REIT Fact Sheet

June 12, 2013

Author(s): Paul Holshouser

REITs and Renewable Energy

Interest in new financing mechanisms for renewable energy has been elevated recently, especially those mechanisms which aim to tap into public capital markets. Along with MLP’s, the idea of using Real Estate Investment Trusts (REITs) to fund renewable projects has been proposed. Public capital markets increase access to capital, and since renewable energy is a capital intensive industry in a growth phase, maximizing the investor pool can be beneficial. REITs are one example of this concept.

 

What are REITs?

REITs are public corporations that own, operate, or finance real estate assets, which are allowed (by statute) to deduct distributions to shareholders from their taxable income. This offers the possibility of reducing corporate tax liability to zero if distributions are high enough. Like stocks or mutual funds, investors (retail investors included) can buy and sell their ownership interest at any time. In the United States, there are 166 publicly traded REITs with a total market capitalization of $579 B as of January 1, 2013[1].


In order to qualify for the benefits of REITs, a few major compliance requirements must be met:

  • Be a taxable corporation, managed by a board of directors or trustees
  • Have fully transferable shares
  • Minimum of 100 shareholders
  • ≤50% of shares held by 5 or fewer individuals during the last half of the taxable year
  • Invest at least 75% of total assets in real property
  • Derive at least 75% of gross income from rents or mortgage interest pertaining to real property
  • Have no more than 25% of assets consist of stock in taxable REIT subsidiaries
  • Pay annually at least 90% of taxable income to shareholders as dividends

 

Do REITs work for wind energy?

Wind energy projects have not been classified as real property by the IRS, and no projects have been purchased as ‘REITable’ assets. AWEA is monitoring this situation if there are signs that wind projects might be eligible assets for the dual 75% real property tests.

[1] http://www.reit.com/REIT101/REITFAQs/BasicsOfREITs.aspx