Mike McGuire, a co-founder of Wiser Capital, currently oversees finance and risk management for the company’s transactions. McGuire has more than 40 years of financial management, investment management and asset securitization experience serving as president and CEO of several community banks.
By Mike McGuire, Special To Solar Power World
The solar industry is growing rapidly, but a vast opportunity for development remains untapped with commercial and industrial (C&I) properties owned by less-than-investment-grade offtakers.
The challenge thus far has been the inability to underwrite and score the credit of both the properties and the offtakers efficiently and effectively for this underserved market segment. The resulting inconsistent and limited capital resources have slowed the segment’s growth significantly.
Without a public credit rating from Moody’s, Fitch or Standard & Poor’s, C&I properties that need a third party financed solution cannot access the capital to build a system. Solar contractors that can sell and install these type of projects know they are sitting on untapped potential, but they are left wondering how to fund them.
This solar segment has two subsets. When an offtaker can fully benefit from the tax incentives associated with a system, it’s known as a host-owned system. When the host or offtaker can’t benefit from the tax incentives and requires a third-party to own and finance the system, it’s called a non-host-owned system.
Host-owned systems are beginning to attract traditional-funding resources. In recent years, a small number of community banks have begun to provide an equipment finance solution to hosts who want to own their solar plants. For banks, this involves the same borrower, property condition and credit-underwriting standards as any other equipment finance request. Banks are well-versed in the business-credit underwriting and legal nuances needed to secure their collateral interests in solar equipment.
A financial solution requiring a third party to own and finance the solar project presents significantly greater underwriting issues and a higher degree of risk, especially when the offtaker’s obligations are secured through a power purchase agreement (PPA) rather than an equipment lease. Understanding and mitigating these risks to the satisfaction of the financing partners is crucial to attracting affordable capital to the marketplace.
- Underwriting requirements assess:
- The system’s ability to perform and deliver projected output
- Credibility behind equipment manufacturer’s warranties
- The workmanship warranty of the contractor installing the system
- Public policy issues that could amend net-metering agreements or other incentives
- Long term operation and maintenance of the system
Most importantly, project risk hinges on the structural integrity of the premises and the host’s financial capacity to make the PPA payments. The capacity of the host and premises to operate continuously for the full term of the PPA represents the biggest risk to the investor. The system’s output needs to be purchased consistently by the host premises and moving the equipment to an alternative site is often cost prohibitive.
Solar integrators and host facilities need to understand this risk level and be prepared to offer supporting documentation to potential investors. This will likely include audited financial statements and tax returns. Nonprofits may need to disclose information about their endowments and a history of its membership numbers. As a last resort, a member of the business or nonprofit may also need to offer a personal guarantee.
Furthermore, the type of facility will play into the risk assessment. Facilities such as multi-tenant offices, warehouses and retail spaces with high tenant turnover may lack the long-term commitments to make the projects viable for third-party owned PPA transactions. These building owners wishing to go solar will find self-ownership or PACE financing the most appropriate solution.
Properties where a change-of-use is unlikely (such as wineries, owner-occupied manufacturing, distribution centers, climate-controlled self-storage, cold storage facilities and condominium home owners associations) are more attractive. These property types provide the greatest assurance that occupancy, ownership and power consumption patterns will be stable for the term of the PPA.
Historically, the process for underwriting these projects has been ad hoc but there are several businesses and organizations working to standardize and automate the process.
When credible systems are in place to provide a detailed risk assessment investors will be able to enter the market with more confidence, bringing more capital at a lower rates and enabling more projects to gain access to financing.