure—would generally be the same as the Up-C structures shown in Figure 7, only with the REIT in place of the C corporation and a TRS situated underneath the operating partnership, if necessary. 8

Although a contribution to a privately held operating partnership in exchange for OP units isn’t, as a legal matter, equivalent to a contribution in exchange for publicly traded corporate stock, the typical OP unit is structured so that it is economically fungible with a share of publicly traded corporate stock. In particular, a REIT or Up-C that utilizes an operating partnership will ordinarily hold all of its assets through the operating partnership, and a holder of an OP unit will generally have distribution and liquidity 9 rights that are substantially identical to the rights of a holder of stock in the REIT or public C corporation. As an added benefit, an operating partnership will often be able to make leveraged distributions to holders of OP units on a tax-free basis, an option generally not available to a REIT or C corporation that wishes to make distributions to its shareholders. For these reasons, a contribution of property to an operating partnership will generally yield substantially identical economic results, but superior tax results, as compared to a contribution of property directly to a REIT or C corporation.

Accommodating Renewable Energy Tax Incentives

As alluded to above, several renewable energy tax incentives have been available to investors in renewable energy projects. These incentives include a production tax credit (PTC) that is contingent on the amount of energy produced and sold by the project, an investment tax credit (ITC) for money invested in certain energy property, and accelerated depreciation for certain types of machinery and equipment used to produce renewable energy.

The renewable energy tax incentives vary in the nature of the benefits they confer, the requirements for achieving those benefits, and their suitability for a particular project or ownership structure. Although a detailed description of the renewable energy tax incentives is beyond the scope of this article, one important point bears mentioning here: each of the renewable energy tax incentives provides tax benefits for only a limited period of time, after which the benefits are exhausted and cease to apply.

Two structural considerations follow from this point. First, those projects that have exhausted their renewable energy tax incentives can be transferred to any of the capital vehicles described above without the need for any special structuring considerations related to the incentives. Because there are no remaining tax incentives, they cannot be wasted by transferring the relevant project to an entity, such as a REIT or an MLP, that does not pay taxes.

Second, if a project’s renewable energy incentives have not yet been exhausted, preserving the

Deck: 
Tax-efficient capital vehicles for unregulated utility investments.
Subtitle: 
Tax-efficient capital vehicles for unregulated utility investments.
Intro Text: 
As tax equity investors are moving away from renewable power facilities, political and market forces are creating the need for additional project financing. Fortunately, three non-traditional capital vehicles offer low-cost financing alternatives.

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Publishing Date: 
Sunday, April 21, 2013 (All day)