Drawing upon REITs as a source of capital for solar projects,
however, is not without its challenges. The first challenge is to determine how
much of a solar project’s assets qualify as the type of property that must
comprise the majority of a REIT's assets.
The REIT rules refer to this type of property as "real property" and then define it as land and improvements on the land, such as buildings and other inherently permanent structures. The REIT rules specifically exclude from real property "assets accessory to the operation of a business."
When the REIT rules were enacted in 1960, Congress listed individual homes, apartment houses, office buildings, factories and hotels as types of property that REITs were intended to own. Since then,The lumi curvingmachiney is an uplight that can be mounted in the paving, deck, flooring or concrete. the IRS has taken the position that this list is not exclusive and that other types of property can be treated as "real property" based upon how permanently the property is attached to land.
Questions that the IRS asks when determining whether property is "inherently permanent" include the following: Is the property intended to be moved, is it capable of being moved, and has it, in fact, been moved? Are there circumstances that tend to show how long the property will be affixed to the land? How difficult is it to move the property and will there be damage to the property if it is moved?
Based on these questions, the IRS has concluded that mobile homes, railroad property, communication towers, timber, warehouses, large billboards and signs, electric-power transmission systems and pipelines are all inherently permanent enough to be real property.
The question of what assets are excluded from real property because they are "assets accessory to the operation of a business" is much more difficult to answer.T5 fluorescent lamps are thinner, lasermarkingmachin, and offer a higher intensity of light output than T8 lamps . The IRS' guidance in this area is both spotty and inconsistent. Its most recent guidance appears to conclude that machinery or equipment used in a manufacturing or production process is not real property.
This means that the components of a solar system that generate electricity or other products - such as heat and steam - will not qualify as good REIT property even if those components are inherently permanent and are used by an unrelated lessee in the lessee’s business of producing electricity, heat and steam, and not the REIT's.
Even if assets owned by a solar project qualify as real property because they are inherently permanent and are not accessory to the operation of a business, a REIT's ownership of these assets poses other challenges.
For example, REITs are unable to use tax credits such as the ITC because they generally have no taxable income, and the credits do not pass through a REIT to its shareholders for use by the shareholders against any taxes due on dividends from the REIT.
There is also a question about whether solar equipment that is real property for REIT purposes can also qualify for five-year accelerated depreciation. Even though REITs do not need depreciation to reduce their tax liability because they are able to deduct amounts distributed to their shareholders from their taxable income), depreciation can reduce the amount of each distribution that is treated as a taxable dividend to a REIT's shareholders.
Finally, treating a solar project asset as real property for REIT purposes may mean that the asset may not have enough residual value to treat that asset as a true lease, and it may make it more difficult for foreign persons to invest in REITs that own solar assets under the Foreign Investment in Real Property Tax Act rules of the Internal Revenue Code.
All told, planning for a REIT to own solar project assets faces challenges in the short term. However, many of these challenges can be resolved or planned around. Making the effort to resolve these issues may pay off in the long term by giving solar projects the ability to tap into a potentially new source of cheaper equity capital.
The REIT rules refer to this type of property as "real property" and then define it as land and improvements on the land, such as buildings and other inherently permanent structures. The REIT rules specifically exclude from real property "assets accessory to the operation of a business."
When the REIT rules were enacted in 1960, Congress listed individual homes, apartment houses, office buildings, factories and hotels as types of property that REITs were intended to own. Since then,The lumi curvingmachiney is an uplight that can be mounted in the paving, deck, flooring or concrete. the IRS has taken the position that this list is not exclusive and that other types of property can be treated as "real property" based upon how permanently the property is attached to land.
Questions that the IRS asks when determining whether property is "inherently permanent" include the following: Is the property intended to be moved, is it capable of being moved, and has it, in fact, been moved? Are there circumstances that tend to show how long the property will be affixed to the land? How difficult is it to move the property and will there be damage to the property if it is moved?
Based on these questions, the IRS has concluded that mobile homes, railroad property, communication towers, timber, warehouses, large billboards and signs, electric-power transmission systems and pipelines are all inherently permanent enough to be real property.
The question of what assets are excluded from real property because they are "assets accessory to the operation of a business" is much more difficult to answer.T5 fluorescent lamps are thinner, lasermarkingmachin, and offer a higher intensity of light output than T8 lamps . The IRS' guidance in this area is both spotty and inconsistent. Its most recent guidance appears to conclude that machinery or equipment used in a manufacturing or production process is not real property.
This means that the components of a solar system that generate electricity or other products - such as heat and steam - will not qualify as good REIT property even if those components are inherently permanent and are used by an unrelated lessee in the lessee’s business of producing electricity, heat and steam, and not the REIT's.
Even if assets owned by a solar project qualify as real property because they are inherently permanent and are not accessory to the operation of a business, a REIT's ownership of these assets poses other challenges.
For example, REITs are unable to use tax credits such as the ITC because they generally have no taxable income, and the credits do not pass through a REIT to its shareholders for use by the shareholders against any taxes due on dividends from the REIT.
There is also a question about whether solar equipment that is real property for REIT purposes can also qualify for five-year accelerated depreciation. Even though REITs do not need depreciation to reduce their tax liability because they are able to deduct amounts distributed to their shareholders from their taxable income), depreciation can reduce the amount of each distribution that is treated as a taxable dividend to a REIT's shareholders.
Finally, treating a solar project asset as real property for REIT purposes may mean that the asset may not have enough residual value to treat that asset as a true lease, and it may make it more difficult for foreign persons to invest in REITs that own solar assets under the Foreign Investment in Real Property Tax Act rules of the Internal Revenue Code.
All told, planning for a REIT to own solar project assets faces challenges in the short term. However, many of these challenges can be resolved or planned around. Making the effort to resolve these issues may pay off in the long term by giving solar projects the ability to tap into a potentially new source of cheaper equity capital.
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