Financing is quickly become necessary for the successful adoption of renewable energy in the United States. If you want to sell geothermal or solar projects, you need to understand finance.

Read the Guide to Financing Commercial Solar Projects
Advice from a $20MM Solar PV Investor for Commercial Solar Installers = Focus on a Niche, Be Fast, and Standardize your Operations
60 Minutes of Video Answering 7 Questions on Financing Commercial Solar Power Purchase Agreements
50 Minute Presentation on Due Diligence, Crowd-funding and Finding Investors to Finance Nonprofit Solar PPAs
Solar MBA Course. Learn how to Finance Commercial Solar Projects from Start to Finish
Test Drive 1% of the the Solar MBA For Free

Great Resources
Finance 101 for Renewable Energy Pros
Finance 101 for Solar PV Pros
The Beginngers Guide to Financing Solar PV Projects
The Complete Guide to Geothermal Tax Credits

How to Handle Unknown Risk to Increase Solar Project Success

Known Knowns PNGImage: Universe of Issues, Risks, and Challenges

This is a guest article from Chris Lord, Managing Director at CapIron, Inc. He’s a former lawyer with extensive banking experience who now consults with solar developers and investors. I’ve never met anyone else who can, seemingly, answer any financial or legal questions about financing commercial solar projects.

In the article, Chris shares some of his experiences about how to understand and mitigate the risks that you don’t know exist in commercial solar development. Unknown unknown risks are extremely important to understand because they can have large negative impacts on profits and relationships with investors and clients. These risks are especially important for firms that are experienced in solar but new to financing larger commercial solar projects.

I found this article extremely interesting and if your work revolves around selling or financing commercial solar projects, I’m sure you’ll love it. If you have questions about the article, please leave a comment. If you’d like to connect with other professionals focusing on best practices for financing commercial solar projects, join our LinkedIn group on Best Practices for Financing Mid-Market Solar Projects.

Chris Lord also teaches our 6-week Solar Executive MBA that starts on Monday, September 15th. In the course, you’ll work a commercial solar deal from start to finish with expert guidance. The course includes financial models, legal contracts, and development tools that are indispensable.

Enter Chris Lord

Not long ago, I spoke with an experienced developer who told me about a small utility-scale project undertaken by a team within his company. Although experienced with distributed generation projects, the team and its leader had never developed a third party financed, utility-scale project. They knew that they had to learn more about the technical and procedural requirements for interconnection with the local utility and delivery of the solar power to the grid. Over the course of development, the project hit many roadblocks and challenges before finally arriving successfully at COD. Throughout the process, the team modeled the project early and often, generally showing a tight but acceptable profit margin for the project. At COD, the company collected its profit and moved on. Less than a year later, the third party investor in the project made a call on the developer’s tax indemnity required as part of the close. It turned out – to the utter surprise of the project manager and his team – that they had incorrectly assumed the federal ITC would apply the interconnection costs paid to the local utility for equipment on the utility’s side of the transformer. The error – when finally caught – cost the company more than its small profit margin on the project and constrained the company’s cash flow.

This articles focuses on the most dangerous and difficult threat to successful project development: the risks, issues, and challenges that you don’t know that you don’t know. These “unknown unknowns” are not the items that you know you don’t know. When you know you don’t know enough about a risk, issue, or challenge, you can remedy that ignorance by focusing on the problem and calling on experts – colleagues, advisors, consultants or lawyers – to help you learn what you must learn to overcome, hedge, or eliminate it. In the example above, the team knew it had to learn more about the technical and procedural requirements for interconnection with the local utility, and they did so successfully. What the team did not know was that it did not know enough about the ITC’s definition of “eligible equipment” and its application to their project.

Understanding the Challenge of Unknown Unknowns

Developers by nature have to be optimistic and confident souls, if they are to make their way through the minefield of project development. Without that optimism and confidence, a developer would never get started on the daunting task of taking a green field site from start to finish. In fact, the persistence that everyone tends to think of as the critical ingredient in developer success is actually just a manifestation of optimism and confidence.

Known Knowns (PNG)

But as life shows us, our greatest strengths are also our greatest weaknesses. That very same optimism and confidence necessary for successful project development often blinds a developer to the biggest risks of all. These are the risks – that through optimism, confidence, and ignorance – are simply not on the developer’s radar screen. These are not the known or expected risks. A successful developer manages a known risk by minimizing and staging investments of time and money until more about the risk is known or its threat neutralized. There are a lot of surprises in the life of a development project, and, because developers are an optimistic lot, it is rare that these surprises add to a project’s upside. More often than not, these “upside” events were already incorporated into project economics as “good to average assumptions.”

So what really can kill projects are the unknowns and the unexpecteds. We will just call them the “unknown unknowns.” These items consist of issues, events, or results that a developer does not even know that he does not know. And while a wealth of experience and education can reduce the potential unknown unknowns, they are always there. Nassim Nicholas Taleb (author of The Black Swan and several other books on risk) and many other investors specialize in investment strategies designed to capitalize on unexpected and dramatic events, such as the mortgage meltdown crisis of 2008. These strategies involve multiple small bets on a wide variety of extreme outcomes. But a project developer is betting on not having unknown unknowns occur, and that is a lot harder to do.

Tackling the Problem of Unknown Unknowns

The image above illustrates the problem. If we begin with the blue box, then that is the complete universe of all issues, risks or challenges. At the very center of the box is the yellow circle that illustrates what we know (sometimes called the “known knowns”). These are the items that, through education and experience, we know how to handle and are comfortable wrestling with them. The orange cloud surrounding the yellow circle represents the items that we know we don’t know. Within this nebulous cloud are the issues, risks, and challenges that we know just enough about to know we must anticipate and manage them, but we don’t know enough to define them and consider the solutions, hedges, or alternatives. In other words, we know that we can expect the item to arise, and that to manage that item we must either educate ourselves, find an expert to manage it for us, or some combination of the two. For example, most developers know that they must consider whether a project will be subject to property tax over the course of its existence. Property taxes are a set of arcane rules that vary not just from state to state but also from county to county. Moreover, solar PV projects may be characterized and taxed as real property in some jurisdictions, but they may also be taxed as personal property in jurisdictions that make the distinction. In this case, when a developer begins a new project in a new state or county, he or she knows to consult local counsel early – before even meeting with local taxing authorities to discuss abatements or PILOT agreements.

Known Knowns PNG

Image: Universe of Issues, Risks, and Challenges

Specific Actions to Address Unknown Unknowns

So, turning back to our unknown unknowns, how does a developer guard against something that by its very nature is unknown and unexpected? Not easily, of course. But a couple of options come to mind. The key to all of these options is to work on expanding the known knowns and the unknown knowns. If you look at the illustration above, we are talking about expanding our knowledge and leveraging the experience of others to make the yellow circle as large as possible and grow the orange cloud outwards as well. In effect, we want to shrink the blue portion of the box – the unknown unkowns – by expanding the circle and cloud. Of course, we can never eliminate the blue, and should not imagine that is where our efforts should focus, but the faster we can grow the yellow circle and orange cloud, the better hedged against the unknown unknowns we will be.

