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April 9, 2021

Stroock Client Alert

By: Evan Hudson, Michelle M. Jewett, Richard G. Madris, Sean A. Babar

On March 31, 2021, President Joe Biden announced his much-anticipated infrastructure package, named the American Jobs Plan (the “Plan”), a proposal to spend $2 trillion on infrastructure in the United States. Specifically, the Plan’s stated purpose is to (i) fix highways, rebuild bridges, upgrade ports, airports and transit systems and expand transit and rail into new communities; (ii) deliver clean drinking water, a renewed electric grid and high-speed broadband to all Americans; (iii) build, preserve and retrofit more than two million homes and commercial buildings; and (iv) undertake various job creation initiatives that we note are only tangentially related to traditional notions of infrastructure.[1]

As a law firm that represents infrastructure funds and private and public REITs of all kinds, one of our immediate questions is whether, and if so, how, the Plan might provide opportunities to the sponsors of infrastructure REITs (and infrastructure funds operating through private REITs). Our discussion below is brief and sets forth our initial reaction to an evolving policy situation. Because the Plan outlines broad goals rather than specific program details, it is premature to provide an in-depth discussion of the technical considerations that could be applicable to infrastructure REITs seeking to invest in various programs outlined by the Plan.

It is important to note that the Plan is neither a law nor even a bill under consideration by Congress. Rather, it is simply a broad outline of what the president hopes to accomplish. The Plan has already drawn significant opposition based on the amount of proposed spending and its intended funding through tax increases. Part of the opposition reflects that much of the proposed $2 trillion in spending has little to do with physical infrastructure, but instead focuses on research and development, job creation, community investment and the development of human capital. That said, if the Plan does evolve into a bill, it may manage to overcome the opposition through the reconciliation process.

From the perspective of private capital (whether private equity, private infrastructure funds or infrastructure REITs), an additional challenge of the Plan is that many of the infrastructure spending proposals involve direct public investment. We hope that the final legislation will include spending and tax incentives for the private sector to invest in the applicable infrastructure and assist in accomplishing the policy objectives of the Plan. Private investment vehicles have amassed hundreds of billions of dollars of dry powder for this very purpose. It would be a shame if the government did not take full advantage of this resource. 

Even with the above caveats in mind, we see in the Plan some possible opportunities for infrastructure REITs. The Plan also might pique the interest of traditional real estate REITs as it aims to bolster the country’s housing stock and make investments in schools, early learning centers, VA hospitals and federal facilities. However, that is not our focus here since such assets are not traditional infrastructure per se.

In addition to REITs being an established method of owning certain types of infrastructure, another factor that may favor REITs is that the Plan proposes to pay for itself in part by increasing the corporate tax rate from 21% to 28%. Accordingly, since REITs are generally not subject to corporate-level taxes, the Plan is likely to encourage investment through REITs (including infrastructure REITs) relative to other entities taxable as corporations, with respect to those assets that are REIT-qualified. If the key elements of the Plan, including the tax provisions, are enacted, then infrastructure REITs could potentially enjoy tailwinds not only from the Plan’s financial support for infrastructure assets, but also from the lower tax rate, as compared to a traditional corporate structure. Note, however, that in light of the numerous REIT qualification requirements, it is often challenging for infrastructure investors to structure their investments through a REIT. As a result, future details with respect to the implementation of the Plan will be crucial in determining the degree to which investors can use the REIT structure to take advantage of these proposals.

Well-Established REIT Infrastructure Asset Classes Targeted by the Plan

Two well-established infrastructure asset classes of a type often held by the private sector, including in the REIT form, are targets of the Plan: broadband and electric transmission lines.

Broadband

The Plan proposes a $100 billion investment to bring high-speed broadband to every American household, particularly focusing on rural areas and tribal lands that lack adequate access. In connection with this proposal, there may be an opportunity for infrastructure REITs. Although the Plan states that it will prioritize support for broadband networks owned, operated by or affiliated with local governments, nonprofits and cooperatives, that wording leaves room for supporting assets owned by the private sector, as most telecommunications assets already are. The ultimate role of the private sector in developing broadband infrastructure depends on the final legislation.

It is well understood that telecommunications towers generally are good REIT assets.[2] Fiber-optic lines used for telecommunications purposes have also been treated as qualifying REIT assets.[3] Some of the largest publicly traded REITs in the country own telecommunications assets as their primary business. The Plan may expand the pool of investable assets for these giants or create a new pool of assets for smaller entities that have not yet established a niche. New markets might open up as broadband reaches tribal communities and other areas with historically inadequate telecommunications infrastructure. REITs could potentially play a meaningful role in the development of these assets because of their access to capital and their tax efficiency. It is too early to say for sure. However, the possibility appears real, and we hope that the industry succeeds in reminding lawmakers that the Plan can leverage investor capital to help achieve the Plan’s policy goals.

