The Inflation Reduction Act of 2022 (the “IRA”), which was signed into legislation on Tuesday, August 16, 2022, contains an funding of over $369 billion in power safety and local weather change. There has been a number of dialogue concerning the extension of the funding tax credit score (“ITC”) for photo voltaic and the availability that enables the switch of the ITC. However, there has not been a number of dialogue a few refined change that might profit an actual property funding belief (“REIT”) desirous about proudly owning a distributed photo voltaic facility.
Limitations REITs Have Historically Faced
A variety of limitations have made it troublesome for a REIT to personal a photo voltaic facility or declare the ITC. These are limitations on:
i. The quantity of revenue a REIT can generate from sources apart from actual property (the “Income Test”) ii. The worth of property a REIT can personal apart from actual property (the “Asset Test”)iii. The quantity of an funding in photo voltaic property that’s eligible for the ITC (the “ITC Limitation”)
In basic, the Income Test requires that at the very least 75% of a REIT’s gross revenue for every taxable yr be derived from actual property sources (e.g., rents from actual property, curiosity on loans secured by actual property, and positive factors from the sale of actual property) and that at the very least 95% of a REIT’s gross revenue for a taxable yr be derived from such actual property sources and from sure forms of passive revenue similar to dividends, curiosity, and achieve from the sale of securities. The Asset Test usually requires that at the very least 75% of the worth of a REIT’s complete property on the finish of every calendar quarter encompass actual property property (e.g., pursuits in actual property and loans secured by actual property), money and money objects, and authorities securities. In addition, a REIT is restricted in its means to personal securities of firms, however as much as 20% of the worth of a REIT’s complete property on the finish of every calendar quarter might encompass securities of a number of taxable REIT subsidiaries (“TRSs”). Because of those limitations, many REITs traditionally have owned their photo voltaic services by TRS constructions, which may current their very own challenges with respect to photo voltaic facility possession and operation and use of ITCs. The IRA incorporates a provision that makes it simpler for a REIT to beat a few of these limitations.
Changes with the IRA
As famous above, the IRA features a provision that enables sure taxpayers, together with REITs, to elect to switch (basically promote) the ITC to an unrelated taxpayer in trade for money. That provision specifies that the quantity acquired by the vendor is just not includible in gross revenue (and there may be nothing that implies that the revenue exclusion is restricted to sure functions). The IRA additionally features a provision that will flip off the ITC Limitation within the case of a REIT that elects to switch the ITC allowed with respect to a photo voltaic facility.
Taken collectively, these adjustments might make it doable for a REIT to personal a photo voltaic facility apart from by a TRS and profit from the ITC by promoting it to a 3rd celebration. Below are some transient ideas on the implications.
Implications for REITs
Income Test. If a REIT elects to switch the ITC allowed with respect to a photo voltaic facility, the quantity acquired from the sale of the ITC is just not includible within the REIT’s gross revenue. Thus, it seems that quantities realized from the sale of photo voltaic ITCs wouldn’t be taken into consideration for functions of the Income Test. If the REIT consumes the electrical energy generated by the photo voltaic facility (which is the probably use) and assuming there is no such thing as a revenue from the sale of environmental attributes similar to renewable power credit (“RECs”), the REIT wouldn’t have any revenue from the photo voltaic facility itself.
Asset Test. Depending on the photo voltaic facility’s traits and anticipated use, some or all the property comprising the photo voltaic facility might qualify as actual property for functions of the Asset Test. With respect to photo voltaic facility property not constituting actual property, a typical REIT would personal different actual property property, so the REIT conceivably might restrict the general worth of the photo voltaic facility property that don’t qualify as actual property to make sure they don’t trigger the REIT to fail the Asset Test. In many instances, the worth of a distributed photo voltaic facility will likely be a small fraction of the worth of the associated actual property (e.g., a rooftop photo voltaic system might have a worth of lower than 5% of the associated constructing).
ITC Limitation. As famous above, the ITC Limitation wouldn’t apply if the REIT elected to promote the ITC. Importantly, nevertheless, it seems that the ITC Limitation would proceed to use to any ITCs that the REIT doesn’t elect to promote (e.g., as a result of it isn’t in a position to promote them). Because the suitable possession construction for photo voltaic services usually should be decided on the outset of a brand new undertaking, the marketability of ITCs doubtless will influence a REIT’s dedication of the optimum possession construction for its photo voltaic facility property.
We count on these adjustments within the IRA will make it doable for a REIT to not solely personal a photo voltaic facility however profit economically from the ensuing ITCs, which will likely be a boon to each the true property and renewable power industries.
[View source.]
https://www.jdsupra.com/legalnews/the-us-inflation-reduction-act-solar-8644321/
