Chris Williams HeatSpring Solar MBA Copyright 2014 Revised Edition: January 10th

MASTERING COMMERCIAL SOLAR FINANCE

The mastering commercial solar finance bundle is a collection of interviews and articles that will help the solar professionals better under the details of financing commercial solar projects. The guide is for experienced solar professionals that need to understand the knitty gritty details of commercial solar finance to increase the profitability of current projects or enter the commercial solar space. This includes business owners, VP of sales, sales managers and developers. The material can also be useful for accountants or lawyers that need to better understand aspects of solar development, financial modeling, legal structures, evaluating customer creditworthiness to better advise their clients. If youd like more in-depth information on the subject. We have 4 specific resources for you. Commercial PPAs 101 Solar Executive MBA. If you want to learn exactly how to work a commercial deal from start to finish and get expert guidance along the way. You'll get all of the tools, financial models and legal contracts that you need. Solar MBA Free Test Drive. Get 1% of the full version and test it out. Finance 101 - If you have no clue what IRR, NPV, discount rates are take this free course.

Audio and Video Files

During the article, audio and video files will be referenced. You can get access to those files here: http://blog.heatspring.com/mastering-commercial-solar-financeaudio-and-video-files/

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Key Learning Objectives

How investors look at commercial projects Understanding customer credit worthiness What un-levered project IRRs need to be for investors Understanding pre-tax vs post tax returns How to deal with SREC risk How to find and manage tax equity investors Transaction costs to deal size ratios that will kills deals

Agenda
1. Advice from a $20MM Solar Investor 2. Why SRECs Markets Will Grow in a Post ITC Solar Industry

3. Non Profit Solar Financing Best Practices 4. Commercial Solar PPA Best Practices 5. Finding, Pitching, and Managing Tax Equity Investors

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[Interview] Advice from a $20MM Solar PV Investor to Commercial Solar Installers

(Refer to the audio and video link here to get access to this interview) There are a few questions that solar EPCs and developers interested in the commercial solar market continuously ask me: 1. 2. 3. 4. Our companys sales are limited by finding investors for projects, but I cant find them. How do we find investors and project finance capital for my projects? What does a good project look like to investors? What is a creditworthy customer? What should I focus my companys time on, and what should the investor do? 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. Hes looking to finance and buy mid-market solar projects between 150kW and 1MW. Because hes 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. Hes been developing and financing commercial solar projects since 2006. In total, hes 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.

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 theres 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 youll 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 theyre selling projects to make sure they wont lose money.

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! ! !

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. Why commercial developers need to focus on a specific, well-defined niche and only call on creditworthy customers Why speed and ease of transaction are the most important factors for expanding a development or EPC firm in growing solar markets on both the sales, equipment procurement, and financing aspects of a project. Why developers should not play the one cent game and shop around a project for months with different investors What a creditworthy customer looks like to Noel and other investors and what red flags are to Noel when hes looking at projects How Noel went from working in commercial real estate to building a $30MM pipeline as the Business Development manager of Northeast Sales for UPC Solar to raising and running his own $20MM fund The 3 key characteristics of the most successful solar development teams Why you shouldnt make special cases for a project that youre working on. As Noel says if youre working too hard to make it work, its not going to work The challenges Noel is facing with distributing his $20MM fund The types of developers Noel likes the work with and the type of projects Noel wants to finance with those developers For the next 5 years, why DG storage is a sweet spot that Noel is excited about it Trends on un-leveraged IRR project returns How the industry will know when storage is actually going to happen. Click here if youd like a steep discount on our upcoming Solar Storage MBA course. Why theyre arent more people like Noel operating with huge funds going after mid-market projects

! ! ! ! ! ! ! ! ! !

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[Interview] Why SREC Markets Will Grow in a Post-ITC Solar World + Other Trends in Commercial Solar Finance
(Refer to the audio and video link here to get access to this interview) 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, Ive found his perspective to be extremely valuable.!Well discuss investor trends in the commercial solar market,!the possible impact of the expiration of the ITC, nonrecourse 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. Ill 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: Its 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 EPCs 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 EPCs ! development plan and how you can quickly reverse engineer the tax appetite required from an investor to fund your development pipeline.

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! ! ! ! ! ! ! ! ! !

Why the standardization of documents (note: you can see the results of NRELs working group here and Tiogas 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.

