Introduction

When gazing into a solar pipeline, it’s easy to lose oneself. It reminds me of when I was a teenager. A certain type of poster, the Magic Eye, was all the rage. The poster was a dense field of dots of various colors. I was told that if I looked into it — no, through it — I would see an image. I just saw dots. 

Site control is specific to each project. Like with those dots, a sharp analyst may find patterns that emerge across project portfolios or pipelines. Unfortunately, however, there are no shortcuts. Each dot, a unique place on Earth, must be evaluated. These dots have individual geographies, unique title concerns, and bespoke agreements. 

In project finance, “site control” refers to an agreement or set of rights to use land or a building surface for the construction and operation of a generating facility. Most commonly, in the case of offsite projects, site control comes in the form of a lease or an option to purchase land, and, in the case of onsite projects, a lease or a license. Fortunately, determining the pull-through rate, or likelihood of successful execution, for site control is relatively simple. Commercial real estate development is nothing novel, and the essential property interests (fee title, leasehold, or license) are governed by the same body of real property laws as any other land transaction. 

The traditional stages of solar site control development, in ascending order of execution certainty, include:

A) For leased land: 

1. Term sheet
2. Option to lease     
3. Executed lease

B) For purchased land:   

1. Term sheet
2. Option to buy
3. Purchase agreement/deed

The good news: Create value, keep optionality, industry maturity

It is no longer enough for the terms of the site control agreement to mirror the term of the offtake agreement. As offtake tenors continue to shrink, investors are relying more heavily on uncontracted merchant revenue following the expiration of the offtake agreement (“the tail period”). Site control provides an opportunity here. To assign value to the tail period, the project must have contracted site control. In the case of a lease, adding one or more renewal periods at the option of the tenant is a potential lever to add value to a project. (Note: It is important to carefully draft such options so as to avoid triggering transfer taxes; see “The Tax News” section below.)  

As with all project documents, optionality creates value. Many leases restrict the tenant’s use of the premises for a defined “permitted use.” Generally, reference is made to a solar photovoltaic generating facility.  However, be sure to consider whether the definition includes storage or other ancillary services that may be important to valuation now or in the next few decades.

As the solar industry has matured, national title companies have become increasingly sophisticated in their understanding of the asset class. Some title companies now have project finance divisions. This is helpful, for instance, when reviewing a survey and understanding the necessity of something like an interconnection easement.

Title policies, a necessity for financing, are negotiated instruments and are often left to the final days before closing a transaction. A developer or investor party with an ongoing relationship with a national title company that has in-house solar expertise provides transactional efficiencies in the final stretch. In some cases where the title situation is particularly hairy, a knowledgeable, collaborative title agent may be critical to execution certainty

The bad news: Lack of interest, hidden costs

Anyone who has closed a few solar transactions has a dramatic landowner story — a midnight drive in the rain across three states to meet a farmer in the town pub to collect a final signature on the eve of closing, for instance.

Landowners are a diverse bunch, from large publicly traded corporations to individual families. Their interest in the project also varies, particularly if rent is near what they would receive for an alternative use. Naturally, landowners are not as close to the project as other counterparties (off-takers, utilities, etc.). Adding to the distance, developers commonly execute site control agreements as the first step in the development process, which can often be years before construction starts.

A critical diligence inquiry would be all communications with the landlord, including any telephone logs. If the answer reveals that the last conversation occurred in 2015, you have some work to do prior to monetization.  But can a project really break over a lease estoppel, you may ask? Answer: Yes.

Generally, site control is modeled as an operating expense, in the case of a lease, or a fixed cost, in the case of a purchase. Costs reflect rent or the purchase price. However, when valuing site control, it is important to think not only of the cost of using the land. One must also consider the cost of preparing the land. Geographic and physical attributes matter. 

This may hardly be a revelation, but it is an often forgotten element in early-stage pipelines. Later-stage assets have generally already gone through a geotechnical analysis, a topographic survey, and other reviews. Earlier-stage assets, on the other hand, may not yet have been evaluated in the normal course of development. Certain site preparation costs can destroy the economics of a project, such as grading or tree removal.  Such costs (not squarely in the site control cost bucket and not squarely in the engineering, procurement and construction cost bucket) do not always find a home in the model.

