Over the last few years, I have written a number of articles directed at owners of California real estate regarding a variety of solar power matters. These posts have dealt primarily with pragmatic, quotidian real estate concerns, such as the financing and tax benefits available for the installation of solar electric facilities, the relative advantages and disadvantages of residential solar leases, and key considerations in deciding to proceed with a solar energy system.
One current facet of the solar electricity sphere that I have not previously touched on is the potential for substantial solar energy projects to be capitalized by real estate investment trusts (REITs). Briefly, REITs are companies that own or finance aggregations of income-producing real property on behalf of and for the benefit of their shareholders. Similar to mutual funds, REITs have the capacity to produce income, diversification and long-term capital appreciation for a varied array of stakeholders, allowing investors to put their resources into collections of real estate assets through the ownership of shares in the REITs, rather than through direct ownership of real property. REITs can also give developers access to sources of capital that are deeper and broader than might otherwise be available from direct investment in real estate.
In May 2014, the IRS and the Treasury Department proposed new regulations to provide more guidance to REITs on what assets qualify as “real property” in order to make it simpler for solar power businesses and other renewable energy outfits to attract funding from REITs and grow. While current regulations gave particular examples of qualifying assets, and previous tax rulings added further clarification, REITs had tried in recent years to invest in assets that were not directly addressed by either the regulations or rulings. The goal of these new rules was to clarify the definition of “real property” under Internal Revenue Code Section 856, which circumscribes the types of investments that REITs may make.
On August 31, 2016, the final regulations on this subject were adopted and published by the IRS and the Treasury Department, based on the proposed regulations issued in 2014, and as modified in response to comments made during the regulatory review process. Despite the intent of these regulations to help renewable energy companies (including solar power businesses) draw more investment from REITs, however, it does not appear that these new rules will provide much benefit in that regard.
While these new regulations will provide additional guidance to REITs and their shareholders, many advocates for alternative energy sources had hoped that they would set down bright line rules defining the types of facilities that will qualify for investment by REITs. Instead, however, these new regulations simply continue to lay out a framework for analysis of the particular asset in question, thus requiring a case-by-case review in order to determine whether a REIT may invest in the asset. As a result, it is not expected that solar electricity and other renewable power facilities will be able to attract much more investment from REITs than they had previously done.
The final regulations may be found at 81 Federal Register 59849.