The Inflation Reduction Act of 2022 (the “IRA”), which was signed into regulation on Tuesday, August 16, 2022, contains an funding of over $369 billion in power safety and local weather change. There has been a variety of dialogue in regards to the extension of the funding tax credit score (“ITC”) for photo voltaic and the supply that permits the switch of the ITC. However, there has not been a variety of dialogue a few delicate change that would profit an actual property funding belief (“REIT”) eager about proudly owning a distributed photo voltaic facility.
Limitations REITs Have Historically Faced
Numerous 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 belongings 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 normal, the Income Test requires that not less than 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 aspects from the sale of actual property) and that not less than 95% of a REIT’s gross revenue for a taxable yr be derived from such actual property sources and from sure sorts of passive revenue equivalent to dividends, curiosity, and acquire from the sale of securities. The Asset Test usually requires that not less than 75% of the worth of a REIT’s whole belongings on the finish of every calendar quarter encompass actual property belongings (e.g., pursuits in actual property and loans secured by actual property), money and money gadgets, and authorities securities. In addition, a REIT is proscribed in its skill to personal securities of firms, however as much as 20% of the worth of a REIT’s whole belongings on the finish of every calendar quarter could encompass securities of a number of taxable REIT subsidiaries (“TRSs”). Because of those limitations, many REITs traditionally have owned their photo voltaic amenities by means of TRS buildings, which might 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 permits sure taxpayers, together with REITs, to elect to switch (primarily promote) the ITC to an unrelated taxpayer in alternate for money. That provision specifies that the quantity obtained by the vendor isn’t includible in gross revenue (and there’s nothing that implies that the revenue exclusion is proscribed to sure functions). The IRA additionally features a provision that may 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 modifications could make it attainable for a REIT to personal a photo voltaic facility apart from by means of a TRS and profit from the ITC by promoting it to a 3rd celebration. Below are some temporary 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 obtained from the sale of the ITC isn’t 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 most certainly use) and assuming there isn’t any revenue from the sale of environmental attributes equivalent 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 belongings comprising the photo voltaic facility could qualify as actual property for functions of the Asset Test. With respect to photo voltaic facility belongings not constituting actual property, a typical REIT would personal different actual property belongings, so the REIT conceivably might restrict the general worth of the photo voltaic facility belongings that don’t qualify as actual property to make sure they don’t trigger the REIT to fail the Asset Test. In many circumstances, the worth of a distributed photo voltaic facility might be a small fraction of the worth of the associated actual property (e.g., a rooftop photo voltaic system could 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’s not capable of promote them). Because the suitable possession construction for photo voltaic amenities usually have to be decided on the outset of a brand new challenge, the marketability of ITCs doubtless will influence a REIT’s dedication of the optimum possession construction for its photo voltaic facility belongings.
We count on these modifications within the IRA will make it attainable for a REIT to not solely personal a photo voltaic facility however profit economically from the ensuing ITCs, which might be a boon to each the true property and renewable power industries.
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