An Investment-Driven Solution to Green Development Problems: The S-REIT (Part 5 in a Series)

This post is Part 5 in a series and is excerpted from a recent thesis on the applicability of the REIT tax structure to large-scale solar development. Parts 1 through 4 may be found at the following links: Part 1, Part 2, Part 3, Part 4.

Implications and Potential Benefits of the S-REIT Model

As noted, an S-REIT regime would provide numerous investment benefits to participants including steady returns and as a portfolio diversification tool. It would also provide an outlet for those interested in investing using a socially-responsible strategy. There are, of course, other benefits to the structure as well. Although it would be naïve to overstate the immediate impact that the S-REIT structure could have on energy policy by itself, in the long-term and as part of a more comprehensive energy strategy, it could lead to subsidiary benefits which are worth discussion. 1

Because solar energy production does not require inputs the way that coal, natural gas or even nuclear facilities do, increasing solar energy’s percentage as part of the overall energy mix would result in a decreased emphasis on fossil fuels required for energy production. This, in turn, would produce security, safety and environmental benefits. With a reduction in the demand for foreign sources of fossil fuels would potentially come a reduction in reliance upon dictators and unfriendly governments. This has obvious policy implications, and, taken to its logical end, could lead to a reduction in the necessity for foreign entanglements in the future. Additionally, unlike nuclear facilities and the constant, though debatably valid concerns regarding terror and safety, no such concerns exist with respect to solar arrays. Finally, the reductions in emissions, fuel spills in the transport process and strategies such as surface mining for coal that would come with a reduction in demand for fossil fuels make the increased use of solar energy particularly attractive from an environmental perspective.

The impact of an S-REIT structure on the environment could extend beyond some of the obvious ones noted above and into the policy realm. For example, utilities could embrace this type of solution as part of their state-mandated renewable portfolio standards (RPSs). Renewable portfolio standards are one mechanisms that states are increasingly using to increase the proportion of renewable energy purchased in their jurisdiction. 2 RPSs typically place requirements on utilities to supply a portion of their load with renewables. 3 Though RPSs have been introduced into Congress on several occasions, most of the regulations now in place are mandates put into place by state legislators and utility regulators. 4 If a cheap source of renewables were available due to the S-REIT structure, it would help utilities meet these standards.

In addition to investment, safety, security and environmental benefits, the S-REIT structure could provide a prototype development model for other renewables. The closest parallel could be drawn to wind power. Wind could be a strong candidate for inclusion in the REIT structure for a few reasons. Though solar can be a very effective and steady fuel source, there are geographic limitations on where it can be most effective. And, though the electric network is being upgraded across the US, there are limits to how far electricity from any source, including solar, can be efficiently transported. Fortunately, many of the regions where solar would be least effective have great potential as production sites for wind-generated power. Allowing wind developers to take advantage of the REIT structure would allow energy supply gaps to be filled and could factor heavily into a more comprehensive plan for the future of energy production. There are additionally benefits in areas of geographic overlap. Most notably, wind could potentially be blowing 24 hours a day, while there are some fairly obvious restrictions on how many hours in a given day solar could be relied upon. Also, the same inclement weather that could render a solar array useless might generate more than enough wind to compensate for deficiencies in solar production during any given time period.


There are some reasons why wind would not thrive in a REIT regime currently. For example, the annual variability in production from wind 5 dictates that it is not eligible for the same contract structures with utilities that the more steady solar developers can put into place. Additionally the production costs of wind do not currently make it as attractive for the structure. However, if wind were included in any REIT-like structure that is implemented for solar, this could ensure that the proper framework would be in place at the point that the calculus of wind production made the REIT structure attractive. Additional practical considerations of this inclusion would possibly include broader support, both in the political and corporate spheres, for the types of changes that are necessary to put the S-REIT structure in place. 6

Finally, there could be some broader global implications in the wake of an adoption of the S-REIT structure in the US. Many nations already have REIT regimes for commercial real estate. 7 Additionally, many nations are struggling with the same type of fossil fuel dependence issues that the US has. Though REIT laws vary, sometimes significantly from nation to nation, it would not be difficult for many states to modify existing REIT structures to allow for the inclusion of solar development. This could have implications for both the developed and the developing worlds. Many developed countries, such as Germany, stimulate solar development with incentives such as feed-in tariffs. A REIT structure could eventually replace this type of regime as the industry becomes more mature and requires less government assistance, producing the same benefits to investors as noted above. In the developing world, a REIT structure with the right incentives could be a tool for governments to invite foreign investment, save costs on imported fossil fuel supplies, and decrease emissions to ensure compliance with any regional or international emission standards regimes. Such a development could have interesting applications in regions such as Northern Africa and the Middle East.

1. Though overall energy strategy is outside the scope of this paper, some other solutions that could be considered as part of a broader plan could include increased energy efficiency, an increased dependence on wind power, and increased local generation among others.
2. Kennedy at 108.
3. Id.
4. Id. at 109.
5. Zweibel Interview.
6. On a tangential side-note, a little foresight could go a long way if wind were also to be included in the proposed structure, in particular regarding naming. Some proposals could include Energy REIT or RE (for renewable energy) REIT.
7. See, List of Country Names, available at http://www.reits.com/h/countries/.