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The Most Common Solar PPA Modeling Mistake, The Fix, and a Free Tool

solar modelling

This article will address the most common error that developers and EPCs make when modeling commercial solar PPAs. The video below will discuss the problem, the solution, and provide a free tool you can download so you can work through the answer yourself.

This article is part of a series common topics and questions that professionals have about financing commercial solar projects. Past topics include how to price the risk of cash equity vs tax equity in a partnership flip and how to calculate the buyout process of a PPA.

This lessons will be on the most common modeling mistakes that Chris Lord see’s developers make. Chris Lord runs a consulting practice called CapIron and is a co-teacher of the Solar Executive MBA that teaches students how to finance commercial solar projects from start to finish with expert guide. You can get a $500 off the Solar MBA here. 

The modeling problem has to do with properly discounting the tax benefits of a project. The result of that problem is two-fold. First, it’s an obvious beginners mistakes. If you want to look like a professional, you need to make sure that you’re not doing this. Second, if you do it improperly, it inflates project returns, which can hurt you when the investor does their due diligence.

Note: If you want to see what Chris is doing, click on the FULL SCREEN button on the bottom right of the video. You can also download the tool Chris is using by entering your email at the bottom of the article. 

We all know the importance of understanding and modeling the economics of a solar project, but what is the most common and easily corrected modeling mistake you see Developers make?

Failing to properly discount the federal tax benefits in a transaction, particularly the ITC. Most show the ITC as a direct and immediate reduction of the Capital Cost of a Project. In effect, developer is asking the tax investor to buy the tax credit by paying $1 for every $1 dollar of tax credit. Developers want to pay a discount. Sometimes the discount is expressed as a price per dollar, but the best way to account for the cost is show the purchase price paid in year zero and the ITC recovered in year 1. This ensures that the ITC will be discounted at least one year by the Investor’s discount rate.

How would you handle depreciation? 

Answer: You take the available depreciation for each year – let’s say that is the excess depreciation beyond what is needed to shelter the project’s current income – calculate the value of that depreciation as the amount of tax savings that such excess depreciation will generate. For example, if you had in year 2 $110 of depreciation and $10 of project income, you would have $100 of excess depreciation. For an investor with enough other qualifying income to use that $100 of excess depreciation, the value is equal to the applicable tax rate times $100. At a 35% federal tax rate, that would mean $35 of value in year 2. Discount that back to year 0 to determine today’s value of that $100 of excess depreciation in year 2.

Download The Sample Model

Enter your email to download the model to help your calculate the value of the ITC and MACRS on commercial solar projects.
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Interview with Cory Honeyman, GTM Research Solar Analyst, on Emerging Trends in Residential and Commercial Solar

In this interview, GTM Research Solar Analyst Cory Honeyman provides some background on the U.S. Solar Market Insight Report and discusses trends in residential and commercial solar, including hard costs, important skills for salespeople, state incentives, common misconceptions, and financing. (The interview has been lightly edited for length and clarity.)

Tom McCormack (TM): Can you give some background on the U.S. Solar Market Insight Report?

Cory Honeyman (CH): The U.S. Solar Market Insight Report is a publication that we release with the Solar Energies Industry Association (SEIA) on a quarterly basis. The key takeaways from the report are a combination of understand installations across each state and market segment, our outlook on future installations, our forecast, by state and market segment on future installations through 2017. Within that, we break apart and identify the leading states and provide qualitative background on the key drivers and challenges to growth that are fueling or hampering installations across the top 10, and some of the newer state markets that are just beginning to hit the national radar. We also cover installation pricing trends, manufacturing and component pricing trends, and, finally, a breakdown of both PV and concentrating solar trends.

TM: What is the methodology for the report?

CH: The quantitative data comes from an extensive data collection effort that I take the lead on. We reach out to 60-80 sources, including utilities, incentive program administrators, and government program administrators, who provide figures on new installation capacity across the major market segments. One key element that sets this report apart from other reports that are tracking growth in the solar industry is the fact that I think we have the most robust coverage of actual utility interconnection data. We also conduct an extensive array of channel checks where we have discussions with people across the downstream value chain for solar about the major drivers of growth in the states where we’re seeing upticks in a given quarter.

TM: What is driving the increase in residential installations?

CH: Customer acceptance and the interest in going solar in the major state markets, especially in California, is increasing every year. When you see three of your neighbors go solar, it inevitably makes you want to go solar, too. Outside of the increased social acceptance, the economics for installing solar on the residential side have become increasingly attractive. The cost to install has gone down, but it’s also been driven by the introduction of a lot more innovative and attractive third-party financing options that have really scaled up growth. The entrance of companies like SolarCity that can enable homeowners to avoid a lot of the upfront costs of installing solar is driving a lot of the growth in the established state markets. We see, on the residential side, in most major markets, that third-party ownership accounts for two thirds to 85 percent of the market each quarter.

TM: What is making solar cheaper?

CH: On the upstream side, we’re seeing declining prices across both components and polysilicon. Combined with that is the fact that we’ve seen increased electricity retail rates for customers. Those two things together increase the value proposition for customers to go solar. Also, in many of the established state markets installers have fine-tuned their internal operational efficiencies, cutting down on a lot of soft costs and have also even focused on customer acquisition.

TM: Do the current solar trends suggest any new careers or skills that will be more in demand in the coming years?  

CH: Our partner SEIA recently released a report on the number of jobs that have been created within the solar industry, and that goes into the types of jobs the industry attracts and how that has evolved over time. As we’ve seen really impressive and continued growth across the entire market, obviously that requires a ramp-up in sales capacities. So, if you go on LinkedIn and type in “solar,” all of the leading companies have positions open for outside and inside sales consultants, and I think that is an area where there will be constant demand. Although it’s becoming increasingly heterogeneous, the U.S. market is still concentrated in the hands of a few state markets. However, the dynamics within those states is changing, so I think there’s a need for more and more roles that involve a strong understanding of where the market is heading both geographically as well as in terms of financing trends and other major trends that can lead to increased acquisition of customers.

TM: What types of skills would make a prospective solar employee marketable today?

CH: It’s a different conversation depending on whether you’re pitching to a residential or a commercial customer. The requirements for commercial are more technical and focused on the financial returns whereas with residential, you really just need to shore up what your elevator pitch is when you’re reaching out to potential customers. Regardless of what the customer acquisition strategies are for a given company, if you’re in a sales position, a lot of that is going to be external-facing and either on the phone or face-to-face work. So, it’s important to understand financing options and be able to explain the key metrics that homeowners care about. So, what is the payback period? Or, what is the discount I can expect based on what I am currently paying for my electricity bill?

TM: What do you consider to be an overlooked or not-well-understood element of the current solar market?

