Economic headwinds lead solar developers to seek funding alternatives

Nontraditional ground leases and other renewable financing fills capital void amid rising interest rates

By Michael Park, Director of Renewable Energy, Twain Financial Partners

Soaring costs – for labor, for equipment, for materials – are hitting every segment of the economy, even previously booming areas like the solar energy market.

Meanwhile, rapidly rising interest rates are complicating an already difficult financing process. Higher rates translate into higher debt payments for borrowed funding and increased reluctance from lenders to fill the gap.

The result is a double whammy – a reduction in capital available for projects at a time when project price tags are growing.

Some developers are choosing to address the problem by simply increasing sponsor equity, thereby accepting reduced project returns. Others, though, are turning to creative alternatives to solve the financing riddle.

What developers need in the current market environment is a partner willing to be flexible and creative – who can collaborate to think outside the box and craft a solution that delivers more financing proceeds.

As an example, specialty finance firm Twain Financial Partners performed a recent portfolio review with a solar developer who intended to own the project land rather than lease it. The customer had been approached by others with offers for a traditional 99-year ground lease to help fund the project, but such arrangements did not interest the developer because they wanted to own the property.

Instead, Twain suggested its ground lease product that essentially operates as a bridge loan, with repurchase options as early as Year 3, all at a fixed, predetermined price. The product allows for the capitalization of up to 36 months of rent, providing time to stabilize and generate cash flow from the completed project. It also provides a third source of fund generation, enabling the construction loan proceeds to be increased.

In addition, Twain’s ground lease capital product decreases the permanent debt leverage ratio, as the ground lease proceeds can be maximized – and at a cheaper cost of capital. The lease is secured by the land rather than the leasehold interest.

And Twain is providing the rest of the capital stack rather than the developer using multiple financing partners. That is because Twain’s renewable energy financing products include construction debt, permanent debt, and tax equity investment.

Regardless of the mix of capital types utilized, the key for developers is finding the right individualized fit for their project.

While Twain has offered financing for traditional commercial real estate assets for a number of years, the firm also has been expanding its renewable energy focus. The company has committed to funding $1 billion in renewable energy projects over the next three years, and it recently closed on a $135 million ground lease for a renewable diesel facility in Reno, Nevada, its largest ground lease investment to date.

One of the main differences between Twain and other financiers is the flexibility to finance the entire capital stack. The result is a streamlined, simplified approach with a partner that provides a single source for all project capital.

In complicated financial times like these, why make things harder than they have to be?

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