Below are soundbites from panel discussions on September 14, 2016 at Solar Power International in Las Vegas. The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or a recording.
Supply of Tax Equity Investment
“There are 32 tax equity investors in the renewables market, about 26 of those invest in solar.” — Managing Director from a Money Center Bank
“It is very challenging when syndicators are trying to bring in new investors. Each new investor takes nine to 15 months to work through its approval issues.” — Director, Renewable Energy Investments for a Commercial Bank
“We continue to see insurance companies get into the market. They like the asset. You might have newcomers that invest in 20 MW of projects in commercial transactions.” — Managing Director of a Boutique Financial Advisor
“There are more investors for solar than wind. Wind is limited to experienced project [financiers]. Overall there is enough tax equity capacity for solar.” — Managing Director of a Boutique Financial Advisor
“We prioritize tax equity investment opportunities based on:
- Basic project finance fundamentals – quality of the sponsor and its management team, the quality of the power purchase agreement (“PPA”), the quality of the equipment and its warranties, and pro forma stress tests.
- The minimum amount out the door. For solar, we want to be investing $75 to $100 million per transaction. If the transaction involves commercial and industrial or residential projects, we like it to take no more than six to nine months to deploy that amount.
- Repeat business. Does the sponsor have a pipeline of projects, so we can reuse the papers we have” negotiated. — Managing Director from a Money Center Bank
Tax Equity Yields
“The yields are higher for commercial and industrial solar projects than utility scale. For utility scale, there is a very effective bidding process, for tax equity that has resulted in lower yields.” — Managing Director from a Money Center Bank
“Commercial and industrial tax equity yields are higher than utility scale. To win [a utility scale transaction], you have to bid pretty low yields.” — Director, Renewable Energy Investments for a Commercial Bank
Tax Equity Structures
“The deepest [segment of the market] is for the partnership flip structure. This is in part driven by what the sponsor needs.” — Managing Director of a Boutique Financial Advisor
“Banks want to get into the market using a sale-leaseback structure as that does not require approval form financial regulators. But we see them quickly migrate to the partnership flip.” — Managing Director of a Boutique Financial Advisor
“Our preference is for a yield based partnership flip structure. The term prior to the expected flip date is six to seven years for residential and eight to 10 years for utility scale.” — Managing Director from a Money Center Bank
“We use a yield based partnership flip structure. We will go out longer than 10 years [for the projected flip date] if there is a strong power contract. We try to be flexible.” — Managing Director of a Corporate Tax Equity Investor
“We have done single investor leases [for solar projects], but we prefer partnerships.” — Managing Director from a Money Center Bank
“We exclusively use [time based] partnership flips. We don’t do sale-leasebacks.” — Director, Renewable Energy Investments for a Commercial Bank
Community Solar
“We look at community solar deals like an apartment complex. Some, but not all, are leased out [initially. Over time,] they are all leased out. Then you have a waiting list if someone moves out.” — Banker from a Specialty Finance Company
“We like the community solar model out of California that involves the mini municipal utilities.” — Banker from a European Lender
“Community solar taps the rest of the marketplace and lets the commercial and industrial marketplace have access to solar.” — CFO of a REIT
Commercial Scale Solar
“Small deals can’t support a lot of [professional] fees that are necessary [for a transaction]. So we try to aggregate deals and have consistent project documents. We try to do a master PPA [with one offtaker] and then have schedules to the master PPA for each project.” —Banker from a Specialty Finance Company
“For a 500 Kw project, your best bet is your local banker.” — Banker from a Specialty Finance Company
Residential Solar
“The residential solar developers need a lot of capital to grow their businesses. They will move down market for their capital.” — CFO of a REIT
Construction Lending
“We started out charging 10 percent interest for construction lending for solar. Rates are lower now due to competition. Commercial banks are entering the space. Those banks are pulling back from real estate and are looking to solar. We look at solar projects as a better credit than real estate projects.” — Banker from a Specialty Finance Company
“The big banks don’t want to get out of bed for less than a $50 million loan. The size projects we work on do not make sense for a big bank. Regional banks are small and nimble and are coming into the smaller construction loan solar market.” — Banker from a Specialty Finance Company
“We take construction risk, because it is not too long-dated; the construction period is six to nine months.” — Banker from a European Lender
To make a construction loan, “we need a line of sight to [project securing tax equity]. Tax equity is not abundant in obscene amounts of dollars. A tax equity term sheet would be constructive, but there are not hard and fast rules” as to what constitutes a line of sight to tax equity for our bank. — Banker from a European Lender
Development Capital
“We try to steer away from the binary risks associated with development.” — Banker from a European Lender
YieldCos
Background: A “YieldCo” is a publicly traded corporation that owns interests in power projects subject to long-term contracts. The projects have typically been renewable energy projects, but there are some gas fired projects that are held by YieldCos. They are similar in nature to master limited partnerships (MLPs), but they are subject to corporate income tax, and MLPs are not.