CH: I think one of the prevailing notions about installing solar is that you need to have incentives to make it work, and I think we expect any project to take advantage of the federal-level incentives, which means the federal investment tax credit along with another incentive or accelerated depreciation. That will continue to be the primary driver of growth for the next couple of years. When a lot of people think about the economics of solar working out, it has to go hand-in-hand with the availability of really strong state incentive programs. That does fuel a lot of growth across many smaller and middle-tier state markets. But we’re really beginning to see a number of the leading states, that account for 80 percent of the market begin to shift away from needing any state incentives to make projects work. Last quarter was a hallmark moment for California, where over half of all the residential installations that came online actually came online without any state incentives. The trend is getting closer to this notion of retail rate parity, where a project can work with only the federal-level incentives. The misconception that you need incentives to make projects work is an important one because if you’re interested in making sales pitches and becoming an attractive candidate for jobs, being able to talk confidently about where the industry is heading and how it’s becoming increasingly independent of these state-level incentives is important.

TM: What are the main drivers of solar growth? Is it the political landscape of the state, the incentives in the state, or simply the availability of solar based on state geography?

CH: I think they all work together and are weighted differently depending on the state. The underlying market fundamentals that need to be there are: “What are the current retail electricity rates in a particular state?” and “What are the solar resources for that state?” When you have those two questions factored in, the role of incentives plays an important role, but when you think about the roles governments and utilities play in helping to promote solar growth, I think it really varies. From an outsider’s perspective, it’s probably surprising to hear that, in a number of states where you wouldn’t expect to see meaningful investment in solar, it’s actually taking place. Yes, California has and will continue to be the #1 state market for solar, but recently, for example, within the utility-scale market segment, North Carolina is the #2 state right now. Also, even farther south, Georgia, and specifically the utility Georgia Power, has made significant efforts an investment to begin ramping up solar development within its territory.

TM: Can you explain why that’s surprising? Is it because we’d expect redder states to be more reluctant to embrace the technology, or is it a different reason?

CG: I don’t think it’s surprising. The value of going solar is not driven solely by altruism and doing right. That’s an important piece to the puzzle, but the economics are structured in a way that, both for utilities and end users, there are strong cases to be made for integrating solar into the mix. So in Georgia, Colorado, and even Minnesota, the value of adding solar not for compliance reasons, but, for example, as a hedge against natural gas prices inevitably rising again. For customers in states where the incentive landscape isn’t as strong, and as project economics become increasingly attractive, the value of avoiding energy costs altogether is something that I don’t think people always factor in to the evaluation of what role solar can actually play across the U.S.

TM: What are the factors that impact how a utility company participates in the market? You mentioned that it’s a hedge against the price of other energy sources.

CH: That’s a second-order driver at this point. The #1 factor has been that states have set renewable portfolio standards (RPS), and a lot of those have solar carve-outs where the utilities are required to procure a certain amount of solar to meet annual compliance obligations. Those pieces of legislation have launched a number of procurement programs and incentive programs across all market segments. There are a number of states where those RPS are set. The most recent one was established in Minnesota.

TM: So, if there’s new legislation in a state, that’s going to be a major driver, forcing the utilities to get on board whether they like the idea or not?

CH: The prospects for new RPS legislation are going to be few and far between. There are a few states where we’ve seen an extension or revision of these standards, but a lot of the standards have been set over the past few years, going back as early as the mid-2000s, so that legislation is not something that will create new demand. It will just sustain demand that’s been set into place over the past several years.

TM: What types of new commercial projects are we seeing on the horizon?

CH: On the commercial side, the market saw a downturn in 2013 and kind of flat-lined. I think the market has shifted toward smaller-scale commercial systems, sub 100 kilowatt. In the past, especially in New Jersey, which was, for a while, the leading driver of growth in the commercial market, you saw a ton of 5 to 10 megawatt, ground-mount systems that were driving a lot of growth there. And, that market fall apart for a bit because its primary driver is SRECs, and the demand for SRECs dropped once there was too much investment in that market. Looking forward, I don’t think you’re going to necessarily see a shift in the types of projects; it’s more about the way in which that market can become reinvigorated. A lot of it has to do with mirroring what has happen recently on the residential side: figuring out ways to unlock capital to start developing projects again. On the residential side, we’ve seen really innovative platforms for linking investors with developers and linking third-party ownership agreements with customers. Coming up with innovative online platforms to facilitate and then unlock investment for commercial customers is a really important strategy that’s been employed on the residential side. Revising the financing structures that are currently in place in commercial markets is a really important trend to keep in mind. But there’s isn’t one specific type of project we can expect to see. It really depends on the state market. In Massachusetts, which is well on its way to being the #2 commercial market, looking at 2014, that market still sees a number of 1 to 5 megawatt, ground-mount systems. So, it depends on which state you’re in, what incentives are in place, and what those incentives are targeting.

TM: If there was something I needed to learn or familiarize myself with, when you’re talking about the more innovative financing for commercial solar, is that just a matter of getting comfortable with the all the different options that are out there, or creatively bringing investors to the table, or exploring new crowdsourcing options? What would I want to key in on to be on the cutting edge of that change as it happens?

CH: That’s one of the million-dollar questions for 2014 with commercial solar. There are a few companies that are beginning to introduce innovative financing structures. There was an announcement from Wiser Capital that they’re introducing a platform for scaling up commercial solar. Topics you’d really want to understand are how a power purchase agreement (PPA) is structured and expected returns and requirements from different types of nonresidential customers. “Commercial” is often used interchangeably with “nonresidential,” but a lot of the developers who are developing commercial projects are also developing projects for municipal, government, and non-profit entities, too. So, it’s important to recognize that the types of financing available for school projects, for example, are different than what you can secure for a commercial customer. And, I think there are trade-offs and benefits to both types of projects, but really understanding what types of debt instruments you can take advantage of with school and government projects, it’s perhaps a little more niche, but some of those opportunities are really important to leverage. Good case studies to reference are a number of school projects that have been developed in California and Arizona where they have PPA documents available to the public that you can review.

We plan to do an interview like this one each quarter to stay on top of quickly-evolving trends in the solar industry. What topics would you like to see covered?


If you’re looking for solar training taught by industry experts, check out these online options:

Solar Executive MBA – The Solar Executive MBA is technical, rigorous, and challenging. It’s the most intense six-week course you’ll ever find but also the most valuable. We developed it for leaders who are responsible for the financial details that drive solar projects. The course is taught by two instructors: Keith Cronin, who built and sold his solar installation business to SunEdison in 2007, and Christopher Lord, a lawyer with deep banking experience who works with solar companies to find viable projects and investors for those projects.

Megawatt Design – Spend ten weeks learning from Ryan Mayfield, the Solar PV Technical Editor at SolarPro Magazine. Ryan, along with help from other industry leaders, has developed this course to help experienced solar professionals get their projects permitted and installed faster and cheaper. This course goes beyond traditional solar training: it is technical, rigorous, and for experienced professionals only. We cover all types of large solar PV systems, with a heavy emphasis on commercial rooftop systems.

Batteries in Solar PV Systems – Six-week intensive training with solar legend Christopher LaForge. PV systems that employ batteries require significant design considerations. Whether using batteries to “back-up” your utility grid or having them as the basis of a “stand-alone off grid system,” choosing the correct battery and sizing it correctly is challenging. This workshop will be an in-depth analysis of the issues surrounding the use of batteries for PV applications.

