Tom Konrad was back writing about Solar REITs on his Forbes blog Monday. For reference, Tom posted the story on Solar REITs that I was quoted extensively in a few months back. I am happy to note that I am featured here as well, commenting on the idea that existing and forthcoming private letter rulings from the IRS addressing investment in solar under the REIT structure might not lead to mass investment in the sector.
Tom paints me as a bit of a pessimist, which is historically odd given that I have suggested that the IRS could, "with a stroke of the pen" make mass changes happen, but is not odd in the context of my recent thinking on the topic. That is, I am slightly skeptical about the ability (or maybe appetite is more appropriate) of the IRS to issue the broad-based types of private letter rulings which would give many taxpayers the comfort to file taxes as REITs.
I do hope I am wrong, not least because I have a personal interest in seeing the S-REIT structure take off. However, given historical precedent, it seems most likely that change facilitated by the IRS will be incremental, slightly slow, and not game-changing, at least in the very short term. For anyone who understood the past few paragraphs and is interested in more on this topic, visit my many posts, including this one, or Tom's original post, here.
On a related side note, The New York Times published an article over the weekend about the many companies in many other sectors that have started to utilize the REIT structure. While this could be viewed as a positive for solar - the more comparisons which can be drawn to existing IRS-allowed asset types, the more compelling the case for solar being REIT safe is - Ross Smotrich, an analyst who was interviewed also pointed out that many companies not paying C-level taxes might have the unintended consequence of putting more of a spotlight on the sector.
My gut tells me that this won't have an impact on those using the REIT structure in their businesses currently, and that managers will face the bridge of narrowing the definition of what is REIT eligible when they get to it. Why bother when there are short-term cost savings! However, it is food for thought for those who see a future for Solar REITs.
Tip of the cap to R.S.
Congrats on the continued recognition!
ReplyDeleteJosh,
ReplyDeleteThe feeling I was trying to convey in my article was that the underlying principles behind HASI's PLR are fairly permissive to renewable energy facilities in REITs.
I don't think HASI's PLR itself is broad based, but I think the fact that HASI did not have to change *anything* about their business model to become a REIT means that the IRS may continue to be generous in granting future PLRs.
In other words, I think HASI's PLR is a more encouraging sign than you seem to... that's why I painted you as a pessimist.
Hi Tom,
ReplyDeleteThanks so much for stopping by. I agree 100% with your assessment that I am a bit more pessimistic at this point than you are - and I will probably continue to be until it becomes clear what is in some of the other PLRs which are apparently in taxpayer's hands.
Everything I have heard has indicated that the IRS was not too keen on taking big steps on its own on this matter. I really hope I am wrong - very few individuals would have more to gain from a Solar REIT structure becomeing a reality than I would. That said, I think I would say I am skeptical until proven wrong.
Now, I will admit that I don't know a whole lot about HASI's business model, and the ruling could therefore be more exciting than I think.
In any case, I hope you didn't misconstrue my thoughts in the post above - I was pointing out that painting me as pessimistic when I have been the biggest proponent of the S-REIT structure would have been odd at points in the past, but that you were correctly doing so now.
And congrats on another excellent article on the topic - you are one of the few people I have seen writing about the S-REIT structure from a knowledgable investor's point of view.
JS
I wasn't offended... just wanted to make sure I was being clear. You know more about it than I do... hope I'm not just being an incurable optimist.
DeleteSeems like Distributed Sun would be a good candidate to request your own PLR. Have you considered that? (or are you, like Eckel, keeping the "private" in PLR?)
Tom,
ReplyDeleteYou might be on to something with the HASI ruling...I just think that a lot of people in the industry are looking for more than a PLR that the recipient has kept very private (your interview notwithstanding) and a lot of whispers about other possible actions by the IRS. The industry is trying to plan for a post-ITC world, a eventuality that is a lot closer that it was when I first published my paper.
As for DSUN's position, I think this is a good time to include a reminder that I am speaking for myself, and not for DSUN, when I speak on the REIT issue (that is particularly true on this site).
However, I can say that DSUN, as a company, is broadly supportive of any changes, whether through legislation or otherwise, which will help facilitate greater development in solar in the future.
Whether it is us or another company, someone will almost always find a way to create value under whichever framework is in place whether it is a REIT or MLP, or an extension of tax credits, or accelerated depreciation, or state schemes, or whatever else comes down the line. The more structures available, the more creative people can get - I think that is true as a general rule in American business, including solar. The more creative people get, the more money will come into the space, and a rising tide will lift all ships (at least those ships who make it through any near-term storms).
While DSUN isn't leading the charge on any such efforts and while we don't have current plans to request any guidance from the IRS on any alternative investment structure, we have been supportive of alternative structures in other ways. For example, we recently endorsed the re-introduced MLP legislation.
JS