It sounds deadly boring to most people, but the idea of a Real Estate Investment Trust (REIT) is an exciting one to me. Imagine a way to acquire, develop, and operate large-scale property investments using securities. Now do I have your attention?
But first, what is a REIT anyway? REITs were originally developed in the early 1960s, and they were designed—oddly, when we think about it now—to spur investment in real estate. Basically, a REIT allows individuals to buy shares of real estate just like stocks or other securities—a bit like 100 friends buying property together and each owning one share. REITs are perfect for investors who want to invest in commercial real estate but who don’t have enough money to buy pieces of property themselves, or for investors who want the benefits of a real estate investment without the hassle of real estate agents, down payments, or worrying about selling the property later. (REITs are traded on the stock market; you might even own some of them as part of your investment portfolio.)
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The income generated from the operations of the investment—like rent payments and equity—don’t generate any tax consequence for the trust itself and dividends paid to individual shareholders are taxed just like any other income. Put it all together and you have an investment instrument that is a highly liquid way of investing in real estate with few tax consequences for the investor. It’s such an attractive investment that REITs can generate lots of money for new development.
Traditionally REITs became associated with three big kinds of development that most would think of as not so sustainable: shopping malls, storage facilities, and timber companies. But maybe there’s a way to put this tool to use for creating private investment in clean energy infrastructure?
Today, a friend in the tax business sent me an article that made me think this approach could work. The tax specialists at Deloitte have a great article called REITs and infrastructure projects: The next investment frontier. The article suggests that a new way of funding public road and highway projects might be using the REIT model. They even highlight a new name for the vehicle: Infrastructure Investment Trusts or IITs.
Under Deloitte’s IIT idea, public infrastructure and land would be owned by the government but leased and operated by a trust. The trust could make money from tolls and selling shares of the project to investors. I have been pretty critical of politicians using their pull for the financing of big highway projects, so I’m not in favor of using the REIT model to finance roads. Yet it is worth considering how the REIT model could be used to support of clean energy for public benefit.
Wind or wave energy projects are the most obvious candidates. Those projects need a lot of capital investment, but create jobs, energy savings and reduced carbon emissions. How about ground-source heating projects? Those might be a perfect way to create a public private partnership to pilot a REIT model for energy efficiency investment.
Here’s an example of how it might work. Private investors could pool their money in collaboration with a cash-strapped city that would identify public land and right-of-way for the construction of a district energy project, which would tap into ground-source heat to provide low-cost carbon-free energy for a neighborhood. (The land might remain publicly owned but leased to the investors for 99 years.) To raise money, the investors would sell shares to investors; and the money generated from the sales of shares would be the capital to build the district heating operation, which in turn could be obligated by the city to generate savings for customers in the district. Everyone comes out a winner: The project makes a profit by selling heating to residents; residents save money by switching to the lower-cost district-heating source; investors benefit from dividend payments from the project;, the city might get some revenue from the lease; and world gets reduced emissions.
Okay, I know it wouldn’t be quite that easy. This kind of project would likely take changes in law, a really good team of accountants, engineers, patient investors, and a very forward looking city government. But the Deloitte article pointed out “several favorable IRS private letter rulings sanctioning the use of REITs to own electric and gas distribution systems have increased interest in their role in infrastructure investments.” So if the financial industry is looking at funding highways and roads using an Infrastructure Investment Trust, shouldn’t the Green Energy Investment Trust (a GEIT) be on the table as well? What can work for roads certainly could work for energy—and it would be a far more sustainable investment for the future.
I am posting this from Portland, and I hope to write a post about how Tax Increment Financing (another great real estate financing tool) could be used for clean energy infrastructure.