“The YieldCo market shut down and is reopening to some extent now. The public [equity] marketplace needs a new product.” — CFO of a REIT
The fact that YieldCos are “out of the market should mean lenders should be busier, because developers need capital from other sources.” — Banker from a European Lender
Power Purchase Agreements
“Don’t try to [negotiate and document] a PPA on your own. Get your attorney involved. It will save you money down the line to get your attorney involved earlier.” — Banker from a Specialty Finance Company
“We find that corporate PPAs usually have problems with them. The clauses in corporate PPAs are not uniform. Google and Apple negotiate differently than a municipality in Massachusetts.” — Director, Renewable Energy Investments for a Commercial Bank
“Not every market is going to support bilateral contracts [(i.e., PPAs)]. In wind, 70 percent of projects are done with hedges. The solar market is more PPA [oriented], but that is likely to change as the solar PPA market becomes saturated.” — Managing Director of a Boutique Financial Advisor
“We prefer utility off-take contracts [(i.e., PPAs)], but we are transacting with other contract forms, such as commercial off-takers and hedges.” — Managing Director of a Corporate Tax Equity Investor
Gas Fired Projects
“There’s a huge boom in gas projects in PJM. That attracts large amounts of capital.” – Banker from a European Lender
Interparty Negotiations
Background: Tax equity investors are typically loath to agree to permit lenders to have a security interest in a renewable project in which they have an indirect ownership interest. Rather, tax equity investors direct developers to use “back leverage.” Back leverage is a loan that is secured by only the developer’s interest, as the manager, in the partnership (usually in the form of a limited liability company) between it and the tax equity investor that owns the project. Back leverage lenders, however, require assurances that, if they foreclose (i.e., step into the shoes of the developer as the manager of the partnership), the tax equity investor will not use the transfer restrictions in the partnership agreement to try to either block (i) the lender from becoming the manager or (ii) the lender’s sale of the manager’s interest to another party. The lender will typically require the tax equity investor to enter into an “Interparty Agreement” that provides it with these assurances. To enter into such an agreement, the tax equity investor often asks for notice prior to the lender foreclosing on the developer and for the right to cure the developer’s default under the loan agreement.
“Lenders are grabby.” — Director, Renewable Energy Investments for a Commercial Bank
“Interparty agreements are never the same for each transaction. [Most significantly, the terms] depend on the strength of the balance sheet of the sponsor.” — Director, Renewable Energy Investments for a Commercial Bank
“Back leverage lenders are pricing [(i.e., setting their interest rates)] commensurate with the risk. Twelve to 18 months ago, back leverage lenders’ pricing was based on a more idealistic view of being pari passu with the tax equity investor, but there’s been some convergence there. — Managing Director of a Boutique Financial Advisor
There has been recognition that both parties [(i.e., the back leverage lender and the tax equity investor) have to coexist, so back leverage lenders are pricing accordingly.” — Managing Director of a Boutique Financial Advisor
“In larger deals with a big group of banks providing back leverage, you get the least common denominator [of the members of the bank group with respect to the required terms and conditions]. That causes friction with the tax equity investor and delays in transactions.” — Managing Director of a Boutique Financial Advisor
“Back leverage is relatively inexpensive and plentiful in the market.” — Managing Director of a Corporate Tax Equity Investor
“If there is a construction loan, we want an estoppel certificate from that lender confirming there is no default under that loan when we fund 20 percent of our tax equity investment and we want the right to cure construction loan defaults.” — Managing Director from a Money Center Bank
“We see a busted condition precedent [(i.e., a requirement that, if not met, means that we are not obligated to fund the transaction)] all the time, and we generally waive it and fund our tax equity to pay off the construction loan. It comes down to the materiality [of the condition precedent that is not met]. For instance, we had a 200-year old university that could not deliver a clean title report for its land,” and we waived that. — Director, Renewable Energy Investments for a Commercial Bank