Monday, January 28, 2013
Solar Costs to Fall as REITs Emerge as Source of Funding By Andrew Herndon,
Bloomberg January 24, 2013 | 3 Comments
SAN FRANCISCO -- A San Francisco startup may win approval as soon as this
month to become the first firm allowed to raise money for solar-power
projects as a REIT, the financing vehicle used in $637 billion of U.S.
Renewable Energy Trust Capital Inc., led by a former Moody's Investors
Service chief executive officer, has asked the U.S. Internal Revenue Service
to classify solar farms as the type of "real property" that may be included
in real estate investment trusts, or REITs. A ruling is imminent, according
to Kelly Kogan, an attorney with Chadbourne & Parke LLP, which advises
financiers on REITs.
A favorable decision may open the U.S. photovoltaic power industry to retail
investors at a time when it needs about $6.9 billion a year. REITs, usually
formed to develop commercial property like shopping centers, returned an
average 28 percent in 2012, data on 208 U.S. REITs compiled by Bloomberg
show. The format would offer tradable stakes while cutting the cost of
capital for developers, according to Felix Mormann, a research fellow at
Stanford University Law School's Steyer-Taylor Center for Energy Policy &
"REITs will significantly reduce the financing cost of solar energy projects
and with it, the overall cost of solar electricity," Mormann said. "They
will bring the solar industry a big step closer to subsidy independence."
Standard REITs own and generally operate income-producing property that pays
investors dividends. While they're marketed as more stable than many
investment classes, REITs fell along with most equities in the last
The 125-member Bloomberg Industries North American REITs index, which
excludes mortgage-related trusts, returned a negative 47 percent during 2007
and 2008. That's more than the 34 percent loss including dividends in the
same period for the 1,611-member MSCI World Index of global equities.
The REIT format was authorized by Congress in 1960 to give retail investors
a way to get into commercial real estate. REITs are required to pay at least
90 percent of their taxable income to shareholders, according to the
industry's Washington-based trade group Nareit.
Most are traded publicly and there were 172 REITs registered with the
Securities and Exchange Commission and trading on U.S. exchanges at the end
of last year, with a combined market value of $603 billion, according to
Nareit. The market value of the 208 U.S. REITs tracked by Bloomberg is more
than $637 billion.
REITs owned about $850 billion in real estate, as of December 31, according
to Nareit. The market value of traded equity REITs was about $332 million in
The format has evolved to provide funding for other industries including
timber, data centers, mobile-phone towers, power lines and natural gas
pipelines. The common denominator is that all are tangible assets that
generate steady income over a long period of time, and photovoltaic power
plants fit that mold, according to Renewable Energy Trust's Chief Financial
Officer Christian Fong.
"Solar PV could be next," Fong said. The company, founded in 2011, is led by
CEO John Bohn, who stepped down from the same post at Moody's in 1996. He's
also served as a commissioner with the California Public Utilities
Commission and CEO of the Export-Import Bank of the United States.
A solar REIT would own and operate power plants that convert sunlight into
electricity, just as standard REITs acquire buildings and other
assets. Solar-energy REITs will make it easier for mainstream investors to
get involved in renewable- energy generation, Fong said.
"There's no practical way for individuals to vote with their dollars and
invest in solar power generation," Fong said in an interview. "A solar REIT
would, for the very first time, give them a way to do that."
The idea has the backing of at least 26 members of Congress, including
Senator Lisa Murkowski, an Alaska Republican that's ranking minority member
of the Senate Committee on Energy & Natural Resources.
"Minor changes to the federal tax code could provide the renewable-energy
industry access to large pools of low-cost capital," the lawmakers wrote in
a letter to President Barack Obama Dec. 12. They called on the Treasury
Department to issue a broad ruling approving the use of REITs for renewable
Renewable Energy Trust asked the IRS at least four months ago for a private
letter ruling that would grant it permission to become a REIT. It typically
takes the IRS about four months to six months to respond to such requests,
The IRS may issue its first decision on solar REITs this month, according to
Kogan, the Chadbourne & Parke attorney based in Washington. That's the only
regulatory hurdle Renewable Energy Trust will need to clear and a favorable
ruling will apply only to Fong's company.
CleanREIT Partners LLC, another San Francisco-based company
pursuing solar REITs, submitted a similar request to the IRS last year and
later stopped the process while it pursued additional capital, according to
co-founder Bill Hilliard. He's now planning to form a REIT in Canada to
invest in U.S. solar assets, and may pursue an initial public offering on
the Toronto Stock Exchange in the third quarter, he said.
Conventional REITs typically pay dividends of about 3 percent to 4 percent,
according to Hilliard. The first solar REITs may pay more, as much as 6.5
percent to 7 percent, because they are a new format with potentially new
risks, he said.
REITs paid out about $22 billion in dividends in 2011, according to the
Nareit group. That's more than triple the estimated $6.9 billion that
U.S. solar developers will need annually for photovoltaic projects through
2020, according to a June report by Bloomberg New Energy Finance.
Most funding for solar projects comes from bank loans or investors that
purchase stakes, in part to obtain a share of a 30 percent federal
investment tax credit that's set to fall to 10 percent in 2017, an
arrangement known as tax-equity financing. This is an expensive form of
capital, according to Hilliard.
A key advantage of the REIT format is liquidity, Hilliard said.
"Because of the way tax equity works, people are locked into their
investments for five-plus years," he said. "They demand a much higher return
than if you had a publicly traded stock that you could buy in the morning
and sell in the afternoon."
This new investment format may become an option just when it's needed, Fong
"This industry desperately needs more capital," he said by telephone.
"Financing has become the bottleneck to growth."
Solar REITs would help resolve that issue, according to Stefan Linder, an
analyst with New Energy Finance.
"High financing costs are well recognized in the industry as a barrier to
growth," Linder said. "Any structures that allow a wider investor base to
get involved, increases liquidity, or lower taxes would be beneficial."
The 30 percent tax credit may be a barrier to using REITs for solar farms,
said Timothy Kemper, national director of CohnReznick LLP's renewable energy
industry practice. "It's going to be tough to compete against investors that
are utilizing tax incentives," he said.
Copyright 2013 Bloomberg
Lead image: Finances via Shutter
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Friday, January 25, 2013
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Thursday, January 24, 2013
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Leading indicator of supply contraction. These financial results will trigger large-scale consolidation and do a Darwin on the weak.
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Friday, January 11, 2013
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Wednesday, January 9, 2013
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Tuesday, January 8, 2013
Friday, January 4, 2013
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Note capacity factors and PPA rates
FW: Energy Tax Law Alert: Fiscal Cliff Bill Includes PTC Extension and Other Energy-Related Provisions
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