Electric Transmission Lines

Another possible opportunity arises from electric transmission lines. Electric transmission and distribution infrastructure can be qualifying REIT assets,[4] and the asset class has been held by REITs. The Plan calls for a $100 billion investment in U.S. power infrastructure. This includes an investment tax credit that would incentivize the buildout of at least 20 gigawatts of high-voltage capacity power lines. A REIT could construct some of that capacity. The proposal also supports other unspecified “creative financing tools” that would spur further buildout of the grid using private capital. This is another area of interest for infrastructure REITs, because when another entity, such as a utility, builds the capacity, a REIT could lend to it on a secured basis, or could acquire the asset and lease it back to the operator, returning the utility’s capital for higher and better uses and allowing the REIT to earn “rents from real property” within the meaning of the federal income tax laws. Assuming a bill takes shape along the outlines proposed in the Plan, a REIT could develop a sale-leaseback model for electric utilities and deploy it at scale and thereby deliver one of the Plan’s contemplated “creative financing tools.” Alternatively, a REIT could use financing analogous to tax equity financing in the renewable energy sector to form a partnership to specially allocate the investment tax credit and other tax incentives to an investor able to utilize such benefits, lease the infrastructure assets to a utility or third party, and benefit from disproportionate cash flow resulting from lease payments as consideration for the tax benefits allocated to the tax equity investor. Depending on how the federal incentives for development of transmission assets are structured, a variety of opportunities may be available for infrastructure REITs to acquire or construct these assets and generate attractive economic returns.

More Speculative Possibilities

Other types of infrastructure mentioned in the Plan are not yet the subject of a private letter ruling from the Internal Revenue Service (“IRS”) approving their qualification as good REIT assets but have features that are analogous in many respects to similar assets that have received favorable guidance from the IRS.

EV Charging Stations

For example, the Plan proposes a $175 billion investment to “win” the electric vehicle market. It would establish grant and incentive programs for state and local governments and the private sector to build a national network of 500,000 EV chargers by 2030. Gas stations have long been a mainstay for REITs, and if the Plan passes, a sponsor might try to launch an EV charging station REIT. However, there could be significant uncertainty in the REIT area about EV charging stations, both as to whether they qualify as real property and as to the characterization of the income from the charging stations. If the stations are leased to a third party, it would seem likely that they could be appropriate REIT assets. However, if the revenue generated from the EV stations is related to supplying electricity, it may be more challenging to satisfy the tax requirements for REIT qualification. Regardless, infrastructure investors should continue to monitor the development of what may become a new asset class. 

Battery Farms and Carbon Storage

The previously mentioned proposed $100 billion investment in U.S. power infrastructure would include a ten-year extension and phase-down of an expanded direct-pay investment tax credit for clean energy storage. REITs have long held a green light from the IRS to invest in a variety of storage-related real estate assets including storage of non-physical assets such as data. Accordingly, one could imagine an attempt to obtain a private letter ruling allowing a battery farm REIT, or at least a case for owning the land underlying a battery farm. Farther afield, REITs might gain approval to own the land and infrastructure relating to the storage of captured carbon, one of the R&D priorities to which the Plan would allocate $15 billion for demonstration projects. 

Rail Lines

The IRS has held that rail lines, including the rails, the land under them and their bridges and tunnels, can be good REIT assets,[5] a determination that at least one publicly traded REIT has relied on. The Plan would invest $80 billion in passenger and freight rail service and hints at providing a multi-year funding stream that would, together with addressing deferred maintenance along existing corridors, possibly fund the construction of new lines in high-potential locations. This could include connecting new city pairs. It is unclear to what extent this would involve investment by the private sector, including REITs. However, because it involves a qualified REIT asset of historical interest to the industry, the rail line angle is something worth watching.

This alert is not intended to address technical infrastructure REIT considerations as it would be premature to do so in light of the general nature of the Plan. Instead, it is an attempt to help our clients see what the Plan may mean for private infrastructure investment, particularly through the REIT form. We have proposed some of the ways that the Plan might be meaningful for private capital, both with respect to proven asset classes and speculative ones. Regardless, whatever form a final bill takes, if signed into law it will have implications for infrastructure investors and infrastructure REITs.

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Stroock’s award-winning Infrastructure practice has extensive experience in fund formation and structuring investments for infrastructure investors, energy funds, private equity, lenders and other clients. Its clients include a $12 billion global infrastructure investments fund managed by one of the leading infrastructure managers in the United States.

Stroock’s REIT practice covers the breadth of the publicly traded, public non-traded and private REITs industries. Our robust non-traded REITs practice focuses on helping institutional real asset managers gain access to retail investors. Stroock has also structured some of the largest and most complex private REITs in the country – including perhaps the single largest private REIT in history.

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For More Information:

Evan Hudson

Michelle M. Jewett

Richard Madris

Sean A. Babar

[1] For a detailed overview of the Biden Infrastructure Plan, please see Fact Sheet: The American Jobs Plan, March 31, 2021, https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/.

[2] IRS PLR 201129007 (July 22, 2011).

[3] IRS PLR 201901001 (January 4, 2019).

[4] IRS PLR 200725015 (June 22, 2007).

[5] Rev. Rul. 69-94, 1969-1 C.B. 189.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.