6 Steps to Secure Commercial Solar Loan Solutions
The commercial solar industry has historically been stymied by a lack of access to capital. One of the fundamental causes of this roadblock is the complexity and variability of projects, which often leads to higher transaction costs and deters lenders from channeling capital into the sector. By increasing awareness among developers on the documents and processes necessary to make a project ‘financeable,’ it will be possible to streamline the financing process for asset owners and lenders alike.
1) Who will be off-taking the power?
Make sure you find a suitable partner. In order to conduct project due diligence, financiers evaluate the creditworthiness of the counterparty that will utilize the solar power produced. Whether the counterparty is a utility, a private business, a municipality, or another organization, identifying an off-taker with good credit is integral to securing long-term debt financing. Developers should seek stable entities with strong financial histories. By reviewing three to five years of most recent financials, developers can determine trends in cash flows. For publicly rated companies, a credit rating at or above BBB is typically a safe bet.
2) Identify the best debt financing option
Once developers confirm key project details, they can determine whether they will need a construction loan, a term loan, or both, and solicit and review different debt financing solutions. Factors to consider include the term of a loan, the interest rate, whether the interest rate is variable or fixed, the amortization period and whether the loan is recourse or nonrecourse.
3) Choose the best financier for the project
Before picking a financier, developers need to understand the background of the entity that will be providing their capital. A few key questions should include: What is the financier’s track record? How long does their financing process typically take, from application to issuance of funds? What are the transaction, legal, and closing costs associated with the loan? Is the legal counsel fee incorporated into the estimated costs? Are costs fixed, or can they increase due to unanticipated challenges in the project due diligence? Are there any hidden costs such as future refinancing costs if the loan is not fully amortizing?
4) Find a tax equity partner
While some developers and owners possess internal tax appetite, oftentimes they need to find an external source of tax equity. The level of tax appetite necessary for a project depends on factors such as the size and cost of the installation. While there are numerous entities willing to serve as a tax equity partner for commercial solar projects, developers with a history of building, operating, and owning projects have a higher likelihood of finding a tax equity partner, as a strong track record reduces the perceived risk of the project. Additionally, some cash equity commitment in the project will likely be required to make long-term interests are aligned.
5) Plan ahead
All solar projects depend on diligent planning and document tracking. Directing time and resources to secure appropriate engineering maps and a strong engineering, procurement and construction (EPC) contract will ensure that you do not encounter obstacles later on in the financing process. The performance guarantee in the EPC contract represents a significant consideration for financiers, so it is wise not to undervalue this as preparatory work.
6) Know what documents you need and what the status of each is
There are six core documents essential to the execution of any commercial solar project: 1) a Power Purchase Agreement (PPA), 2) a land lease, easement, or other site control, 3) the Interconnection Agreement, 4) all necessary permitting documents (this can vary by state and municipality), 5) the engineering and construction documents, and 6) an EPC contract. Before meeting with financiers, developers should have the appropriate documentation ready to present and know the status of each one – for example, whether the PPA is in the drafting stage or has been executed by all necessary parties. Oftentimes, projects are halted because the contracts are not complete, or there are unanticipated issues interfering with the project completion.
By following these guidelines, developers can anticipate what information and documentation they will need before kick-starting the financing process.
To learn more about debt financing solutions from Open Energy watch a recording of our webinar HERE.
Graham Smith is CEO of Open Energy, a provider of debt financing solutions for commercial solar projects. Smith has more than 15 years of experience in renewable energy finance and building capital markets brokerage platforms. He founded Open Energy in 2013 to use financial technology innovation to drive debt financing and unlock the U.S. commercial solar market.
Open Energy provides innovative financing solutions to support the growth of commercial and industrial solar energy infrastructure. Open Energy’s financing approach, utilizing an online marketplace to direct investment, is based on a technology-driven underwriting process. Open Energy offers increased access to capital and a time- and cost-efficient loan application process. For more information about Open Energy and its debt financing solutions, please visit www.openenergygroup.com.