John Marciano Co-Authors Article on REITs for Wind Projects

Tax partner John Marciano has co-authored an article for North American Windpower regarding the benefits and potential challenges of using a real estate investment trust (REIT) to fund renewable energy projects over traditional sources such as grants, government-guaranteed debt, pure debt, tax equity, subordinated debt and true equity.

In “How Fixing REIT Rules Would Help Wind Projects,” the authors note that using a REIT to fund a renewable energy project could lower the project’s cost of capital for two main reasons:

  • Higher dividend yields: “Most REITs distribute all of their taxable income annually, so they owe no corporate-level income tax. This means that a REIT can offer higher dividend yields than a regular corporation can.”
  • Highly liquid shares: “Because many REITs can be publicly traded without affecting this tax advantage, the shares of REITs tend to be highly liquid.”

Although there are many benefits to using REITs, the authors note that there are potential challenges and disadvantages as well, including:

  • Issues raising tax equity: “Even though a REIT only is subject to a single layer of tax, it is not a pass through entity. That means that tax benefits do not flow through the REIT to its shareholders in order to offset taxes on dividends.”
  • Inefficient use of production tax credits or depreciation: “A REIT generally has no taxable income of its own. In fact, even if a REIT were to have a small amount of income (if it were to hold back a small amount of earnings), the investment tax credit would be available only to the extent a REIT were to pay tax on its earnings.”

However, addressing those concerns, the authors note that, “as long as a REIT can meet its minimum thresholds for income from – and holdings of – real property, it has a fairly free hand to invest in tax-equity transactions, provided that it does not sell power (inventory). If a REIT can meet these minimum thresholds, it merely has to be careful not to cause the tax-equity investor to lose its tax benefits.”