Over the past year, one of our developer clients based in the Southeast has expanded into the commercial solar development industry. The business fits very well with some of the firms’ existing areas of expertise – entitlements, land development, construction – and they have historically been a firm that offered tax-centric investment opportunities to their investor base. Commercial Solar seems to fit very well into their business, and if you are not aware, commercial solar projects can offer huge tax credits that can potentially boost equity yields as investors have historically been able to deduct 30% of the total cost of a solar installation from their federal taxes
Our client’s venture into this business has given us the opportunity to learn more about the industry and uncover capital sources to help them grow. In this Insights Series Post we highlight a unique financing program that we recently discovered that is set up for commercial solar development projects.
The program provides capital to a developer-sponsor in two phases. First, the lender provides a construction loan to enable the development of the project. Once the project is complete and the system is turned-on, the loan converts to a lease on the property at a pre-arranged stepped-up value. At this point, the developer converts from a borrower to a lessee and is responsible for oversight and management.
This program is very unique and is beneficial to both borrower and lender. The lender, under this program, makes a profitable construction loan and then acquires a credit tenant long-term lease, as the “off taker” for the power is typically a local or regional utility company. The lender can keep the asset on its books or sell it into the secondary market.
The developer gets 100% Loan-to-Cost financing for the project which includes an acquisition & entitlement fee along with a development fee for project oversight. Once the project is built, and converted to a lease, the developer gets to keep any remaining cash flow generated from the sale of power beyond the lease payments.
For more details on the intricacies of the financing, including pricing and guaranty requirements, please reach out to:
Ethan Schelin
Managing Partner
(949) 335-2241