Therefore, look for site preparation costs. If the answer is, “There are none,” it is appropriate to ask, “Why not?”

The tax news: Solar property and real property assessments

In a solar lease, the landowner often continues to pay all taxes assessed on the underlying real property, and the project owner pays all personal taxes assessed on the solar system, as well as any incremental increase to the real property tax assessment due to the solar installation. It is less common, but not wholly unusual, to encounter a “triple net” lease, where the tenant pays all taxes, including real property taxes. Complicating matters, certain jurisdictions such as New York have solar property tax regimes that implicate real property taxes, so that the project company most likely pays real property taxes, if they are assessed.  

This post will not explore all the various tax treatments of solar property, which vary by state and municipality and, in some cases, are quite byzantine. We trust that you will call your lawyer on this one. Nevertheless, it is worth noting certain commonly recurring tax matters.

Second, if the lease term extends beyond a certain length, the lease may be subject to transfer taxes. The length of term beyond which transfer taxes apply depends on the jurisdiction, though some can be surprisingly short.  

Third, certain jurisdictions tax leases regardless of length. In such jurisdictions, the filing of a memorandum of lease may trigger an assessment. Thus, you may find portfolios or pipelines with unrecorded leasehold interests where developers have decided to wait to file the memorandum of lease. 

Fourth, if the property is being purchased for the solar project, it is important to structure and stage the land transaction and the project transaction to avoid less than advantageous tax treatment.

10 lessons learned the hard way​

1. Solar site leases and option agreements typically include cliff dates by which the project must commence construction and/or begin to pay rent. If projects in the pipeline are nearing cliffs, assume extensions will require more development capital. 
2. Until a title report and an American Land Title Association (ALTA) survey have been completed, there still may be binary risks associated with the land. 
3. For rooftop systems, the off-taker may operate in the building, but not own the building. Ideally, the project has a lease with the owner of the building. For certain off-takers, however, their relationships with their commercial real estate counterparties are sensitive enough that they do not allow direct conversations with the building owner. In this instance, site control may flow through the offtake agreement and building owner consent becomes critical.
4. If the landowner has design review rights, a clear understanding of and adherence to timelines for review is a must, particularly if the project’s revenue is volatile over time (as in the case of solar renewable energy certificates revenue).
5. Often, developers will leave certain economic terms to be negotiated at a later date. This may include the exact layout of the leased area or performance assurances with respect to decommissioning. If this is the case, finalize these terms well in advance of any cliff dates for financing. Otherwise, the landowner may sense the urgency and your negotiating position is weakened.
6. A positive landowner relationship can be helpful during permitting, particularly if the projects encounter NIMBY concerns. Certain pipelines are particularly susceptible to NIMBY concerns.
7. Always consider the operations at the site, which may have implications on project schedule and cost. As to cost, for instance, if the site is agricultural and the developer intends to break ground during the growing season, the developer may need to compensate the landowner for planting crops. As to schedule, for instance, assume certain delays due to testing schedules at school sites and holiday shopping at retail and warehouse facilities.  
8. Long-stop dates need to be just that — long. 
9. Don’t forget your relationship with adjacent landowners. If a project cannot reach the point of interconnection without crossing one or more other parcels, begin conversations with the neighbors early on in the process.
10. Engage real estate and title experts. Both of these matters are incredibly nuanced. A specialist is required.
    
    Hungry for more? Read the last article on how permitting affects project success.

The series is written by Leslie Hodge, an associate at Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo. It was first published by Greentech Media. Hodge’s practice focuses on energy project finance, general commercial transactions, startup and corporate matters, contract disputes, and litigation. 

La entrada How Site Control Affects Project Success​​ se publicó primero en We turn good projects into great deals - Green Dealflow.

The importance of permits in renewable energy projects​

This year will break records. More gigawatts of solar will be installed than in any year before.

Behind the scenes, financiers and investors are fueling growth by lowering the cost of capital, entering the development cycle earlier, and providing a dynamic liquidity that many in the development community could not have imagined even a few years ago. Acquisitions of and investment in solar development platforms and pipelines will likely surge again this year.

