Clean Edge Views
MLPs and REITs Back in the Spotlight: Will Washington Finally Level the Playing Field?by Ron Pernick
May 7, 2013
In our book Clean Tech Nation, which came out late last year, Clint Wilder and I offered up a Seven-Point Action Plan for Repowering America. One of our main action items was “Leverage Proven Investment Tools from the Oil, Gas, & Real Estate Sectors.” Namely, level the investment playing field by opening up master limited partnerships (MLPs) and real estate investment trusts (REITs) to clean-energy projects.
Fast-forward eight months since the release of the book, and this action item is starting to gain some bipartisan support and traction inside the Beltway. Late last month, a group of lawmakers reintroduced the Master Limited Partnerships Parity Act, spearheaded by Senators Chris Coons (D-Del.) and Jerry Moran (R-Kan.) and House Representatives Ted Poe (R-Texas) and Mike Thompson (D-Calif.). The bill would extend MLPs to clean energy, instead of limiting them arbitrarily to oil and gas projects. “This market-driven solution supports the all-of-the-above energy strategy we need to power our country for generations to come,” Coons said in a statement. “Our legislation will unleash private capital, create jobs, and modernize our tax code.”
The bill’s language has changed from earlier versions and now includes specific provisions for clean-energy technologies ranging from electricity storage and renewables generation to combined heat and power and energy-efficient buildings. “In the ether of policy, some fossil fuel interests seem ready to accept an MLP structure that secures the mechanism for their own interests while opening it up to clean energy,” explains Patrick Von Bargen, partner at clean-tech government relations firm 38 North Solutions.
Does it have a chance of passage? Well, the bill has not been scored yet by the Joint Tax Committee of the House and Senate. In other words, there’s no clarity yet on the impact such changes to the MLP structure would have on federal revenues. Depending on the impact’s size, how would it be paid for? And finally – and perhaps most importantly – what legislative package would this all be attached to? With comprehensive tax reform unlikely in the near future, it’s more likely it would be part of a bargain on the sequester, debt limit, and fiscal 2014 funding, according to Von Bargen.
In addition to MLPs, the opening of REITs to clean-energy investments is also gaining traction. April 18th, for example, saw the initial public offering (IPO) of Hannon Armstrong Sustainable Infrastructure Capital Inc. (NYSE: HASI), one of the first structured REITs investing in energy efficiency, clean energy, and other sustainable infrastructure projects. Hannon Armstrong was already active in financing and structuring deals, facilitating a reported $3.9 billion of debt and equity financing deals for some 450 sustainable infrastructure projects since 2000. But its receipt of a favorable private letter ruling from the SEC enabled it to restructure itself as a REIT with the ability to invest in solar, wind, geothermal, and energy efficiency infrastructure.
The firm’s president and CEO, Jeffrey Eckel, speaking with New York Financial Press on the day of its IPO, explained that the company is focused on supporting sustainable infrastructure (everything from energy-efficiency retrofits to solar rooftop installations) primarily for state and local government buildings, hospitals, and similar facilities. The firm has about $600 million in funds to invest in projects right now, Eckel says, both from IPO proceeds and other sources.
Another offering, POWER REIT, isn’t faring quite as well. Mired in litigation which has delayed its plans, this REIT has a low market cap and is thinly traded with a recent average daily trading volume of less than 3,000 shares.
Clearly, for financial offerings like REITs and MLPs to be successful, they need to have strong, well-versed management teams that possess deep industry knowledge and the ability to structure and deliver world-class projects. Based on Clean Edge analysis, well-structured clean-tech REITs and MLPs should be able to currently provide relatively strong yields, around five to seven percent annually. Not bad in today’s environment, if they can deliver.
Many of these recent developments have gone unnoticed both inside and outside of clean-tech circles. That’s not surprising, perhaps, considering what else has been going on in the news lately from Boston to Pyongyang to Damascus. (Hannon Armstrong’s IPO was on April 18, just three days after the Boston Marathon bombings.) But I suspect that will change. With hundreds of billions invested in conventional REITs and MLPs offering competitive returns, Washington should work in a bipartisan fashion to open up these investment structures as soon as possible. Our federal legislators and tax regulators should level the playing field, get out of the way, and let the market and investors vote with their dollars.
Ron Pernick is founder and managing director of research and advisory firm Clean Edge and the coauthor of two books on clean-tech business trends and innovation, Clean Tech Nation (HarperCollins, 2012) and The Clean Tech Revolution (HarperCollins, 2007).