Wednesday, June 13, 2012

FW: A Renewable Energy REIT?

One idea that's been put forward to finance renewable energy projects over
the long term, in addition to green bonds, is using a REIT structure.

REITS, which are commonly used to finance real estate development, could
similarly be used to finance renewable energy infrastructure. Everyone would
then be able to invest and get a direct stake in solar, wind and other

"Solar real estate investment trusts (S-REITs) are particularly applicable
because of the nature of the technology, particularly its dependable output
independent of most market risks (e.g, fuel price increases and risks
related to new greenhouse gas regulation) and its long useful life," says
Joshua Sturtevant in a paper on the subject.

Currently, the IRS limits REITs to specific types of real estate assets, so
the tax code would have to be broadened as well as clarified to allow
proceeds from power purchase agreements to qualify as revenue. Either the
IRS could directly rule on this or Congress could amend the tax code through

Although there is no pure renewable energy REIT now, the Power REIT
(AMEX:PW) aims to fill the hole until the rule changes are made.

Money manager, Tom Konrad, writes in Forbes:

It's possible to strip out the real estate assets from a wind or solar farm,
and put them into the REIT. Renewable energy developers are already familiar
with complex ownership structures (thanks to our tax laws), so stripping out
real estate assets should not be a big leap.

In order to implement his vision, Lesser and his team began buying the
shares of what was then known as the Pittsburgh & West Virginia Railroad, an
infrastructure REIT holding 112 miles of main line railroad real estate that
is triple-net leased to Norfolk Southern Railroad (NYSE:NSC) for 99 years.
The renamed PW still holds the railroad asset, and has no debt.

Based on the income from the railroad lease, PW pays a $0.40 annual
dividend, for a 5.5% yield at the current stock price of $7.24. Lesser
believes he can invest in renewable energy assets at yields in the 8.5% to
9% range. These will be financed with debt at around 6.5% and potentially
additional equity. Any such transaction would bring an immediate increase in
income per share.

Acquisitions have an added advantage of increased scale. Power REIT needs to
grow in order to better manage the expenses of being public. Income from the
existing railroad asset is insufficient to support these expenses.

Read Konrad's article.

Read the paper:
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