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How to Price the Risk of Cash Equity vs Tax Equity Positions in Solar Partnership Flips

This article is part of a series common topics and questions that professionals have about financing commercial solar projects. Chris Lord of CapIron provided some insights into pricing certain types of investor risk in partnership flips. Chris is a co-teacher of our Solar Executive MBA. The 6 week class teaches solar professionals how to finance commercial solar projects from start to finish including financial modeling, legal contracts, development tools, and a capstone project.

Now, onto the question.

In a partnership flip, just how much riskier is the Cash Equity position, compared to the Tax Equity position? How do you put an IRR or Discount on that?

In a partnership flip, the cash equity’s return is subordinated to the tax equity’s return. In other words, the lion’s share of all cash and tax benefits for a project are allocated to the tax equity, with only a small allocation to the cash equity. This continues until the tax equity achieves its target return. That target return could range from an upper single digit return for the best of the best projects, and more typically in the low to mid double digits for typical mid-sized DG projects. This allocation favoring tax equity could extend for anywhere from 3 to 10 years depending on the strength of the project’s economics. Only after the tax equity realizes its target return, does the allocation of cash (and tax) benefits swing back to strongly favor the cash investor. This means that cash equity returns are pushed back later into a project’s lifecycle, and that longer term and subordinated role mean a cash equity position is always “riskier” than a tax equity investor and ought to receive a return greater that than the tax equity investor.

How do you put an IRR or Discount on that?

Hard for a developer to put a price on it, but the real test is what kind of a return does the market require.

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How to Calculate the Buyout Price for Commercial Solar PPAs

This article is part of a series tutorials, interviews and definitions around commercial solar financing that is leading up to the start of our next Solar MBA that starts on Monday September 15th. In the Solar MBA students will complete financial modeling for a commercial solar project from start to finish with expert guidance. The class is limited to 50 students, but there are 30 discounted seats. 

This article is part of a series on common topics and questions that professionals have about financing commercial solar projects.

Chris Lord of CapIron provided some insights into pricing certain types of investor risk in partnership flips. Chris is a co-teacher of our Solar Executive MBA that teaches professionals how to finance commercial solar projects from start to finish. The 6 week class involves working a project from beginning to end with expert guidance including legal contracts, financial modeling, and development timelines. You can get your $500 discount on the Solar MBA here. 

Now onto the question.

How do you calculate a buyout price for your host customer if they want to purchase the system in Year 7 or Year 5?

You are trying to determine what an investor will want to sell the project for. An investor would take the remaining cash flows from the project for years 8 through the end of the PPA, and discount that stream back to Year 7 using the investor’s target IRR. This will give you an approximation or guide to what FMV might look like in year 7.

What about a residual? How does that play in?

Project sellers love residuals, but buyers never do. A residual value is a guess as to what a project might be worth at the end of the PPA term. For example, if a 20 year PPA had a renewable term, then it would be fair game. Or, if we have a utility scale project and the site lease goes beyond the PPA term, then there is potential value. The question of what that value is, of course, is hard to determine. Moreover, whatever value might be agreed upon, is then discounted back ten or 15 years, which further reduces its role in the ultimate determination of FMV. So, at the end of the day, you can make some residual values, but it is a bit of a guessing game.

What if you want to set the buyout price at the start of the PPA?

Well, that you cannot do if you are seeking to monetize the tax benefits. If there is a firm, fixed price buyout set as a specific dollar amount at the start of the PPA, the IRS might conclude that the tax equity investor is not a true owner of the system because they don’t have any “downside” risk. To determine whether a tax equity investor is truly an “owner” for tax purposes, the tax equity owner must be at risk for losses if the project proves not to be as valuable as the parties thought. Hence the IRS expects you to agree that an option can be exercised for a price equal to FMV, but that FMV price cannot actually be determined until the time of exercise.

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[Interview] How to Provide Solar Financing to Any Non-Profit Solar Project Larger Than 50kW

solar crowdfunding

Lee Barken and his team at Collective Sun have figured out the holy grail of commercial solar financing.

Collective Sun can provide solar financing to non-profit solar projects from 50kW and up. Currently, they’re offering their product in California but are interested in doing the securities and legal work to open up shop in other states, if there is a non-profit that has serious interest in working with them.

Listen to the interview below to learn more about Collective Sun (CS) and how, specifically, their underwriting process is different than a traditional investor. Their key advantage is their unique underwriting process. It’s a really interesting strategy. Their process has more to do with selecting investors that see specific non-profits as low risk, rather than finding the non-profits that meet the stringent constraints of a tradition solar investor’s risk profile.

Why focus on non-profits?

There are several reasons why there has been such focus on non-profit clients.

  1. Non-profits operate on small budgets and they always need cash. Having lower and predictable operating expenses is very valuable to these organizations. It’s an easy sell to get your foot in the door.
  2. Non-profits have a social mission that tends to fit well with solar.
  3. There’s A LOT of non-profits! So the potential target market is huge. According to NCCS, there are 1.4 million non-profits in the US. Figuring this problem out will result in a huge increase in sales for the firms that provide this service.
  4. They can’t purchase a system in cash, because they don’t have a tax appetite, so financing is a natural fit for them.

A few months ago, we did a live Q+A that was specifically on performing due diligence, using crowd-funding,  and finding investors for financing non-profit solar projects. You can see the 50 minutes of video answering 5 question here. If you want to learn how to finance commercial solar projects from start to finish including all of the legal contracts, financial modeling tools, click here to read more about Solar MBA that starts on Monday April 14th. You’ll walk through the financing of a project in 6 weeks. Click here to enter your email and get one of the 30 discounts to the class.

Listen to the Interview

In this interview, here’s what you’ll learn.

  • How many projects Collective Sun (CS) has financed.
  • The types of non-profits that CS is focused on.
  • The size of non-profit that CollectiveSun will work with.
  • The spark that made CS decide to focus on financing non-profits.
  • Lee Barken’s background and how that led him to CS.
  • Why financing non-profits is more than a tax problem.
  • How CS deals with non-profit risk by working with a very specific type of investor.

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[30 Minute Interview] Why SREC Markets Will Grow in a Post-ITC Solar World + Other Trends in Commercial Solar Finance

Chris Lord of CapIron, Commercial Solar Finance Expert

All eyes are on the reduction or expiration of the 30 percent federal solar tax credit (ITC). While it’s the prime goal of SEIA (Solar Energy Industries Association) to maintain the federal ITC, some have argued explicitly that it’s time to dismiss solar tax credits on the local level, while others have argued the federal tax credit SHOULD be reduced or eliminated to help the solar industry.

In this 30-minute interview posted below, I talk with Chris Lord, of CapIron Inc, a solar finance expert. Chris works with property owners, developers and financiers to develop mid-market solar projects. Chris has extensive experience financing solar projects and because he deals with stakeholders on all sides of a project, I’ve found his perspective to be extremely valuable. We’ll discuss investor trends in the commercial solar market, the possible impact of the expiration of the ITC, non-recourse bank lending trends, how EPCs should find investors in their local market, and the impact of crowdfunding.

