Over the last several years, private letter rulings by theInternal Revenue Service have allowed the use of REITs to ownelectric and gas distribution systems, thereby increasing interestin their role in infrastructure investments, Weller says."Increased access to private capital through public-privatepartnerships would be a welcome complement to traditionalinfrastructure financing using tax-exempt bonds, and advantages ofusing a REIT structure over the traditionally-used fund model maybe the right incentive to generate interest."

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The report which Weller prepared, "REITs and InfrastructureProjects: The Next Investment Frontier?" spells out the rationalefor using REITs in this context. "The challenges faced by theUnited States in maintaining and updating its currentinfrastructure have been well documented," Weller writes, notingthat a 2009 report by the American Society of Civil Engineers putsthe price tag for bringing infrastructure up to par would be $2.2trillion over the next five years.

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Although the American Recovery and Reinvestment Act of '09provided some stimulus money for US infrastructure projects, andthe Obama administration has made a commitment to fund high speedrail and other select infrastructure categories, "public fundssimply 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 benecessary to fill the gap."

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When the private sector has gotten involved in such publicworks, it's been through vehicles such as limited liabilitycompanies. In the UK, Australia and other foreign countries, theuse of PPPs to accomplish the same goal "has reached a level ofmaturity across numerous infrastructure sectors," Weller writes inthe report.

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A major advantage of REITs over partnerships, he says, is theirability to raise capital from diverse sources, particularly amongforeign investors. This would be especially helpful in the PPPmarket where many of the current equity investors and projectdevelopers are "global corporations that often need complex taxstructuring to optimize their participation."

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But Weller makes it clear that infrastructure REITs, while aviable option, have not yet become commonplace. "We're at thebeginning of a process," Weller says. "REITs have been used in somebricks-and-mortar situations, but in the broader sense of capitalfor roads, bridges, ports and other classic infrastructure, it'smore in the talking stage than in the implementation process."

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Despite the advantages that the REIT model offers, Wellercontinues, "the limited definition of what assets a REIT can holdand what kinds of income it can generate have been the impedimentsin applying the REIT structure to transportation assets."

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He says the concept will need some legislative assistance ingetting over those hurdles. One way to do it, Weller writes in theDeloitte report, would be to enact a law creating infrastructureinvestment trusts.

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The IIT structure would eliminate the income test barriers forusing REITs by including revenues from PPP infrastructureparticipation as qualifying income, regardless of whether thatincludes rent from real property. The IIT legislation proposed inthe Deloitte report would also modify other rules, such asclosely-held limitations and asset tests, where a qualifyingorganization's assets consisted solely of concessions oninfrastructure subject to a public-private partnershiparrangement.

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Another approach would be to adopt a system allowinginfrastructure assets to be owned or leased by a taxable REITsubsidiary, without the current limitations on the total value ofthe REIT that can be represented by its TRS entities or currentrestrictions on rent that a REIT can derive from related parties."This could potentially allow a fair return on capital to beREIT-eligible as rent or interest paid to the REIT by its TRS," thereport states.

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Notwithstanding the obstacles that must be overcome, Wellerbelieves the infrastructure REIT will catch on "within five to 10years." That's roughly the time horizon, he notes, in which thesize and scale of this country's need for capital to fundinfrastructure 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.