MLP Used to Hold Site Leases

Publication February 8, 2016

Master limited partnerships can be used to raise equity against portfolios of site leases for wind and solar projects and rooftop licenses for solar panels.

The conclusion follows from a private letter ruling the IRS released in December. The ruling is Private Letter Ruling 201549013.

Master limited partnerships, or MLPs, are large partnerships whose units are publicly traded. No taxes are collected at the entity level. Rather, earnings are taxed directly to the partners. MLPs can raise equity at higher multiples to earnings than corporations because there is no entity-level tax on the earnings. Investors also pay a liquidity premium for the ability trade the units in a public market. 

An MLP can own sites, site leases and rooftop licenses.

The MLP described in the ruling planned to lease or sublease the sites to companies that own cellular towers, rooftop wireless and broadband internet installations, billboards, wind turbines and solar arrays.

The MLP said at least 85% of the rent received will be for use of the each site as opposed to rent for use of equipment put on the site. It said most of the rents will be fixed dollar amounts, but, in the case of sites used for billboards, they may be a percentage of gross receipts from advertisers reduced by some expenses. The expenses are agency fees or commissions paid by the lessee to a broker for finding advertisers, illumination charges, business license fees for the right to erect billboards on the site, continuity discounts, and non-income taxes paid in connection with billboards.

An MLP must have at least 90% good income each year to maintain status as an MLP. “Real property rent” is a form of good income for an MLP. Real property rents cannot be tied to income or profits, but can be a fixed percentage or percentages of the lessee gross receipts. The rent must be for use of real property, but up to 15% can be for use of equipment leased in connection with the real property.

The ruling confirms that someone can amass a portfolio of site rights to put up renewable energy facilities, including rooftop solar, and monetize the future rents by raising equity against the projected rents in the public equity market.

Why not do the same thing with debt since debt is cheaper? 

MLP equity may have a cost that is close to debt, but with equity, there is no obligation to repay a fixed amount by a fixed date. The equity investors take project and lessee credit risk. The ruling suggests that this may be easiest to do with bare sites or rooftops where the lessee is installing new assets. The rents should not be set at a level that is also rent for use of the equipment.

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