My takeaway: The impact of the possible ITC expiration will depend on the local market. In markets that have flexible programs, namely SREC markets, it could actually increase the adoption of solar PV by increasing the value of SRECs — after a short drop in supply — which would then open up an entire markets for both properties and investors that could not use the ITC before. While in markets with more rigid structures, like feed-in-tariffs, cash rebates, or tax credits, it might have a more long term negative impact.

In this interview, you will learn:

  • Why there are a lot of banks and funds investing in 2-MW+ and residential solar projects, but few focusing on commercial. I’ll will share why I do not see a trend of more and more project investors focusing on smaller and smaller commercial projects even though there is a huge opportunity. (Note, there are some funds focusing on mid-market projects, click here to listen to an interview with a $20MM solar tax equity investor that only finances mid-market commercial projects.)
  • Why mid-market commercial projects are the hardest part of the market for investors to deal with. Hint: It’s because of the high transaction cost relative to the size of the deal and the inability to aggregate deals.
  • Even though commercial financing is difficult, Chris will share how he sees projects are still being built.
  • The four characteristics of the right investors for mid-market commercial projects.
  • What are the three steps a developer must take to find project investors for their projects.
  • How an EPC’s development plan for a project and the tax appetite of an investors are intimately linked.
  • How the tax appetite of an investor will be the limiting factor to an EPC’s development plan and how you can quickly reverse engineer the tax appetite required from an investor to fund your development pipeline.
  • Why the standardization of documents (note: you can see the results of NRELs working group here and Tioga’s open source PPA here) will only have a minimal impact on reducing the transaction costs for mid-market deals.
  • Why developers should work on creating a specific formula with their investor partners with a specific jurisdiction that can be replicated as much as possible.
  • How tax benefits are a double edged sword and how the expiration of the ITC could greatly simply financing and increase adoption of commercial solar.
  • The maximum transaction cost-to-project deal ratio that I see in the market.
  • The impact that the expiration of the federal ITC could have on local solar markets and how it will be different based on the rigidity of state incentive programs.
  • How low gas prices could shut down coal plants and increase electric rates, increasing solar adoption.
  • Why non-recourse debt is not getting substantially involved in the commercial solar market.
  • Why the expiration of the 2016 ITC could switch the market to using a hosts debt and their own balance sheet to finance projects, eliminating the need for a PPA because tax credit monetization is no longer needed.
  • Three advantages of crowd-funding over borrowing from banks for developers.
  • Two reasons why crowdfunding is attractive to investors.

If you’re interested in more information about the post federal solar tax credit era, check these out

Do you have feedback or questions about this interview?  

Please leave them in the comment section or send me a note on twitter.

This article was originally posted in Renewable Energy World

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50 Minutes of Video Answering 5 Questions on Finding, Pitching, Managing Solar Tax Equity Investors

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This event has already happened. Please scroll down to see the recording and read the answers to the questions. 

This week our focus has turned to a question that everyone wants answered. Investors, investor, investors! Everyone needs more capital for projects, so they can build even more projects. Everyone thinks that lack of investors that can provide capital for projects is holding their business back, which may or may not be true.

We reached out to a few HeatSpring friends that are doing commercial solar work and asked them what issues they were facing with project investors. There are 5 questions below that we’re going to answer on Tuesday.

Interested in more information on the financing commercial solar projects?

We have a lot of awesome information on the subject for you to sink your teeth into.

The 5 Questions

Question 1 – Where do investors come in in the development process of a project? I have 8 acres of land and it has the potential of building a 2MW facilities. I’m in EPC with a strong relationship with the landowner, when should an investor be brought in on the project?

Investors should always been in your orbit and you should develop a prospectus template for your projects. You should first have site control for any project you consider developing. A letter of intent is critical to have executed and if it can be binding for a period of time- 3-6 months as you perform your due diligence, the better. Explaining this to the landowner first is essential and once explained “why” they usually understand that the process is detailed and often one item could kill a deal. Creating a development plan, which consists of specific activities and events that need to happen in order to see a project go from idea to interconnection can be the difference in not only completing a project, but providing potential investors with the confidence in you. Investors have alot of places to park their money today and they need to know that you’re a strong EPC and also that you have a solidified relationship with the land owner. This helps everyone be efficient with their time and reduces the potential for the “cry wolf” types of projects that invariably never get built.

Crafting a timeline with specific milestones and assignment of responsibilities is essential, if you want to attract the most qualified investors. A development plan should also be included and be circulated to the investor pool to show them when you will hit the specified milestones. From a cash flow perspective, this is going to be also important as an EPC, so you’re not carrying the weight of the economics of the project throughout the development process.

Question 2 – What are the most important topics to include in the first page of an executive summary on a project when dealing with an investor for the first time? What will get them interested and afraid?

An executive summary can be as detailed as it needs to be to garnish the attention of an investor. Some things to highlight in the summary should be:

a. Project summary- tell them a story

b. Project financials- what is in it for them

c. Project team- who are you and why you are better than other providers

d. Project details- technology to process- (development plan)

e. Project risks- and how you will overcome them

Investors are being pitched by everyone and anyone and its not just in the solar sector. Returns balance risk- higher returns, higher risk and vice- versa.

What is your unique angle on your project that will get them interested? Are you appealing to their wallets, their altruism goals, more projects in the pipeline, simple project, low risk, high returns, etc.?

Ask them questions: what do they want? Listen and take notes as they will tell you what they’re looking for in a one off project or a portfolio of projects.

Question 3 – I’m an EPC in the northeast and I’m in the process of negotiating a deal with an investor on a 450kW rooftop project. The investor is a local real estate investor that has the passive income to invest in these projects, but he’s new to solar investing. What are my biggest risks and how to I avoid them?

Congratulations – you are well on the way to mastering two of the most challenging parts of a middle-market commercial solar transaction: finding a customer and an investor. As an EPC you probably have a lot of experience finding and landing the customer. The challenge is that financing is not normally in the job description of an EPC, and yet it is a critical component of the puzzle you are trying to put together. So, what are your risks? Where do you need to pay attention?

In a nutshell, your risks arise from your investor’s inexperience and ignorance. That means you must be sure they understand the economics and the structure you are using. Now let’s look at the detail behind that short answer.

The biggest risk you have comes from the fact that your investor is not experienced in the solar arena. Let’s assume though that he or she is a successful and confident real estate investor. We can extrapolate and say that – whether your investor verbalizes this or not – he or she will not want unexpected surprises in the structure or economics. Those are your two biggest risks – failure to understand economics and failure to understand the subtle complexity that comes from a tax equity structure.

In this scenario – ignorant and inexperienced solar investor – some people may take the strategy of give them as little information as they can – a “just get the deal done” strategy. But there are serious legal risks to you and your EPC business if the investor experiences unexpected and unpleasant surprises after the deal. There are business risks as well from this strategy, but they pale by comparison to the legal risks. Losing a million dollars could be pretty painful but nothing like prison. Violating legal rules regarding investment disclosures can carry not just civil but even criminal liability. Besides, your business reputation depends on a successful venture from start to finish, and you want to tap into this investor and his social/business circle for future deals, so there is a great deal of value in getting this right.

