7 Tips for Financing Solar Projects

As the warm weather approaches, we see the usual signs of spring which, in a good year, includes an increase in commercial development and corresponding financing transactions.  Most notably this year is the increase in financing requests for solar projects, including construction, permanent, bridge and mini-permanent loan options.  Below is a list of tips we have assembled to make your solar project more readily financeable.

1. Underlying Real Estate.  Most lenders will request a mortgage on the underlying real estate where the solar array is located.  If the fee in the land is also owned by the project owner then a first priority mortgage will be recorded against the land.  Many times, however, the project is located on property owned by a third party and ground leased to the borrower.  In this scenario, the lender will request the borrower grant a leasehold mortgage, which will require a notice of lease to be filed at the registry, if not already of record.  The lender will also look for certain mortgagee protections in the ground lease including: (i) the right, but not the obligation, to cure any borrower default after notice and any applicable cure periods; (ii) that the lease can be collaterally assigned and/or a mortgage granted without ground lessor’s consent; and, (iii) the obligation of any holder of a fee mortgage on ground lessor’s property to enter into a non-disturbance agreement with the tenant/borrower should the ground lessor ever be foreclosed upon.  When negotiating a ground lease for a solar project, these provisions should be negotiated up front and included in the form of lease to avoid the tenant/borrower having to obtain a written consent or amendment from the ground lessor when trying to obtain financing.
2. Zoning.  A lender will want assurance that the project has received all of its required permits from the municipality and proof each is recorded in the chain of title, as so required.  Some developers/borrowers use a local permitting counsel for this process and will ask for a zoning opinion to be provided to the lender, affirmatively stating the project has received all such required permits.  In lieu of an opinion, a borrower could obtain a certificate from an engineer associated with the project that all permits have been obtained and the project is or will be built in accordance therewith.  A zoning endorsement from the title company may also satisfy this requirement, but the title company will need to rely on a third party zoning record search or some other evidence of zoning data.  If a project is fully constructed, some municipalities have issued a Certificate of Occupancy (despite no “occupancy” will actually take place) stating the project and the use are in compliance with local zoning bylaws and issued project permits.
3. Power Purchase Agreement.  Prior to entering into a financing arrangement, a lender will require that the project owner has entered into a fully executed power purchase agreement with a third party to purchase the power generated by the project.  A lender will confirm the executed agreement contains the following provisions:  (i) it may be collaterally assigned by right in order to obtain lender financing (if that is not the case, then a written consent of the power purchaser will be needed for closing); (ii) the term (typically 20 to 30 years) is longer than the full amortization period of the loan; and (iii) should the lender foreclose or otherwise take over the project with a new operator, the power purchase agreement will remain in place.
4. Engineering, Procurement and Construction Contracts (“EPC”).  A lender and its engineering consultant will review the EPC along with the credentials of the construction contractor and any known subcontractors.  If the financing is for a construction loan, the lender will confirm the timing and requirements for draws and forms of lien waivers set forth in the EPC are consistent with the loan disbursement schedule and the lender’s requirements.  Often the EPC will also include a production guarantee and warranties; therefore, the EPC should also contain language allowing a collateral assignment for financing without consent of the contractor.
5. Solar Renewable Energy Certificates (“SRECs”).  Once the solar array is constructed and has achieved its commercial operation date, the Statement of Qualification from the Massachusetts Department of Energy Resources evidencing the project is eligible to participate in the Solar Credit Clearinghouse Auction must be provided to lender.  Each interconnection agreement for the project is given a specific corresponding identification number and each time 1MWh of energy production is achieved, an SREC is created.  The SREC is “minted” and deposited quarterly into the project’s account.  An annual auction at the end of July is held to sell the SRECs.  Lenders will often structure repayment of their loans using quarterly interest payments and annual principal payments to match the cash flow of a solar project which is based on the SREC time table.
6. Section 1603 Grant Funds.  As part of the American Recovery and Reinvestment Act of 2009, federal grants were made available for a portion of the costs associated with installing solar projects.  This program is only available for projects that submitted an application before October 1, 2012 and for which at least 5% of project costs were spent before that date. While new projects are no longer eligible (they do remain eligible for Federal Investment Tax Credits) , a number of projects still under construction, that met the  listed requirements, are grandfathered  under the program. The grant funds are received once the project has achieved its commercial operation date.  Lenders may provide interim bridge financing during the construction of the project based on evidence of an awarded grant.  The bridge loan will then be repaid in full upon receipt of the grant proceeds, such receipt may be assigned directly to the lender at its request.
7. Reserve Accounts.  Often a lender will require a debt service reserve account to be funded at closing, which is tied to a dollar amount consistent with a certain number of months of debt service payments, in case there is a period of low energy generation production or lag in the sale of SRECs, which may present an issue in meeting required payment provisions.

A lender will also look for either an extended warranty for the solar inverters (which convert the solar power into useable electricity on the grid) which extends through the term of its loan or will require an annual payment to a blocked reserve account held with the lender to ensure funds will be available at the end of the estimated useful life of the inverters to purchase replacements.