The current solar project finance model typically requires project developers to sell their assets to aggregators in order to have enough liquid capital to develop the next project and cover operational overhead.
Addressing Finance Challenges Facing Large Solar Projects
Jim Spano, Co-Founder and Head of Originations | RadiantREIT
Tell us about yourself and your company RadiantREIT.
I am the co-founder and head of originations at RadiantREIT,and I lead other ventures in the solar and real estate industries as a managing partner of Spano Partners Holdings, a real estate investment firm. I am also the co-founder of My-Resi, an energy storage development company. I am the founder and president of the New Jersey Solar Grid Supply Association (NJSGSA), vice president of the Mid-Atlantic Solar & Storage Industry Association (MSSIA), on the board of the International Battery and Energy Storage Alliance (IBESA), a founding member of The CleanTech Leaders Roundtable, and an advisory board member to several renewable energy companies in the United States. My background in real estate, land development and project finance, combined with my passion for solar energy, led me to co-found RadiantREIT with my business partner, Jeff Just, in 2018. RadiantREIT will be the first solar mortgage real estate investment trust, and will offer developers comprehensive, cradle-to-grave financing that enables more self-ownership and healthier balance sheets.
What does the solar finance landscape look like today?
The solar finance landscape remains a borrower’s market, but most of the loans that are available to developers today have shorter terms that are not in line with the operational life of projects. According to Wood Mackenzie, mini-perm debt structures are the most commonly used financing vehicle today. Mini-perm debt structures mean the lender offers repayment terms of 4-7 years, after which the project sponsor must refinance. This process repeats multiple times over the course of a 20-30 year solar contract. This exposes the project owner to unnecessary default and interest rate risk. In recognizing this mismatch, the industry has been discussing the benefits of shifting towards shorter PPAs, but this shift would still leave small to mid-sized developers with the same structure of today, which is akin to financing your mortgage with a car loan.
What are some of the biggest challenges facing large solar projects looking for financing?
The current solar project finance model typically requires project developers to sell their assets to aggregators in order to have enough liquid capital to develop the next project and cover operational overhead. This is because the loans available to project developers are misaligned with the operational life of the project. Loans on projects with long-term PPAs and 30+ years of expected operation are amortized over much shorter periods. This problem is particularly challenging for small and mid-size project developers, who often don’t have the balance sheet or institutional finance partnerships to secure optimal debt terms. Since at least 2012, these developers have sought public, long-term debt to reduce solar’s cost of capital and allow them to maintain ownership in the projects they’ve developed.
How is RadiantREIT revolutionizing the way solar projects are financed?
RadiantREIT is enabling the next wave of solar growth by offering access to public, long-term debt markets that offer project developers and asset owners a lower cost of capital, more positive cash flows and loan terms that match a project’s operational life. The solar mortgage REIT breaks the endless cycle of developing and selling projects to aggregators, allowing developers to capture more of the value created in their projects and providing flexibility in how they grow their businesses. This is not a niche problem to address -- 90 percent of solar projects in the U.S. are financed. This means we cannot overlook the impact that financing has on whether or not projects succeed, and whether market growth continues and utilities are able to meet increasing demands for renewable energy. If more developers are able to adopt this approach, they will have the ability to develop more projects to grow their own businesses and also help meet utilities’ ever-growing need for solar. It is a fundamental shift in how we think about the business of solar development.
What is a solar mortgage REIT? How is it similar or different to the more common Mortgage REIT?
Mortgage real estate investment trusts are widely deployed and proven in the real estate industry. When used for the solar market, solar mortgage REITs can lower the cost of capital for projects, while increasing the net operating income of a project to ensure positive cash flows over the lifetime of a solar project. The solar mortgage REIT, in which revenue is generated from interest payments on loans backed by the real estate portion of the solar project, helps solar developers fully realize the benefit of the REIT model. The solar mortgage REIT also reaps solar tax credit benefits while allowing for debt repayment schedules that are aligned with the life of the asset. The mortgage REIT model is also attractive for the investor community, particularly for ESG funds looking to increase their impact while maintaining a diverse, liquid portfolio that includes long-term, predictable income streams from solar energy assets.
How do you determine if a solar project is a fit to be included as a RadiantREIT investment?
RadiantREIT works with experienced small and mid-sized utility scale solar developers. Short-term loans that are currently available create a paradigm of negative project cash flows in which developers must flip their projects to investors in order to have working capital to develop their next projects. The solar mortgage REIT was designed to help this particular group of solar developers maintain ownership of their projects and grow a healthy business, which benefits the overall solar industry.
How will changes to the solar ITC influence the market, and how can new financing vehicles help address these changes?
With changes to the solar ITC, there is an opportunity to address some of the long-term financing challenges that have confronted the industry for many years. New debt financing vehicles, with terms that match the full operational life of solar projects, will support continued industry growth as utilities, cities and states are increasingly establishing renewable energy targets.
On paper, it may be true that the ITC step down hasn’t negatively impacted installed capacity or job growth, but the changes that come with shifting tax structures are important to recognize. One silver lining to the step down is that tax equity will become a smaller part of the capital stack for solar projects, making more room for debt to fill in that gap – so long as that debt is cost effective and long-term. Again, this ultimately enables ongoing industry growth and meets the needs of utilities looking for more renewable energy resources.
What can we expect from solar financing in 2020 and beyond?
Project developers are the cornerstone of a successful solar industry, bridging the gap between technology and deployments. But even with the market success of solar as a reliable investment, developers continue to be hindered by suboptimal financing solutions. As we enter the sunset of the ITC, bringing proven investment vehicles for long-term, comprehensive financing will help to ensure solar’s growth is sustainable through changing incentives and for many years to come.
About Jim Spano
Mr. Spano is a managing partner of Spano Partner Holdings and leads other ventures as a nationally recognized expert in solar development and finance. He is the co-founder and head of originations at RadiantREIT, which will be the first solar mortgage real estate investment trust in the country, established to offer long-term, fixed-rate debt that enables more self-ownership for developers and healthier balance sheets. Jim is also the co-founder of My-Resi, an energy storage development company using aggregated residential solar plus storage to operate as virtual power plants.
The content & opinions in this article are the author’s and do not necessarily represent the views of AltEnergyMag
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