Your challenge lies in teaching solar investment as thoroughly as you can over the course of your negotiations, and the build out. But at the same time, you don’t want to confuse or discourage him or her.

Given that your biggest risks stem from a failure of the investor to understand the economics and the structure, you need to prepare a simple but effective model so that the investor or his/her specialists can thoroughly get there head around the economics and related risks. You also need to prepare effective material to explain the tax, legal and business ramifications of the solar investment structure you are selling to the investor. We will cover both in the course in greater detail, but that is the answer in a nutshell.

For our discussion here, I would also add that you must recognize that you cannot explain the structure and get an investor comfortable with an economic model in a single meeting. This will take at least a few weeks and you must be patient. Even once you have an agreement in principle, you must be sure to communicate regularly with your prospect about the deal and its progress.

So, cutting to the chase, don’t assume you can slip a fast deal past an investor. Business models and deals built around assuming the gullibility and shortsightedness of the investor are inherently flawed.

Question 4 – How do you manage an investor communications during the development and construction process?

Carefully and diligently!! The answer to this questions flows from the risks we identified in the preceding question: investor knowledge and understanding of the economics and structure of a deal.

For simplicity sake, we will assume an experienced investor and an inexperienced investor. In both cases, you have the same objective, but the detail and tools may vary.

For the experienced investor, a solid and detailed presentation on the deal, coupled with an online due diligence data room will probably be sufficient to get you most of the way there. You not only want to communicate the substantive aspects of the specific transaction to your investor, but you also want a good record of what you disclosed and when. Whether you are an EPC, customer or professional advisor/broker, you are legally responsible for disclosing the investment risks to the investor.

For an investors with three or four deals completed and a couple of years’ worth of payout under at least one deal, you don’t have to worry as much about global, big picture risks as you do specifics that are peculiar to your deal. Cover the most meaningful ones in your presentation. The due diligence data room should cover all aspects of the deal – from the customer through the EPC. Often an experienced investor will have their own due diligence checklist, and you want the structure of your online data room to mirror that checklist to make things easier for the investor. You probably don’t have to share an economic model in this scenario but you need a single document that contains all of the economics assumptions and data. For example, an investor does not want to have to hunt through your data room to get the PPA price and escalator, or the annual O&M Costs.

What that covers the substance and means of communicating with your investor, you must still figure out the pace and timing of your communications. You don’t want to be haphazard, elusive or an obsessive pain, but you do want to be regular, thorough and timely. Schedule each of your follow-up conversations at the end of your current meeting or call. Make sure your emails are timely and have all of the necessary data. Give a heads up if there are unexpected developments. Remember your investor is a human too, and he or she will be communicating internally with bosses, credit committees and other team members. Help them to look professional and competent, and you will be valued accordingly.

For the less experienced investor, you have a lot of work to do. As we noted earlier, you must combine not only the usual disclosure requirements and procedures, but you must also be educating your investor on the economics and structure. For example, you are going to probably have to share an economic model with the investor. You need to make sure it is a good one, and that it can grow with the sophistication of your investor. As hard as it will be to remember, you are trying to build a long-term relationship with a prospect. Even if they do not have the capacity to make multiple investments, they will have a circle of business and social colleagues who may well follow them. Remember – local investors know and watch one another and so your professionalize and performance will precede you in the local community.

Question 5 – There are only 15 or so large banks offering tax equity in huge funds to residential providers or 5MW+ facilities. I run a successful contracting business in the mid-atlantic but we’re new to solar, we have a great reputable and an existing book of business so I have a pipeline of 1MW of projects that I can install at around $2.35/watt  I can build over 4 sites and I see this growing by about 25% per year. What is the specific profile of an investor that I should be looking for for these size projects and how would I about finding them?

My first recommendation for all solar projects – residential, commercial or institutional – is, first and foremost, to find as many customers as possible who will do the projects without financing. Doing deals without the complexity of financing is far more profitable than doing deals with financing. Always.

Residential deals have the challenge of being smaller and so an investor can afford very little in the way of legal and due diligence costs. That is why residential went to aggregators first.

Now, in your hunt for financing, don’t overlook the fact that there are residential aggregators out there who will work with multiple EPC’s. They are essentially in the finance business and pull together a raft of deals that one of the larger institutional investors will then put money into. Of course, there is the middleman’s cut, so you need to be sure you have enough economics in the deal to pay them and still make your EPC/Developer margin. They will also require you to use their documentation or at least markup and approve your documentation, which means you must lock up with such an aggregator before you enter the deal with the residential owner. The aggregator will also want to be comfortable with you as an EPC and a credit risk. So have good data on your construction experience, and be ready to walk them through the details of your design for a specific solution. The aggregator will also want to see your pipeline because they only make real money – and recover their investment in you – over time.

And this brings us to your challenge if you are looking for locally, well-heeled investors looking for a few smaller deals. The economics are challenging when you throw in legal fees, appraisals and accountant’s advice. To find these investors – and make a deal work – you will need to create your own aggregation. You probably need at least ten deals with a common structure, identical documentation, single utility and preferably located in the same taxing authority. As you already know from the size of your pipeline – four deals a year – this could be difficult.

So, I recommend the following profile: a savvy real estate investor with commercial solar investment experience, a large tax appetite and a comfort with solar risk. This type of investor will know and understand that the due diligence must be focused but limited, and the documentation kept as standard as possible. Ideally, this investor might also be an investor in your EPC business. That would give the investor insight on your track record and responsiveness to the “unexpected”.

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Advice from a $20MM Solar PV Investor for Commercial Solar Installers = Focus on a Niche, Be Fast, and Standardize your Operations


This article is part of a series of tutorials, interviews and definitions around commercial solar financing that is leading up to the start of our next Solar MBA that starts on Monday September 15th. In the Solar MBA students will complete financial modeling for a commercial solar project from start to finish with expert guidance. The class is limited to 50 students, but there are 30 discounted seats. 


There are a few questions that solar EPCs and developers interested in the commercial solar market continuously ask me:

  1. Our company’s sales are limited by finding investors for projects, but I can’t find them. How do we find investors and project finance capital for my projects?
  2. What does a good project look like to investors? What is a creditworthy customer?
  3. What should I focus my company’s time on, and what should the investor do?
  4. How do I determine what I should install the project at and what is an appropriate PPA price to the customer?

The following is a 60+ minute interview with Noel Lafayette of Steep Hill Renewables. Noel runs a $20MM solar fund and is an active solar PV investor. He’s looking to finance and buy mid-market solar projects between 150kW and 1MW. Because he’s actively looking to buy projects and has deep experience in the solar industry, his insights are extremely actionable and valuable to any solar contractors looking to grow in the commercial market. He’s been developing and financing commercial solar projects since 2006. In total, he’s developed more than 50 MW of solar projects.