The time value of money, an important consideration for any investment, takes on even greater meaning in the context of a solar pipeline. As an asset class, solar’s development cycle is attractive. Conventional energy assets may take close to a decade to reach operation. And even solar’s renewable peers, hydro and wind, have development cycles of between four to seven years.

A solar project, on the other hand, is typically operational between six months and two years from the execution of an offtake agreement. Nevertheless, industry vets refer to the “solar coaster” because that difference between six months and two years can be significant and, in the case of some projects, may pose an existential threat. In order to properly value a solar development pipeline, one must understand the anticipated development cycle and the potential impacts of delays. For an individual project, delay may cause a diminution of value. For a pipeline, the delay could mean megawatts’ worth of attrition.

In this final installment of our series, we will explore the fourth and final pillar of project success: permitting. 

Project permitting – the greatest unknown​

Permitting often poses the greatest unknown in the development timeline. Developers must navigate interconnection timing with about 5,000 utilities and over 100,000 “authorities having jurisdiction” (AHJs) across the country. These include federal, state, and local agencies with unique and overlapping responsibilities. This regulatory patchwork disproportionately impacts residential and sub-utility-scale project developers.

Permitting costs are the biggest factor in the lag of residential solar adoption in the United States compared to other OECD nations, despite America’s technological advances. Recently, the Solar Energy Industries Association and the Solar Foundation created a framework for standardized solar permitting. If adopted by select jurisdictions, these efforts could be transformative. However, current projects must navigate the complex existing system.

This article will explore the stages of permitting development and the most significant risks. Before outlining potential challenges, it’s important to set the tone for new investors.

Depending on the jurisdiction, solar permits are issued “by right” or require a special exception. Even when a project needs a special exception, permitting usually adds cost or time, but outright rejection is uncommon. Solar permitting does not carry the same political risks as other infrastructure investments. Political support for renewable energy is growing at state and local levels, with backing from voters.

In areas with high incentives, the risks of feeder congestion or market saturation outweigh the risk of permit denial. Exceptions exist, such as municipalities with permit application surges that may impose moratoriums and agricultural regions where depressed farm economics coincide with solar achieving grid parity.

In these cases, policies may prevent solar leases from taking agricultural land out of production.

Stages of permitting development​

The location, size, and nature of the land or building determine the specific permits needed for a solar project. For ground-mounted projects, federal, state, and local agencies require various environmental permits. Sites with wetlands, forests, and habitats for threatened or endangered species face additional scrutiny and permitting requirements. Beyond environmental permits, historical, cultural, or archaeological authorities, federal and state departments of transportation, and the Federal Aviation Administration may also require permits.

Depending on the project size, a lead agency may take charge. For example, projects under 2 MW often fall under county jurisdiction, with the county coordinating final site plan approval or a special-use permit. Larger projects typically involve the State Department of the Environment (or its equivalent) as the lead environmental agency, with the Public Utilities Commission also issuing a permit. Projects on federal lands or larger projects must comply with the National Environmental Policy Act and secure approval from the Bureau of Land Management.

The stages of permitting development in a typical pipeline include:

Key risks

Costs​

Obtaining all necessary permits can significantly add to a project’s expenses. Permits may require costly mitigation measures (e.g., reforestation or stormwater management) and expensive design features (e.g., screens or buffers). Some of the more extreme cost adders include discretionary approvals or permits necessitating extensive road improvements, such as widening commercial roadways, constructing sidewalks, and installing stoplights.

Diminution of value​​

Generally, as development progresses, megawatts decrease. Permitting often forces a reduction in system layout size to accommodate stormwater management features or meet setback requirements. For rooftop systems, redesigns can be relevant to incorporate vents, bringing the roof up to code. Such examples are common, while there are virtually no permitting outcomes that increase system size.

Delay​

Delays pose the greatest threat from permits. Since permits are required before construction begins, they serve as the ultimate gating item. Depending on the project’s economics or the development platform, delays can pose an existential threat. Delays have the potential to cause a number of things, including:

Ultimately, permitting is critical to project finance success. It varies greatly by jurisdiction and generally requires a team of outside consultants. No one ever said commercial solar is easy. 

