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

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.

• [60 Minute Interview] Advice from a $20MM Solar Tax Equity Investor for Commercial Solar Developers
• [30 Minute Interview] Why the ITC Expiration Could be Good for the Solar Industry + Trends in Commercial Solar Financing
• Read and Watch: Non-Profit Solar Financing – 50 Minutes of Video Answer 7 Questions about Due Diligence, Crowd-funding and Investors
• Read and Watch: 60 Minutes of Video Answering 7 Questions Best Practices for Commercial PPAs
• Free Course on Commercial Solar PPA
• Read more about our Solar MBA, where you’ll learn how to finance commercial solar projects from start to finish, and get all of the financial models, documents and tools to do it. Click here to test drive 1% of the Solar MBA for free
• Join our Linkedin Group “Best Practices for Financing 250kW to 2MW Solar PPAs”
• A List of Everything You Need to Know to Finance a Commercial Solar Project

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”.