REIT-Funded Solar Projects

Brian Hicks

Written By Brian Hicks

Posted January 22, 2013

Could REITs be the future of alternative energy investments? Later this month, Renewable Energy Trust Capital Inc., a San Francisco startup, could become the first U.S. company to gain permission to raise funding for solar projects as a REIT.

REITs, of course, have been used as financing platforms in almost $640 billion of domestic property ventures.

Renewable Energy Trust Capital is arguing that solar farms be seen as “real property” so they can be included in real estate investment trusts. A positive decision in this case would allow retail investors to flock to the U.S. solar photovoltaic sector, infusing a potential $6.9 billion annually.

From Bloomberg:

“REITs will significantly reduce the financing cost of solar energy projects and with it, the overall cost of solar electricity,” [Stanford University research fellow Felix] Mormann said. “They will bring the solar industry a big step closer to subsidy independence.”

REITs typically own and operate property that generates income and pays normal investor dividends. They are required by law to pay a minimum of 90 percent of all taxable income to shareholders, and as of the end of 2012, some 172 REITs were listed with the SEC and trading on U.S. exchanges. This group represented a market value of around $603 billion last year.

REITs have proved useful as funding platforms for timber mills, power lines, natural gas pipeline projects, and even mobile phone towers, as all of these generate income over a long time and are physical assets. By that logic, solar PV plants could certainly be next.

Presently, the notion has Congressional support to a degree—26 members are known to be in favor of the solar-REIT model. The REIT format would offer some much-needed liquidity in financing, while avoiding expensive tax-equity financing requirements.

Lack of adequate financing is indeed a problem for solar investments, which often require significant early capital. REITs could be the solution.

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