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Non-Profit Solar Financing Best Practices

(Refer to the audio and video link here to get access to the video answers and audio for these questions) Why are non-profits a special case?!Why are we hosting this Q+A on financing solar on non-profits? Weve had a large cohort of 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. Whats 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. Its 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. Theres 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 cant purchase a system in cash, because they dont have a tax apetite, so financing is a natural fit for them. Question: Im in the process of completing my first PPA.! Our company is no longer structured to take advantage of tax credits for PPAs, 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? Answer: 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, theres 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.

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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 investors 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 PPAs 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. Weve seen spans of 8-12 weeks or more, depending upon the circumstances. Question: Does the recent push for, and acceptance of, crowdfunding in solar provide opportunities in financing not for profit solar projects?! If so, how? Answer Yes, but before we get to how, lets 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 1920s 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
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suited to provide tax equity.) But even so, low cost debt well under 10% and probably average between 6 and 7 percent in todays 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 companys 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 nonprofits 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! doesnt 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. Question: Im specifically interested in issues associated with members of a nonprofit 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? Answer: 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 dont 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 investors perspective, as sometimes, nonprofits dont 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
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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 arent an active participant in the business, this is considered passive income. The challenge is most individuals dont 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. Question: What should be on a due diligence checklist for screening non-profits clients and potential investors for those projects? Answer: 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.

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! !

Power off take- who is buying your power? Rooftop and its 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 utilitys job: selling and delivering power to a customer. Utilitys are heavily regulated entities, and like all monopolies jealously guard their turf. So as a general rule, PPAs 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 states permit third party PPAs where the power is produced and used on site, but they do so under different schemes. For example, in California PPAs are permitted in all investor owned utility jurisdictions. Most municipal utilities either dont permit PPAs 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 PPAs 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.)
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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 kWhs 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 dont want any expenses. They prefer triple net type of leases, and a fixed stream of revenue.

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Commercial PPA Best Practices

(Refer to the audio and video link here to get access to the video answers and audio for these questions) Question: How do you explain pre-tax vs. post-tax ROI with regards to ITC?! How do you illustrate pre/post tax IRR with regards to tax equity investors?! Answer: ITC can only be looked at on a after-tax basis, and so a pre-tax IRR would be a cash only return, and an after-tax basis would reflect the ITC and depreciation benefits. Here is why. The ITC is a credit against taxes paid. If you owe the IRS $100 in taxes, and you have a $100 ITC, then you net the two and owe the IRS zero. So you effectively gained $100 cash, after tax, because you did not have to spend $100 cash to settle with the IRS. So, as an investor with a pending tax bill, how much would you pay for a $100 investment tax credit? There is no profit in paying $100, and no one is going to give it to you free. So, look at the risk, factor in the time value of money (you pay your tax bill in the April following the year in which you acquire the tax credit), and set a price. If the market is above you, you get it. If it is below you, no one will sell to you. The thing to remember is that renewable energy projects need that tax benefit in order to make economic sense for an investor. The cash generated by a project is rarely enough to compete against the very low price of coal- or gas-generated electricity, so you have to get used to looking at projects on an after tax basis. That raises the next point: how do you explain an after-tax return in a way that a prospective investor can compare it to the pre-tax returns that he or she is used to getting on their investments. The easy answer is find an investor experienced with tax-based investing, but lets assume you arent lucky enough to have one lined up. Well, an investor who gets a pre-tax return must pay tax on the income paid to it as interest. So, if the interest income is $100, then the tax is $35 (assuming a 35% tax rate) leaving a $65 after-tax return. Put another way, if the $100 interest income is for a 10% return, then after taxes, you are looking at a 6.5% return. You can get there my multiplying the 10% return by 1-35% or 6.5%. So in a simple world, multiply a pre-tax return by 1-65%, or divide the after-tax return by 65% to get an equivalent pre-tax return.

