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 projects.

"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 legislation.

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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