S-REITs – The Closest Option to Public Solar Financing?
Solar finance is not a new concept, but it’s predominately controlled through private and business to business transactions. The limited availability of capital, combined with the risks associated with a still maturing solar market, leave developers with a higher transaction costs in the search of financing for solar projects. Platforms such as SolMarket attempt to mitigate the challenges of solar finance by matching projects with an appropriate network of pre-qualified investors.
In the search for new sources of capital, topics of “real property” and REITs (Real Estate Investment Trusts) have arisen within the solar community. A REIT, as defined by the Securities and Exchange Commission, “is a company that owns – and typically operates – income-producing real estate or real estate-related assets.” REITs act similar to exchange traded funds where public investors can participate in a diversified pool of real estate investments without owning or purchasing property. Investors would earn a share of the income produced through the commercial site through dividend payments. Currently, there are two tests for REITs. First, the income test requires that 95% of income must come from approved sources (usually rent). Second, the asset test requires that 75% of its assets must be real property.
If the property definition for solar PV systems is changed through tax code reform, investors could begin to explore the potential world of S-REITs (Solar Real Estate Investment Trusts). S-REIT’s would allow for a more transparent, secure, and competitive method of financing solar projects. The pool of investors would expand beyond private investment funds, to retail investors and even pension funds. One of the most attractive features of a REIT is its exemption from corporate taxation, as long as it distributes 90% of income to investors. In the case of solar, the main challenge arises with the income test. Unfortunately, the qualifications of a power purchase agreement as a form of rent are, at best, questionable.
Of course, even if solar fulfills the requirements of a REIT system through PPA installments, PV systems are still considered personal property. A change in the property tax code has to occur in order for S-REITs to exist. One important definition by the Internal Revenue Service regarding real property includes “land or improvements thereon, such as buildings or other inherently permanent structures thereon,” (Section 1.856-3(d) of the Income Tax Regulations) while personal property is essentially everything else that you own.
While solar energy systems can be physically moved, they are often fixed for periods up to, and beyond, 25 years. The main inhibitor to establishing solar as real property is the concept that solar panels operate in a system. That is, if the inverter or mounting is removed from a solar installation, the array’s functionality is reduced or completely eliminated.
S-REITs are yet another innovation of the solar finance community. However, like other facets of the solar market, S-REITS face the challenges of complex state regulations and tax codes. While the concept may never come to fruition, the idea signals a greater demand for a more transparent, liquid, and stable solar market.
About Sol Systems
Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.
Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying the origination, diligence, and financing processes. Developers seeking financing for projects can access over $2.5 billion in capital through the Sol Systems investor network.
In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.
For more information, please visit www.solsystemscompany.com.