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Question: Is it reasonable to assume that it would be possible to execute a master PPA with a large corporate entity that has multiple sites in various geographic locations, then the site-specific details could become addenda to that master contract?! What contractual items would be natural to address in the master agreement, and what should be in the individual addenda? (assuming that it is better to do as much of the heavy lifting in the master agreement, and keep the addenda as light and efficient as possible) Answer: Master agreements are very common for entities, like large retail chains and are folded into the agreement. The point of a Master Agreement is to cover as many of the most important risk allocations as possible, so that there you leave a minimum of open items to discuss and settle on the individual projects. Typically a Master Agreement is structured so that new projects are added through a series of Schedules or pre-negotiated forms of Agreement attached to the Master Agreement. If the Master Agreement will involve multiple jurisdictions (more state, than county), and or multiple utility territories, or any other multiple variables that are site specific then there will be more items you will have to leave open for resolution on a site by site basis. For example, if the Master is going to cover both leased real property and property owned by the counter-party on the PPA, and both types of property are found in different states, then you will need to configure the Master Agreement to handle both. If there are a lot of these items you will have to weigh convenience and efficiency of a Master Agreement against handling each of the items as a specific carve out under the Master Agreement, or an addendum to the forms of Agreement attached to the Master Agreement. One extremely important thing to remember about Master Agreements is that they require special attention if you anticipate having more than one financing party. Most financiers will require you to assign as security or part of the sale, each of the Schedules, Attachments and Agreements related to a specific deal. They will also want you to assign the Master Agreement to, and once you do the Master Agreement is no longer yours to control. Typically, you can get around this by assigning the Master Agreement, only to the extent that it relates to the underlying, deal specific, Schedules, Attachments and Agreements, but not all financiers will feel comfortable sharing collateral. Be sure you know how your primary financiers feel before going the Master Agreement route. You might be better off with an unexecuted template that covers just one deal at a time, and is fully comprehensive. Having a Master Agreement covers the legal aspects, but remember that most items are project specific; economic modeling of system size; projections on IRR and applicable local incentives, et. . . .

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Question: I work in Connecticut which has a ZREC program which incorporates 3 levels.! ZREC auction have been coming out once per year, and have at least 5 more bid years. The first two are a reverse auction bid for projects that are a) greater than 100kW AC up to 250kW AC, and b) greater than 250kW AC up to 1MW AC. The third level is a tariff that is established by the medium value of the 100 to 250 kW bids.If selected, the projects receive a guaranteed 15 year income. ZREC values range from $95 to $150. Knowing that this income potential exists in commercial deals, what position would the investor consider understanding that the ZREC is not guaranteed.! Of note, a project that does not receive a ZREC award this year can bid in again in a following year(s). My understanding to date is that the investors who have been considering the sale of the electricity, and tax credit/ depreciation as this income source are still not motivated to finance even with extremely competitive capex values that we can build at.!Also, are investors considering utility scale projects in Connecticut? Answer: At the core of this question is:! how do tax equity investors look at SREC values when those values are market driven and fluctuate with supply and demand variance? The answer is: very skeptically. A tax equity investor is willing to do a qualifying project for an after-tax return of 8 to 12%, depending on the specific risk attributes of the project. This compares to a pre-tax return of roughly 12 to 18%. For that level of risk, and understanding that the return comes with tax code complexities, traditional tax equity investors are unwilling to openly take risk on projects that they can avoid by investing in a different jurisdiction. For example, in Connecticut, the SREC value for any given year depends on auction pricing. So far, as the question indicates, that price could range from $95 to $100, but it is also reasonable to assume that it could be zero if your projects ZRECs fall above the reverse auction bid. Until recently in California, the market offered a Performance Based Incentive (PBI) that only depended on production to be earned. In other words, the price and term were set, and so as long as the project performed you were guaranteed the revenue. Remember: with risk must come reward, and so the SRECs look risky and so projected values will be heavily discounted by anyone looking to go long on SRECs. SREC markets are inherently more difficult to finance than most other subsidies. The price history in New Jersey is good evidence. How do you solve the problem? There are three possible avenues to pursue if you are unable to find a tax equity investor willing to take SREC risk: 1. The traditional solution is to find a strong, credit-worthy buyer and enter a long term, fixed price contract for the purchase of the SRECs. The trade-off is to get the right combination of term and price to maximize dollar impact in your model. Front loading helps! Alas, this solution is very difficult to implement few big buyers are interested.

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2. 3.

Persuade your customer to take the risk by buying the SRECs at a fixed, discounted rate over the term of the deal. The stronger the credit quality the better the deal. Find a hedge fund or other investor that specifically takes SREC Risk and will buy them with an upfront cash payment. The deep discount they will demand out to be proof positive that this is a risky investment. Use this to supplement a project sale price.

