The following is a guest post by Fred Paris, the instructor of our Solar PV Installer Boot Camp Training + NABCEP Entry Level Exam Prep. Fred tells the story of how he worked with members of a church to finance a solar PV project. This could serve as a model for non-profit clients that you work with that really want solar. If you have any questions for Fred, please leave them in the comment section.
If you’re new to the solar industry and need to learn how to market, sell, design, and install projects, check out Fred’s online course: Solar PV Installer Boot Camp Training + NABCEP Entry Level Exam Prep.
If you’re an experienced solar professional and need to learn more about financing commercial solar projects, I have a few resources for you:
- View 60 minutes of video answering 8 questions about best practices for financing commercial solar power purchase agreements.
- Click here to learn about our Solar Executive MBA Training, an in-depth course that covers everything you need to know about developing and financing commercial solar projects.
- Join our LinkedIn group on “Best Practices for Financing Commercial PPAs Between 200kW and 5MW” and continue the conversation about best practices.
I’ve put some comments in [brackets]
Enter Fred Paris…
A church wanted to install a 13kW PV system. Intuitively knowing that the $4,000 budget would never cover a system of this size, we went ahead and designed a 13kW system and agreed to test different ideas on how to pay for it. The survey done, the system designed, and along with some structural reinforcement, the cost would be $65,000. [13kW at $65,000 gross installed cost is $5.00 per watt] We went in knowing the church would not qualify for the 30% federal tax credit or the state tax credit. Using projections, we knew the system would generate more than a megawatt of energy a month and some $3,000 a year in electricity in our 18¢ utility. The project was presented to the congregation along with a financial plan showing the possible ROI available for a third-party owner, if one could one be found. We agreed to put a plan together.
The plan was to form a for-profit LLC to buy and own the system. Since profits from an LLC flow down to LLC members [the flows of profits and losses will depend on how you set up the operating agreements], those having tax liabilities would use the federal and state credits of more than $20,000. The church would continue to pay a lower 14¢ monthly electric bill to the LLC, the LLC would get the SREC payments – we used a conservative projection of a couple hundred dollars a month, [I would use $175/MWh as the lowest effective value of SRECs in Massachusetts, you can read more about the impact of SREC assumptions on project IRRS here] – and would depreciate the PV system as an asset they own. Recognizing the startup cost to setup the LLC, along with legal and insurance costs for the life of the arrangement, the financial break-even for the LLC would be less than 8 years. [The financial break-even is when the net present value goes from negative to positive] Eight years later, the system is fully paid off and the church stops paying the reduced 14¢ rate. The LLC then votes to donate the system to the church – with perhaps another write-off, and the LLC is dissolved. Everybody wins.
We need to look beyond the financial dollar amount of PV incentives and consider value. The same financial incentives can have more or less value depending on the owners’ tax and financial position. The church’s tax situation was obvious, but there are many for-profit businesses that will not have a significant tax liability. You may want to explore setting up a single-purpose business entity to capitalize on the incentives. Everybody can win.
Follow-Up Questions for Fred
How much were the legal fees for setting up the LLC, PPA, etc.? Who did you use to do this? How did you make sure the documents were legitimate?
Part of the group was a lawyer so he took care of all of the documentation. A simple LLC can be formed for $1,000. However, this becomes more expensive and challenging when you have multiple investors because you need to establish clear operating rules for the LLC that explicitly state how the profits, losses, and credits of the LLC will flow.
How many church members were there? Did they each buy into the LLC evenly to make the operating agreement and flow of credits and cash simple?
There are 5 investors, and, no, they did not invest evenly but using a simple percentage of investment equals percentage of SRECs or whatever. This works okay.
How long did the whole process take versus a cash sale? (In other words, if it would have taken 4 months to do the project with a cash sale, how long did it take with the LLC? )
Once the decision was made to go with the LLC, the project moved along at a good pace. Creation of the LLC was not on the critical path – plenty of slack time.
A Few More Notes and Thoughts about Fred’s Project
1 – The investors didn’t want to make money; they wanted the church to save money. Understanding what each party wants is a fundamental part of the sales process. If the investors had wanted a 15% return over 8 years, the project likely would not have happened. What they wanted was an amazing way to donate to the church (because the church would save money) without losing any money, because they got it all back!
2 – Their legal fees were essentially free, because one of the church members was an attorney. If legal fees were $10,000 the installed cost would have increased from $65,000 to $75,000, or from $5.00 per watt to $5.76 per watt (a 15% increase).
Here are the rough financial analysis for the project that Fred describers. Note, I did not take into account insurance costs, or sales tax, but I did take into account.
If you want to use the same model I’m using, you can download the basic solar PV model here. If you need a really robust commercial solar PV model, you can download one here. If you need to learn how to finance commercial solar projects, take a look at our Solar Executive MBA Training.
Here are the project assumptions. IRR = 11.50%.
What happens if legal fees are $10,000?
If the legal fees were not free, they would increase the installed cost from $5.00 per watt to $5.76, this would decrease the IRR from 11.50% (see above) to 8.73%.
How do you determine when the partnership flips?
In a partnership flip, the flow of cash flow changes when a specific party, typically investors, have received a certain IRR or a specific NPV on a number a years. In the case of the church, the investors only want to make back let’s say a 4% return. If we set our discount rate to 4%, we then need to see when the net present value is equal to zero. We do this calculation by simply adding the present value of each year’s cash flows together. Here are the results. Notice how the “Cumulative NPV” goes from negative to positive in year 8?