In early 2013, many in the solar industry appeared to be thinking that the IRS’s blessing of a solar REIT would be provided within weeks. It is now the middle of 2013, and it appears the thinking from a few months ago was at best irrational exuberance. Three events have triggered a change in perspective on solar REITs.
First, Hannon Armstrong’s private letter ruling request as to its REIT status is now public. Prior to the ruling being made public, the industry scuttlebutt was that the ruling would bless rooftop solar as REIT eligible. However, Hannon Armstrong’s CEO Jeff Eckels best describes the actual substance of the ruling – “We did not ask the IRS about renewables and we did not receive anything from the IRS that mentions renewables.” The article quoting him is available here. What the ruling actually concluded is that certain energy efficiency improvements are able to be included in Hannon Armstrong’s REIT qualification calculations as real estate. The redacted ruling is even more cryptic as to the specifics of those improvements. The redacted ruling is available here.
Second, Renewable Energy Trust Capital, Inc. submitted a private letter ruling request asking for the IRS to rule that ground-mounted solar projects are real estate for REIT purposes. Renewable Energy Trust Capital, Inc. was predicting that it would have its ruling by the end of January. It is now mid-June and that ruling has not materialized, and Renewable Energy Trust Capital, Inc. is no longer being featured in financial publications. There are no official reports, but it appears the IRS declined to issue that ruling.
Third, three public corporations disclosed that their conversion to REIT status, which was dependent upon receipt of an IRS private letter ruling is at best delayed pending study by a newly formed IRS working group as to what assets qualify as “real estate” under the REIT rules. None of the corporations are in the solar industry. One is Iron Mountain which provides sophisticated warehouse storage for physical documents.1 The second is Lamar Advertising which owns billboards.2 The third is Equinix which owns electronic data storage centers.3
The IRS working group appears to have at least two origins. First, certain members of Congress, many of whom have Republican leanings, were concerned about the loss of revenue from public corporations converting from C-corporation status, with two layers of tax, to REIT status with effectively a single layer of tax. Second, I suspect that the IRS had trouble articulating why ground-mounted solar did not constitute “real estate” for REIT purposes in light of rulings it had issued about assets such as electric transmission systems and data storage centers. This challenge may have made the IRS question the accommodating rulings it had issued in recent years.
I believe the IRS working group will take at least six months to complete its review. In that time, any REIT eligibility rulings will be relatively plain vanilla. At the end of the review, I suspect the IRS will decide not to back track on its prior positions regarding assets like transmission, cell towers and data storage centers, but it will decline to further expand the definition of real estate for REIT purposes. Therefore, new asset classes like solar and warehouse storage for physical documents may not receive favorable rulings. Nonetheless, after the dust settles, I suspect the IRS may have a favorable view of roof-mounted solar systems that only provide power to the building on which they are mounted.