Earlier this year, Sol Systems provided an overview of solar real-estate investment trusts or S-REITs. This post gives an update on the status of S-REITs as the IRS may soon issue a ruling that would allow the creation of a new asset class for solar photovoltaics (PVs) and open the floor for investors to utilize the REIT finance mechanism for solar project investments. The IRS is expected to respond to a private ruling request made in September by the end of this year, potentially lighting the way for a definite ruling on S-REITs and the opening of a new investment market for solar.

Investing in solar can generate compelling profits; however, for small investors interested in buying shares in solar, the only feasible way to do so currently is to invest in solar manufacturers. Currently, private equity investors dominate direct investment in solar projects mainly because they are capable of monetizing the tax benefits that accompany such deals. Tax credit investors are crucial for financing solar projects of nearly any size, but the difficulty in finding those investors and the transaction costs involved in the deal leave a large gap between demand for solar projects, and the capacity of actual projects getting built. Solar REITs (S-REITs) would open up a new investment method that would allow individuals and institutions to invest in a piece or pieces of utility scale solar projects in the same way that they would invest in mutual funds, thanks to REITs’ tradable nature. Reflecting increasing interest in green energy in the face of growing concerns about climate change and extreme weather events, the S-REIT will give individuals the opportunity to participate in the renewable energy market.

In an exciting development, the Renewable Energy Trust Capital, Inc. (RET) made public in September its request for a private letter ruling to the IRS regarding S-REITS. Such a ruling addresses only the case of the taxpayer that made the request, though it can be read as an indication of how the tax code should be interpreted. Although the RET request will be binding only between the RET and the IRS, a private letter ruling often holds precedence to future tax cases since revenue rulings, which are applicable to all taxpayers when issued by the IRS, are often based on previous private letter rulings. It is also possible that there are other S-REIT ruling requests that have already been filed, since a private letter ruling can only be public knowledge if the requesting taxpayer decides to announce it.

As was mentioned in Sol System’s earlier S-REIT blog post, the National Renewable Energy Laboratory (NREL) released a report in June 2012 that concluded that PVs meet many important criteria that fit the definition of “property” per the REIT qualification requirement. The significance of NREL issuing this report is an indication of government interest in the technical specifications that validate S-REITs, an interest that could potentially lead to a future revenue ruling. In the past the IRS has extended the definition of real property for REIT purposes to include other assets like billboards and refrigeration systems that are technically removable but were nevertheless judged to be permanent property. This broad definition application could be used to justify the classification of PVs as permanent property.

Ultimately, the NREL report, coupled with the IRS’s historical REIT asset approval pattern, are indicators of a favorable ruling response from the IRS regarding S-REITs. Sol Systems will continue to monitor the development of a potential S-REIT market and its implications for the current model of investment in commercial solar projects.

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 solar 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 their origination, diligence, and financing processes. Developers seeking financing for solar 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 or www.solmarket.com