If you believe that selling, financing, and building projects between 100kW and 1MW is the future of your company or career, this interview is for you.

If you have a question for Noel, please leave it in the comment section of this article.

In this interview, you will learn

  • How most solar deals have 2, 3, or 4 “moving parts” and why investors can accept 1, maybe 2, but never 3.
  • Why policy should not steer property owners toward leasing but should let the market dictate the best ownership model.
  • Why there’s a huge opportunity and going to be a “roof grab” on roof projects between 200kW and 500kW in Massachusetts in the next 24 months.
  • Why you should be pricing your PPA energy price at a 20%+ discount to the customers’ current electric cost to sell projects. You might be able to sell projects at a 10%, but you’ll be able to sell much more at 20%.
  • A key sales strategy for dealing with more conservative or more speculative property owners. What happens when you let the customer keep their SRECs or not.
  • Why new EPCs should work directly with their financing partners when they’re selling projects to make sure they won’t lose money.
  • How to develop a relationship with a solar investor so working out the terms of a deal take 15 minutes on the phone and not weeks.

Continue reading

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50 Minute Presentation on Due Diligence, Crowd-funding and Finding Investors to Finance Nonprofit Solar PPAs

This Q+A has already happened. Please see below for the recording and to ask any questions about the content.

If you’d like to RSVP for our next Q+A on Finding, Pitching and Managing Tax Equity Investors that will be on Tuesday January 28th at 2pm EST, you can click here to do RSVP.

If you’d like to submit a question for the Q+A, please join our Linkedin group “Best Practices on Financing Commercial Solar Projects between 200kW and 5MW” and ask it on the course wall. Lastly, you can watch our last recorded Q+A, which is 60 minutes and answers 7 questions about financing commercial solar projects. If you need to getting into the knitty gritty details of how to finance commercial solar projects from start to finish, click here to read more about our Solar MBA (the next class starts February 3rd) or sign up for a Free Solar MBA Test Drive here.

Here is the recording. It was a great session.

Since we started running the Solar Executive MBA course (click here if you want to learn more about the Solar MBA) and teaching experienced solar professionals what they needed to know to finance commercial solar projects, we continuously get a large volume of questions specifically about financing non-profit solar projects.

Here are the Five Questions that we Answered

I’m in the process of completing my first PPA.  Our company is no longer structured to take advantage of tax credits for PPA’s, thus I am struggling to find investors to take a project. What is the best way to find investors? What is their profile? How should I approach them? How long does it typically take from the first time I speak with them to closing a deal?

The best way to find investors- perhaps the question is, what part of the investment is needed? Debt? Equity? Each part is different and often one party could bring one to the table and not the other. It also depends on the size of the deal. Small deals are often not as attractive to institutional investors.

If it is a small project, there’s an opportunity to get a loan via the local bank and finding tax equity investors is usually more challenging. The amount of time to closing can vary greatly, depending upon the deals characteristics and competing deals with higher returns and lower risks.

Approaching investors can come in a variety of ways. If it is a PPA on a for profit business, this can usually be easier to find. Offtakers for a for profit business are going to look at all the documents related to the project and who the company is. Often 3 years of audited financials of the company/host is going to be required in order to qualify the project from an investor’s perspective. There will also need to be title search done on the property to make sure there are no encumbrances. Also looking at the type of business that it is and its long-term goals is critical, as PPA’s go out 15-20 years in the future. Will they be around? Can the PPA be assigned to the new owner? Is the property in a desirable location and can it be sub-leased?

If we are looking at a small project on a non-profit, like a house of worship, there could be affinity investors (high net worth), or people that go there, that could become the investors. They could be accredited investors and be able to hurdle the SEC and financing rules to be a good fit for your project. If they have other investment vehicles, like real estate, then their profiles could match the profile of an energy project. Providing them with a summary of the project, a pro-forma and other related supporting documents can assist you in the marketing of the project.

If it is a larger project, where you need institutional investors, contacting your local lending institutions to see who is doing deals, as they usually know what is happening at loan origination or in their leasing departments (which are usually now called Equipment Financing). They will have access to contacts and it is those relationships that you want to foster.

The amount of time that it can take can vary. We’ve seen spans of 8-12 weeks or more, depending upon the circumstances.

Does the recent push for, and acceptance of, crowdfunding in solar provide opportunities in financing not for profit solar projects?  If so, how?

Yes, but before we get to how, let’s talk about what crowd funding is and how it differs from traditional financing. Traditional project financing involves raising capital – debt and/or equity. Both the Federal government (primarily through the SEC and banking rules) and each State (through “Blue Sky” and state banking requirements) regulate the when, how and from whom of raising capital. The regulations were created in the wake of the prevalent fraud and abuse that characterized the 1920’s capital markets right before the great market crash of 1929. As a consequence of these rules, sophisticate financial institutions generally provide the bulk of all project financing in the U.S.

With the advent of the Internet age, Congress has begun loosening the rules that regulate raising capital, and one result is the emergence of crowd funding. Crowd funding uses the Internet to raise small amounts of money for a specific project from a lot of different people. For the moment it is primarily limited to debt – equity is still on the horizon, but coming soon. (Even when it does come, it will probably be limited to very small transactions, for example under $1 million, and not likely to be well suited to provide tax equity.) But even so, low cost debt – well under 10% and probably average between 6 and 7 percent in today’s market – can still greatly enable a project.

The leading crowd funding platform for solar projects is probably Solar Mosaic. Here is how Solar Mosaic works. Solar Mosaic performs due diligence on the project and if the project meets its threshold requirements will enter a funding agreement pursuant to which Solar Mosaic lends the project $X, at an agreed upon rate and term. Solar Mosaic then raises money by posting the project investment opportunity on its web site. Effectively Solar Mosaic is issuing its own non-recourse notes (secured solely by the revenue from the Project company’s note). Prospective investors have access to the due diligence material. Each investor that likes the Project, including the return, can sign up for an amount of its choosing (subject to a max and min). Once the full amount has been raised, the transaction is closed to further investors.

Crowd Sourcing can work particularly well for non-profits because it allows “affinity investors” an opportunity to participate in a carefully structured transaction and benefit from the due diligence and data gathering presented by Solar Mosaic. An Affinity Investor is someone otherwise affiliated with, or supportive of, the non-profit’s mission. For example, an Affinity Investor for a Church might be a member of the congregation.

Crowd Sourcing is particularly useful for affinity investors because it offers smaller investors an opportunity to participate, and – because it involves only debt and no tax equity  – doesn’t require investors with substantial “tax appetite”.

The negative of Crowd Sourcing for non-profits, is that a tax equity investor must still be found. In fact, if a project is not viable without tax equity, then Crowd Sourcing can only reduce – but never eliminate – the need for tax equity.

I’m specifically interested in issues associated with members of a non-profit organization providing the tax equity financing for a solar installation on their own church, temple, or faith community. How can this be done? What are the issues that need to be addressed with passive income and securities regulation for the investors in these third-party systems on non-profits?

