I recently outlined the factors that family offices should keep in mind when considering whether or not to invest in solar. It is safe to say that none of us anticipated the markets and our world would change so drastically since that story was published just a couple of months ago. But there is still great value in educating family offices about the different types of solar investment opportunities — especially given the current volatility in equity markets and the appetite for low-risk vehicles with returns above 10-year Treasury yields.
Before I dive into the solar options available to family offices and other investors today, I’ll share a story that may bolster readers during these uncertain times. During the 2008 financial crisis, our company’s other co-founder was a real estate developer on the verge of bankruptcy. At the time, one of his shopping mall projects was about to go under when he decided to add a solar system to the site. This decision ended up saving the project and led him to pivot his family office to solar. In the years since, he’s established multiple successful renewable energy business ventures, including our work together, a solar mortgage real estate investment trust company. The renewable industry has grown exponentially since that time. I am certainly not prescribing any actions or suggesting that all family offices should take this same approach, but it is an example of why there is value in learning more about the different solar investing vehicles available.
Direct Ownership Or Lending
Family offices and other institutions can invest directly in solar projects through lending or ownership. Lending long-term debt to solar projects is a good way to lock in a strong, risk-adjusted yield. Owning a project offers significant tax benefits from the federal investment tax credit and accelerated depreciation, along with any relevant state incentives. This option is less liquid than other approaches and requires staff who understand and can source solar projects.
Utilities and renewable energy companies introduced YieldCos to the market as a way of raising investor money to build new solar or wind projects. Share owners receive dividends based on the revenue of operating assets. The goal of YieldCos is to sell power under long-term purchase agreements and to separate more volatile activities, like development and construction, from the stability of operations. That said, YieldCos have experienced ups and downs over the years, and risk-averse family offices may be more inclined to pursue other tax-beneficial investment options for the time being.
Green Bonds (Climate Bonds)
Green bonds, also known as climate bonds, are financial instruments that support third-party-verified climate change solutions and environmental projects. The Climate Bonds Initiative reported that $255 billion worth of green bonds were issued globally in 2019, a decade after the World Bank first introduced the concept. Because it is still a fairly new and relatively small asset class, the green bond market is somewhat difficult to enter and exit. This is not typically a concern for family offices, but investors seeking more liquidity may want to look elsewhere. The tax benefits are also important to consider because they often make green bonds more attractive when compared to similar taxable bonds.
Equity Real Estate Investment Trusts (REITs)
Until recently, when the REIT model was talked about within the solar industry, the conversation usually focused on equity REITs. These generate revenue from the rents of property owned by the REIT. Due to current IRS qualifications, the renewable energy equity REIT does not allow family offices to invest directly in solar projects, but rather in the land around the project. With solar project land leases, capital is put toward a more stable revenue stream, since the project itself can face permitting, construction and other types of risk. Equity REITs are reliable, but family offices that are specifically looking to make an environmental impact should recognize they are not directly tied to renewable energy generation.
This is a newly emerging investment option that generates revenue from interest payments on loans backed by the real estate portion of solar projects. This option is attractive for family offices that focus on environmental, social and governance investments and want to increase their impact with solar energy assets. Mortgage REITs also allow family offices and other investors to maintain a diverse, liquid portfolio with long-term, predictable income streams. Tax advantages also provide a lower cost of capital than other financing options and at lower levels of risk.
Solar Options Abound For Family Offices
The goal of this guide is to provide family offices and others with a point of reference for solar investing. A lot remains uncertain, but as the solar market evolves and there are more investment opportunities, we can support an industry that will deliver reliable returns in the near term with positive implications for future generations.