This concludes the How to Value a Solar Development Pipeline series. We hope you have enjoyed our look at the four pillars of project finance success: revenue streams, interconnection, site control, and permitting. Whether you are an investor, developer, off-taker, or represent any other link in the solar value chain, may 2019 bring you success.  **

The series is written by Leslie Hodge is an associate at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. It was first published by Greentech Media. Hodge’s practice focuses on energy project finance, general commercial transactions, startup and corporate matters, contract disputes, and litigation. 

La entrada How Permitting Affects Project Success se publicó primero en We turn good projects into great deals - Green Dealflow.

Introduction​

 It is estimated that there are about 150 gigawatts of solar projects in interconnection queues across the United States. Compare that to the 12.1 gigawatts expected to be installed in this year. Clearly, a queue position is not in itself an indicator of project success. Interconnection provides the physical path to deliver power and imposes the physical constraints of such delivery. Interconnection also represents one of the critical fixed costs of a project. 

These features naturally lend themselves to old-fashioned wildcat speculation. While some developers chase power-purchase agreements in search of demand for their power, other developers seek out ideal localities (or nodes) from which to supply their power. Skilled developers can do both.

In order to determine a pull-through rate for a project and to properly value a pipeline, we will explore strategic considerations related to interconnection development and evaluate the various stages of the interconnection process. Finally, we’ll consider trends that may factor into the interconnection process in the years ahead. 

Interconnection as a strategy

Because interconnection costs do not have a one-to-one correlation to system size and are even less tied to revenue, projects with low interconnection costs provide distinct advantages. Developers with site control and low-cost interconnection may speculate on these queue positions and wait for projects to find them, in a sort of “if-you-interconnect-it,-they-will-come” strategy.

The strategy may be sound.  Nevertheless, site control and interconnection are but two of the four pillars of project success.

The value of assets without offtake and permitting ought to reflect the outstanding binary risks and associated pull-through rates. For investors with the patience and appetite to warehouse or hold assets, this style of development may provide long-term, outsized returns. For investors looking for quarterly or annual returns on capital and/or investors with high carrying costs, on the other hand, this strategy may be too risky. 

Alternatively, investors looking for a platform that does both (recycles capital with near-term gains and places a few long-term strategic bets) may consider pipelines that combine varying levels of interconnection speculation.

Stages of interconnection

Within a single development pipeline, you may encounter projects of various stages of interconnection development. 

• • Application submitted
• • Feasibility study
• • System impact study
• • Facilities Study
• • Interconnection agreement executed
• • Commencement of construction of interconnection facilities

Each of these stages varies from utility territory to utility territory.  Nevertheless, there are some technical and economic commonalities.  A typical progression for territories in the Pacific Northwest, Southwest, Northeast, Mid-Atlantic, and Southeast may look like this:

Time and money

When reviewing any timelines or Gantt charts of a development pipeline, it is important to ask where the dates come from. These dates may have their basis in law or tariff. A utility or the public service commission may set timelines within which the utility is to review and/or provide responses. Given this statutory patina, these dates feel reassuringly firm. They are not; they are aspirational. A utility may fully comply with the timelines, but the process is iterative at nearly every stage.

A response from a utility may call for a new submission or clarification, and you will suddenly find that the clock has started over again. Other times, a utility may miss a deadline by a few days (or weeks). These slips hardly rise to the level of a Public Service Commission hearing, and there is generally no practical recourse for these slips that do not have the perverse effect of delaying the project further.

Therefore, it is critical to understand what development milestones are tied to utility action. Questions to ask include

(a) whether utility action is a gating item for another development task on the project schedule (e.g., the execution of interconnection agreement is a condition precedent to application for an incentive),

(b) whether utility delay could present a binary risk (e.g., tax equity deadlines), or

(c) whether utility delay could present a cost adder (e.g., liquidated damages in the offtake agreement).

Once an interconnection agreement is executed, the utility may be contractually bound to act within set timelines. Most typically, utilities take these contractual obligations seriously. Therefore, dates based on an executed interconnection agreement are more truly firm. Before the executed interconnection agreement is in hand, however, time may not be on your side. 

Additionally, some states have multiple net-metering tariffs. It is not unusual to find that an executed PPA may not fit within the confines of the net-metering tariff that the developer intends to use. This increases regulatory risk and may require redevelopment, transforming a later-stage asset to an early-stage asset. It is particularly important to understand the applicable net-metering rules related to system size, co-location of multiple systems, remoteness from the off-taker, and the eligibility of the off-taker itself.

