Over the last few years, much of the novelty of solar power generation has worn off. Purchasers of solar energy are driven less by environmental issues and more by economic ones. As such, solar power companies are now competing with other forms of more conventional investments in their search for investors and customers. For a solar company to provide its product at a competitive price, it must squeeze its expenses wherever it can do so.
As with all capital intensive projects, the expense of acquiring capital is a significant component in the success of any solar project. Solar companies, like all capital intensive industries, have attempted to utilize all different types of financing to increase access to capital while keeping the expense of investing as low as possible.
One form of ownership structure that has been successful over the years in the real estate industry has been the Real Estate Investment Trust ("REIT"). REITs are an investment creature that was created by the United States Tax Code. Simply put, REITs are corporations that own or invest in real estate assets and are allowed to avoid income tax at the corporate level if 90% of their taxable income is distributed to their investors in each year. A REIT allows investors to participate in the ownership of a class of real estate assets in a fashion which allows others to undertake the management of the properties, allows the investor to move in and out of the investment through publicly traded shares, and spreads the risk of the real estate ownership through ownership of a number of properties, rather than just one property. A REIT typically owns income-producing real estate in a specific geographic area or product type. Generally, REITs concentrate their ownership in income-producing assets, such as office buildings, apartment buildings, shopping centers, and hotels. Some REITs specialize in the ownership of mortgages secured by those classes of real estate. Most REITs compare as an investment structure to a mutual fund that provides investments in stocks.
Since income from a REIT can be passed to its investor free of the corporate tax, and since a REIT can invest in a variety of real estate assets (thus, low-ering risk), the yield required by investors in a REIT is often less than financing rates imposed by real estate secured lenders. However, under the tax code, only those assets classified as "real estate" may be held by a REIT.
The limitation imposed by the IRS on the classes of asset ownership has precluded REITs from investing in solar generation facilities. That limitation may soon be eliminated; however, based upon a current letter ruling request made by a California- based company to the Internal Revenue Service (IRS). Renewal Energy Trust Capital, Inc. has asked officials at the IRS to classify solar farms as the type of "real estate" that could be included in a REIT. That ruling request has been with the IRS for many months now, and all involved are hopeful that the service will respond shortly.
According to the Bloomberg Service, the solar power industry requires almost $7 billion a year in capital or financing. A favorable letter ruling from the IRS would permit smaller investors to invest in REITs that include solar in their asset mix. That change would offer tradable shares in a company to investors while cutting the cost of capital for developers. If financing or capital costs are reduced, the overall costs of solar energy products should also be reduced. Hopefully, those reduced costs will make the solar industry more competitive with other forms of investments and will reduce the need for tax or other subsidies. In the final analysis, those reduced costs should serve to make solar power more competitive in the energy market.