By Jim Spano, co-founder and head of originations at RadiantREIT; managing partner of Spano Partners Holdings
The solar industry is booming, with installed capacity growing by about 50% annually between 2015 and 2018. Yet inefficient and costly project financing inhibits many solar developers from tapping into the market’s true potential. With changes to the investment tax credit (ITC) looming, 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 and will give developers of all sizes the opportunity to build a thriving business.
Solar financing 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 Power and Renewables’ “U.S. Solar Project Finance and M&A Landscape,” mini-perm debt structures are the most common financing vehicle today. The number of total lenders and new market entrants is rising, which is increasing competition and has generally outweighed the negative effects of the ITC step down (a bit more on that later).
Mini-perm debt structures mean the lender offers repayment terms of four to seven years, after which the project sponsor must refinance. This structure is akin to financing your mortgage with a car loan, and results in negative project cash flows from day one. The result is a paradigm in which developers must flip their projects to investors in order to have working capital to develop their next projects. In effect, this means that project developers are only as successful as their last project. New models of long-term financing like the solar mortgage REIT can help break this cycle and align debt repayment terms to the operational life of the project, ensuring positive cash flow from commercial operation date (COD).