As in our first question, identifying people that fit the profile is essential. Knowing what the characteristics are early and focusing on who your ideal candidate is will eliminate a lot of potential people that are interested, but don’t qualify. Like question #1, the issue always at hand is the passive income rules. This is something you need to talk to your accountant and attorney about. These deals are done often, but it requires more scrutiny from the investor’s perspective, as sometimes, non-profits don’t have a long track record and could also cease business operations as well. As an example, even in a house of worship, a leader in the organization, like a pastor, could leave and take his flock with him to another location, emptying the church and its operations. This will adversely impact an investor and is a risk you should consider.

Active income, is income received like a salary from your company or a gain from the sale of an asset or a business. Passive income, is from things like a rental income. If you receive losses from a business but aren’t an active participant in the business, this is considered passive income.

The challenge is most individuals don’t earn much passive income and has been the issue for a long time, as it relates to investors capacities with solar assets. The other issue is that passive investors can only use tax credits or depreciation to offset other forms of passive income.

What should be on a due diligence checklist for screening non-profits clients and potential investors for those projects?

Due diligence can be lengthy and can also be brief. We like to get as many details about a project, but often in local markets, many vetting cycles for smaller projects are relationship based. (at least that is the case here).

It is also desirable to setup an online data room to effectively manage the layers of documents and correspondence during this process. This keeps everyone informed and up to date with the latest revisions of the documents and limits the digging into your email for the most relevant doc sets.

Developing a detailed process for gathering this information is essential as having a framework will assist you and your team in a consistent way for finding projects as well as how investors will look at working with you. Investors often know others that are in the market for these types of opportunities and creating a template of the items you and they need to go through streamlines the process.

Here is a brief list of items you should consider in vetting a project. Note they are in categories and are essential in streamlining the process of lead generation to COD.

  • Site Control- this by far is the most important first step in the process. Having a LOI with a building or landowner is the first step.  Once this is secured, you can do your feasibility study to determine the system size and other environmental attributes associated to the preliminary permitting scope to provide the land owner with a MOU and lease document. These are usually contingent upon the findings of the next step.
  • Permitting- this is one that will make or break the economics of a deal. You could have an unforeseen site condition that could halt the development of your project or an added cost that will make the return the investor needs to fund the project, undesirable.
  • Power offtake- who is buying your power? Rooftop and it’s the customer and the utility or is it a PPA directly with the utility? Knowing these things early determines the economic desirability for an investors appetite and risk.
  • Project finance-what kind of funding sources are you looking for? What will be the terms of the deal for investors? Is is a direct purchase, sale-leaseback, partnership flip? Who will monetize the incentives? Are there insurance policies to manage risk? Is there a clear construction schedule and penalties for delay? Have you spoken to the utility for a schedule?
  • Interconnection- where is the transmission line? Is it rooftop project and interconnection is easy? Do you know these costs and have a contingency fund if there are cost overruns? Do you have consulting engineers costs figured out? Are there any studies that need to be performed by the utilities that could take time and be an added cost?
  • Engineering- what are your critical path items? Will you do everything in house or outsource? Do you have sub contractors that have done the work before that work with and understand the engineering requirements? Who will fill out the interconnection agreement? What will happen if the utility needs to curtail the system? Who will do the testing and verification?

With all due diligence, comes the risk of timing. As with solar tax credits, the end of the year timing is crucial in investor and tax planning. Not having your project built in the particular year you pitched to investors can have an adverse affect on their projected returns and can make the deal un-financable.

When would we want to use a PPA and when would we want to use a lease to finance a non-profit solar project.

The selection of a PPA vs. a Lease will be driven by at least two important factors. The first and most important is whether applicable law and the serving utility for the project permit a third party PPA. Under a PPA, the project owner sells power to a host customer. This sounds suspiciously like a utility’s job: selling and delivering power to a customer. Utility’s are heavily regulated entities, and – like all monopolies – jealously guard their turf. So as a general rule, PPA’s are not permitted unless expressly permitted by applicable state law or otherwise approved and acceptable to a utility. That is the bad news. The good news is that most state’s permit third party PPA’s where the power is produced and used on site, but they do so under different schemes. For example, in California PPA’s are permitted in all investor owned utility jurisdictions. Most municipal utilities either don’t permit PPA’s or limit how power may be produced and sold within their service territory. For example, LADPW has long interpreted its charter as preventing any other party from selling and delivering power to a retail customer within its service territory. Luckily, where PPA’s are not permitted, leases can and often do work. Under a lease, a user of electricity leases a solar system from a leasing company. The user then uses the solar system to generate and deliver for its own use solar power. (In both cases – a PPA and a lease – you must still follow all of the interconnection requirements.)

The second factor in determining whether to use a PPA or lease depends on the economic objectives of the non-profit, and the investors/project company. Under a PPA, a customer has little responsibility for a solar system other than to pay for the electricity delivered from it. The operating and maintenance expenses, taxes and insurance are all the responsibility of the power provider (and ultimately the investor). In addition, a PPA revenue stream looks variable because it will fluctuate with the number of kWh’s delivered by the system. That variability is important because if a solar system under delivers, or unexpectedly breaks, the risk and cost are all on the project company/investor.

By contrast, a lease shifts many of those risks to the non-profit. That is, under a lease, the payments due from the non-profit are fixed lease payments, and not variable PPA revenues. Put another way, under a lease the non-profit will be responsible for operations, maintenance, taxes and insurance. If the systems under performs or even fails to perform, the non-profit must continue to make the lease payments while bearing the cost of repairing the system.

In some cases, one might structure a lease to shift O&M, taxes and insurance back to the leasing company, but this will be a rare exception. Leasing companies are financing machines, and they don’t want any expenses. They prefer triple net type of leases, and a fixed stream of revenue.

Why are non-profits a special case? Why are we hosting this Q+A on financing solar on non-profits?

We organized a Q+A on commercial solar projects in August and it was a huge success.  Click here to see the 60 minutes of video answering 7 questions ranging from how to calculate pre-tax vs post-tax ROI to what owner/lessor arrangements needed to be made in tenant situations.

Since then, we’ve had a large cohort ot students go through our Solar Executive MBA course (the next Solar MBA starts in February. In the class students learned how to finance commercial solar projects from start to finish, click here to test drive the Solar MBA course for free). Also, our Linkedin group on “best practices for financing commercial solar projects between 250kW and 3MW” has continued to grow.

What’s the one topic that we continue to get a lot of questions about?

You guessed it, how to finance non-profits. So, this is your chance to get your question answered.

There are several reasons why there has been such focus on non-profit clients.

  1. Non-profits operate on small budgets and they always need cash. Having lower and predictable operating expenses is very valuable to these organizations. It’s an easy sell to get your foot in the door.
  2. Non-profits have a social mission that tends to fit well with solar.
  3. There’s A LOT of non-profits! So the potential target market is huge. According to NCCS, there are 1.4 million non-profits in the US. Figuring this problem out will result in a huge increase in sales for the firms that provide this service.
  4. They can’t purchase a system in cash, because they don’t have a tax apetite, so financing is a natural fit for them.

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Posted in Financing, Solar Photovoltaics | 6 Comments