The City of Palo Alto Utilities is offering a feed-in tariff of 16.5 /kWh fixed for 20 years for the bundled energy and RECS from new Palo Alto PV installations which are not net metered (www.cityofpaloalto.org/PACLEAN). We have not yet seen any project applications and want to know what additional services we should consider offering to help developers find interested property owners. What is the formula to calculate the residual value at the end of a power purchase agreement or lease term? Seems to me that if they have no applications, the program is not competitive with other market opportunities. The power price could be too low, or perhaps there is something else in the program that it makes it difficult to execute or perhaps finance. Canvass local developers to see why they are not interested and what it would take to interest them. ? Is there anything else more specific you can think of? I would agree that perhaps there are road blocks that arent even brought up in the question that even the person asking the question is unclear about. So, Id like to focus on the second part of the question, as its a good general question that all can benefit from. The residual value is often expressed in terms of IRS statues and solar projects have not had the amount of time placed in service to come up with a standard calculation. Some of these have been expressed in terms of a percentage of the projects initial value. We like to look at the cash flows, on a discounted basis for determining valuations. Many times this is a negotiated number. BTW, as an aside, very few, if any, investors in renewable energy projects pay much attention to residual value on a 20 year old project. It is a long time away, technology is advancing, and market structures change. Hence adding residual value a to a model does not make a large enough difference on the return to warrant a lot of attention even if the panel maker promises a 25 year warranty, or the project will otherwise be capable of producing meaningful power for forty or more years. Question: What arrangements should be made with the Owner/Lessor of Commercial Roof space, when negotiating a PPA. Would the PV system Owner be better served by a.) negotiating a % of net income or b.) Agreeing to pay the Owner a flat rate?! And, if a flat rate", how would one calculate this?? When negotiating a PPA with a Lessor (site Owner); what position should one take, when the Lessor requires renting the solar site?! Should this rent be a percentage of the
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net profits or a flat fee? When negotiating a PPA with a Lessor (site Owner); what position should one take, when the Lessor requires renting the solar site?! Should this rent be a percentage of the net profits or a flat fee? Answer: We will show you how to calculate this in our economic model to discern between what the best value would be for an owner or lessor. Some owners of a roof would rather be safe and take a fixed rate over the course of the term and others might be more risk oriented and be willing to take a percentage. With the percentage, you take on a host of risks but could benefit from the rewards if the system is performing at 100% and optimally over the life of the term. Calculating this we will go over in the course, as it has to make financial sense to all parties and support the economics of the deal. Specifically, the model we will help you build, will allow you to toggle between the two scenarios fixed and a percentage of revenue. You can then determine which set of numbers make the best sense for you or your client. Bear in mind that this is an important exercise on every project that involves a site lease payment. Operating expenses are recurring numbers over the life of the project and can have a much bigger impact on value than most people expect. Question: What are the risk associated with a PPA for the investor and a non-profit client? Answer: As in the previous question, this is a negotiated position of assignment of risk., and the types of risk are usually common to both profit and non-profit. That said, one large important difference goes to credit-quality. A non-profit does not sell goods or services to stay in business, but rather relies on contributions, grants and its certificate as a 501(c)(3) non-profit. In addition, a non-profit does not often have a very large list of physical assets. As a consequence, you must consider whether this entity will really be around and purchasing power for the next twenty years or whatever the term of your PPA. For example, if a church begins losing membership, and already has a mortgage holder for the physical building, there is no additional security that you can grab to cover your losses in the event that the Church folds or its members join a different congregation. For most financing parties, non-profits are not as easily understood in market dynamics, and so they are reluctant to take on the risks if they can find lower risk deals in the market.

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Finding, Pitching and Managing Solar Tax Equity Investors

(Refer to the audio and video link here to get access to the video answers and audio for these 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. Im 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 youre 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 youre 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.

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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 theyre looking for in a one off project or a portfolio of projects. Question 3 Im an EPC in the northeast and Im 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 hes 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 investors inexperience and ignorance. That means you must be sure they understand the economics and the structure you are using. Now lets 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. Lets 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 dont 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
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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, dont 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 dont 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 dont 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.

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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 dont 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 were 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, dont overlook the fact that there are residential aggregators out there who will work with multiple EPCs. 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 middlemans 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
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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 accountants 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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