Trends: Congestion, Storage, and Additional Revenue Streams

Developers who choose the latter path will need to convince the utility of the effectiveness of such a solution. (This is just one area in which in-house engineering is a critical value-add.) Even if a utility greenlights the larger capacity, the utility still may require that a utility-owned reclosure device be installed to ensure that the system is curtailed when it reaches the export limit. It is important to model out such curtailment when financing such a system. 

The race is on to pair storage with solar at scale. It is important to consider the submitted information in the interconnection application and what systems were studied, if the project has been studied, to determine if adding any particular type of storage would require a revised application or study. Either case may result in a loss of queue position.

Solar assets will likely produce revenue for decades.  It would be rather shortsighted to assume that the grids to which they connect will remain static. As more renewable assets come online, grid operators will need a generation that can be flexible and respond in a second (or split second) to signals from the regional transmission organization. Most grids have already monetized such services. Historically, this is normally where “baseload” power (e.g., natural gas or nuclear) steps in. However, a solar project (especially when paired with storage) can be incredibly flexible and responsive to the intermittency of other generators on the grid. It’s a “clean get cleaner” sort of world. Therefore, early engineering should contemplate flexibility with respect to the grid, and interconnection applications should build in as much optionality as is commercially reasonable

Bonus: Note on interconnection agreements

Interconnection agreements, by and large, are form agreements. Their legal terms are concise at best, and lacking at worst. Nevertheless, with certain exceptions, there is generally no opportunity to negotiate. For investors looking to cover any and all risks associated with the interconnection agreement, it is important to note that seeking an executed estoppel from a utility can be a lengthy and fruitless process. If estoppel is not forthcoming, the business team ought to find alternative ways to confirm that the utility is ready to work with the project company. 

So, if the legal terms are sparse, there is no room to negotiate, and estoppel is out of the question, should your lawyer skip over the “interconnection” folder in the data room? No. 

Legal diligence is necessary to determine the mechanics and ramifications of milestone dates and cliff dates, particularly with regard to deposit payments and placed-in-service dates. Your legal team should also read the interconnection agreement in the context of the applicable utility tariff. 

Finally, interconnection agreements are peppered with various obligations during construction and operations, which should be considered when drafting the various construction contracts and operation and maintenance agreements for the project. Keep your lawyer out of this data room at your own peril. 

Ready to read on? 
Click here to read the next chapter on how site control affects project success.

The series is written by Leslie Hodge, an associate at Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo. It was first published by Greentech Media. Hodge’s practice focuses on energy project finance, general commercial transactions, startup and corporate matters, contract disputes, and litigation. 

Joe Song, vice president of project operations at Sol Systems, also contributed to this piece.

La entrada How Interconnection Affects Project Success se publicó primero en We turn good projects into great deals - Green Dealflow.

Investors are flocking to renewable projects​

Renewable energy witnessed a substantial influx of global investments in 2023, reaching approximately USD 2.8 trillion. Notably, over USD 1.7 trillion was allocated to clean energy projects, surpassing the combined value of the entire global entertainment and media market, including everything from newspapers to video games, television, and movies. Projections indicate that this trend will persist, presenting a promising future for developers. However, the challenge lies in securing the final investment from precisely the right investor.

With over a decade of experience connecting developers and investors, we dive into the trenches, revealing the most common mistakes developers make that sink renewable energy projects before they even see the light of day.

“Ready to build” means business!​

The phrase “ready to build” shouldn’t be a convenient mantra. Be honest about the project’s stage. Investors appreciate transparency and upfront assessments. Don’t paint a rosy picture just to secure funding; manage expectations to build trust and lay the groundwork for a smooth collaboration. For example, a land option agreement does not mean the same as a notarized land lease and a grid connection offer does not mean the same as a secured grid connection.  A tip is to provide a clear timeline of project development and key milestones achieved.

Secrecy breeds suspicion​

Imagine pitching your dream project while clutching a “secret sauce” recipe close to your chest. Investors, seeking long-term partnerships, value transparency. Withholding key information – be it technical details or supplier contacts – raises red flags. Be upfront about potential risks and showcase your mitigation plan. Remember, trust is the foundation of any successful investment. Investors are looking for assertive CEOs who take reasonable action to reduce their potential downside. A tip is to always have NDA and NCA in place.

