In the competitive landscape of solar project development, securing adequate development capital remains a significant challenge for many in the industry. With traditional funding sources often presenting hurdles in the form of high interest rates and stringent repayment terms, developers find themselves in a precarious position. This common plight in solar project financing has been a persistent issue, particularly given the high interest rates, sometimes reaching 18%, that mirror lenders’ perceived risk in these ventures.
The prevalent practice among developers has been to reinvest proceeds from completed projects into new ones. However, this strategy harbors inherent risks, notably the slim margins for error. Delays in project sales can extend the timeline for revenue realization, thereby jeopardizing subsequent projects’ funding and potentially stalling a developer’s entire project pipeline.
A novel solution, however, is emerging within the industry, offering a more reliable and cost-effective source of development capital.
Strategic leases
The key lies in the strategic financing of solar leases, a method that is gaining traction among developers. By collaborating with financial partners who recognize the long-term value of solar, developers are tapping into a source of capital that is not only more accessible but also comes with significantly lower interest rates.
The process involves a variety of strategies, such as selling owned land or purchase options, selling leases, or securing solar land loans against lease values. This approach contrasts sharply with traditional project financing models, where full development fees are only realized upon project completion.
By financing the land at the Notice to Proceed (NTP) stage, developers can unlock additional, unrestricted capital, which can then be utilized across various needs, including payments for solar panels, acquiring additional sites, making lease or option payments, covering interconnection deposits, and funding engineering efforts.
A case in point is Norbut Solar Farms, a leading solar developer in New York.
Utilizing SolaREIT-financed solar loans, Norbut Solar Farms successfully established a steady stream of flexible funding. This financing mechanism is based on the value of the solar lease rather than the appraised land value, typically resulting in a loan amount that exceeds both the land’s purchase and appraised values.
This approach enabled Norbut Solar Farms to not only cover the cost of the land but also generate surplus capital for further development and construction. The streamlined process ensures that the funds are usually available within 30-45 days, a significant improvement over traditional financing timelines.
The broader implications of this financing model are considerable. When a single solar lease is financed through SolaREIT, the resultant development capital can be used to advance multiple projects concurrently, thereby creating a multiplier effect. This effect is further amplified when additional post-NTP projects are financed, cumulatively enhancing the total megawatt capacity developed.
This creative, low-risk, and competitive financing model can transform the solar development landscape, offering flexibility and efficiency to developers facing funding challenges. As the industry evolves, such innovative approaches to project financing are likely to become increasingly pivotal in driving the growth and sustainability of solar energy development.
Laura Klein is CFO & COO of SolaREIT, a solar and battery storage real estate investment fund. Laura is an experienced energy executive with 15+ years developing and financing clean energy projects in the U.S.
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