Over the last several years, private letter rulings by the Internal Revenue Service have allowed the use of REITs to own electric and gas distribution systems, thereby increasing interest in their role in infrastructure investments, Weller says. "Increased access to private capital through public-private partnerships would be a welcome complement to traditional infrastructure financing using tax-exempt bonds, and advantages of using a REIT structure over the traditionally-used fund model may be the right incentive to generate interest."
The report which Weller prepared, "REITs and Infrastructure Projects: The Next Investment Frontier?" spells out the rationale for using REITs in this context. "The challenges faced by the United States in maintaining and updating its current infrastructure have been well documented," Weller writes, noting that a 2009 report by the American Society of Civil Engineers puts the price tag for bringing infrastructure up to par would be $2.2 trillion over the next five years.
Although the American Recovery and Reinvestment Act of '09 provided some stimulus money for US infrastructure projects, and the Obama administration has made a commitment to fund high speed rail and other select infrastructure categories, "public funds simply will not be sufficient to meet all of the United States' ongoing infrastructure maintenance and new construction needs," according to the report. "Additional sources of capital will be necessary to fill the gap."
When the private sector has gotten involved in such public works, it's been through vehicles such as limited liability companies. In the UK, Australia and other foreign countries, the use of PPPs to accomplish the same goal "has reached a level of maturity across numerous infrastructure sectors," Weller writes in the report.
A major advantage of REITs over partnerships, he says, is their ability to raise capital from diverse sources, particularly among foreign investors. This would be especially helpful in the PPP market where many of the current equity investors and project developers are "global corporations that often need complex tax structuring to optimize their participation."
But Weller makes it clear that infrastructure REITs, while a viable option, have not yet become commonplace. "We're at the beginning of a process," Weller says. "REITs have been used in some bricks-and-mortar situations, but in the broader sense of capital for roads, bridges, ports and other classic infrastructure, it's more in the talking stage than in the implementation process."
Despite the advantages that the REIT model offers, Weller continues, "the limited definition of what assets a REIT can hold and what kinds of income it can generate have been the impediments in applying the REIT structure to transportation assets."
He says the concept will need some legislative assistance in getting over those hurdles. One way to do it, Weller writes in the Deloitte report, would be to enact a law creating infrastructure investment trusts.
The IIT structure would eliminate the income test barriers for using REITs by including revenues from PPP infrastructure participation as qualifying income, regardless of whether that includes rent from real property. The IIT legislation proposed in the Deloitte report would also modify other rules, such as closely-held limitations and asset tests, where a qualifying organization's assets consisted solely of concessions on infrastructure subject to a public-private partnership arrangement.
Another approach would be to adopt a system allowing infrastructure assets to be owned or leased by a taxable REIT subsidiary, without the current limitations on the total value of the REIT that can be represented by its TRS entities or current restrictions on rent that a REIT can derive from related parties. "This could potentially allow a fair return on capital to be REIT-eligible as rent or interest paid to the REIT by its TRS," the report states.
Notwithstanding the obstacles that must be overcome, Weller believes the infrastructure REIT will catch on "within five to 10 years." That's roughly the time horizon, he notes, in which the size and scale of this country's need for capital to fund infrastructure work will become apparent.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
