Follow the Money: REITs, MLPs and Yieldcos
Building owners and those who advise them face important choices in the financing of energy efficiency projects and, a bit more indirectly, must understand the financial underpinnings of their renewable energy suppliers.
This week – in conjunction with its annual conference and expo in Washington, DC – The National Institute of Building Sciences (NIBS) released a report entitled “Financing Energy-Efficiency and Renewable Energy Projects.”
The report, which was written by the Institute’s Council on Finance, Insurance and Real Estate (CFIRE), outlines three potential financing structures: Real estate investment trusts (REITs), master limited partnerships (MLPs) and yieldcos. “There are pros and cons [to each], but also some real barriers that need to be addressed,” CFIRE Program Director Ryan Colker told Energy Manager Today. “The all have their specific utility.”
An overview of the three:
REITs: A REIT, according to REIT.com, is “a company that owns or finances income-producing real estate.” The idea, as explained by the site, is fairly simple:
REITs allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property.
A wait-and-see attitude about the ability of REITs to finance renewable energy projects may the best approach. “REITs offer opportunities to support investment in building level projects, but the specifics are a bit fuzzy right now,” Colker wrote. “Rules for the ability to invest in efficiency and renewables for improvement of REITs must be clearer to help drive further investment.”
MLPs: An MLP is based on a limited partnership (LP) — or limited liability partnership (LLP) — so it makes sense to define those first. LPs and LLPs, according to NOLO, are businesses with more than one owner. They differ from a general partnership in that they confer some personal liability on owners for business debts. One of the owners is designated as the general partner and makes decisions and is personally liable for some of the debts. Limited partners have no decision-making authority or liability in such structures.
A MLP is simply a publicly traded LP or LLP, according to Investopedia.
Colker suggests that this form of financing has more of a future than a present in the renewable sector. “Currently, MLPs do not apply to renewable energy projects, but could offer a mechanism if applied to renewables the same way it is applied to fossil fuels (the Master Limited Partnerships Parity Act would help resolve that issue),” he wrote.
Yieldcos seem more specifically tied to the renewable industry. Sean Brodrick at Energy and Resource Digest says that yieldcos are similar to MLPs:
A yieldco is a holding company formed by a renewable energy developer. The yieldco “buys” power plants from its parent company via a drop-down transaction. We see such action in MLPs all the time. Only, for a yieldco, it’s solar farms instead of pipelines.
Brodrick added that yieldcos generate stable cash flows through power purchase agreements (PPAs) struck with utilities. Cash is distributed through dividends.
Colker added a cautionary note: “Yieldcos are designed for renewable energy projects, but have some potential disadvantages around the need to continually add projects to maximize tax implications.”
The CFIRE report is high level. Colker points to a related CFIRE document that NIBS released early last year which focuses in a more granular way on financing energy efficiency retrofits of smaller buildings (less than 50,000 square feet). The report, he wrote, looks at tools such as property assessed clean energy (PACE), loans made by utilities to customers (on-bill) and Small Business Administration (SBA) loans. The report makes seven recommendations, including expansion of federal programs, encouragement of development and testing of retrofit programs at the city, county or utility levels and the use of public/private approaches.
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