No track record to show​

If you were to invest millions in a project, would you not want to know if the people responsible for the development of the project had experience doing what you pay them to do? Of course, you do. Whether it’s on the personal or company level, investors value track records that ensure that the person in charge of the company behind the development knows the ropes and has done it before.

Ignoring the social and environmental impact ​

Today’s investors increasingly focus on projects that contribute positively to their communities and the environment, but also to limit ESG risk. So, besides showcasing your project’s financial viability, be prepared to showcase your project’s social impact and how you plan to engage with local stakeholders.

Sloppy emails, sloppy business​

Imagine receiving a proposal riddled with typos and grammatical errors. Does it inspire confidence in your professionalism and attention to detail? Absolutely not. Why many developers fail when talking to investors is because they do not treat communications with the same meticulousness you dedicate to your project. Remember, they’re evaluating you as much as your venture.

Ignoring deadlines and timelines​

Promising to send the project teaser by Thursday? You better! One crucial element of building trust is adhering to deadlines. When a developer promises a deliverable or milestone to a potential investor, meeting that deadline demonstrates professionalism, reliability, and respect for their time.’
Promising to send the project teaser by Thursday? You better! One crucial element of building trust is adhering to deadlines. When a developer promises a deliverable or milestone to a potential investor, meeting that deadline demonstrates professionalism, reliability, and respect for their time.

Missed deadlines can have a domino effect. Delays in one area can ripple through the project timeline, raising red flags for investors. This can erode confidence and potentially derail funding discussions. Conversely, consistently hitting deadlines showcases your efficiency and ability to manage a project effectively. It reassures the investor that the project is progressing according to plan and reduces concerns about potential roadblocks. Timeliness fosters a sense of dependability, a critical quality for any long-term partnership between developer and investor.

Neglecting the legal and regulatory landscape

This offtake arrangement (often a form of net metering) is enjoying popularity at the moment. “Community solar” is used to designate a wide variety of project configurations in the development community. If often means a structure whereby the system owner sells electricity to the utility, provided that the system owner is able to amass a certain amount of subscribers within the utility’s territory. Compliance with the precise statutory authority and the utility’s guidance is critical here.

Early diligence should reveal the number of subscriptions and the total megawatts subscribed, as well as the number of subscriptions and total megawatts required to be subscribed to commence construction and to achieve commercial operation. Additionally, there may be quota limitations for certain classes of subscribers.

The endless money pit ​

Constantly needing “just a little more” to clear the next hurdle? This constant cash-grabbing paints a worrying picture of your budget management skills. Investors aren’t ATMs. Provide realistic funding needs and proactively manage risks for the project’s lifetime. Transparency breeds confidence, not suspicion.

Guarantees are for mattresses, not investments

Promising unrealistic returns might seem like a quick win, but it backfires spectacularly. Investors are savvy and can see through manipulated financial models. Instead, offer detailed financials, identify potential roadblocks, and demonstrate your willingness to navigate them as a true partner. Remember, long-term success requires honesty and shared risk management.

Neglecting due diligence

Don’t just focus on securing funding; perform your due diligence on potential investors. Understand their track record, investment philosophy, and alignment with your project’s values. We understand that this can be a time-consuming, tiresome, and at times difficult task, especially if you are dealing or want to deal with international investors.

Taking the next steps​

Navigating the renewable energy investment landscape can be daunting, especially for new developers, but experienced ones can still face challenges, now you know the basics behind why developers fail when talking to investors, and how to avoid falling into the same traps. 

Remember, a well-honed pitch, supported by data, transparency, timeliness, and a deep understanding of investor priorities, is your golden ticket.

But don’t go it alone.

Consider partnering with experienced advisors who can help you navigate the complexities of due diligence, identify the right investors, and fine-tune your pitch to perfection. By focusing on your core strengths and leveraging the expertise of trusted partners, you can transform your green dream into a bankable reality, paving the way for a brighter, more sustainable future.

Get more insight on our approach that helps you find the right investor.

La entrada How To Get Investors Onboard Your Project​ se publicó primero en We turn good projects into great deals - Green Dealflow.