A new concept in Large-Scale Solar Development?
Why can't we just keep everything the same?
Because the current Dev Fee structure is a Win/Lose model. It often ends up being a race for dominance, but usually it is a race to the bottom!
In the current Dev Fee structure, Developers are caught in the dilemma of developing projects and flipping sites or holding them for recurring revenue.
If they flip the sites, they have no recurring revenue and need to start over every time they sell a portfolio of projects.
If they elect to hold the sites for long term recurring revenue, they usually fail to obtain the required financing to bring them to COD and revenue generation and end up selling the sites in a distress sale.
So why not try something new and make it a Win/Win for both Developers and Purchasers of Large-Scale Solar sites?
I call it the “Horizontal Dev Fee”. It is easy to understand if we think of the traditional model as the “Vertical Dev Fee”.
As the CFO of a developer, lived the “Vertical Dev Fee" model where we sold sites at NTP. In this model, cash flow was always a problem so we had to make compromises and sell sites earlier in the development process. It was a model where we found ourselves rushing to sell projects before they were ready because we were running out of cash!
Fortunately we were acquired by a large PE firm and quickly became the Purchaser. But this came with its own set of problems.
We needed to find Developers with projects to sell. They had the same problems we had experienced as a Developer, so most of their projects were not NTP ready.
We spent a lot of resources “Due Diligencing” the projects and each project required a complicated “one off” set of contracts to protect us against the Developers sub par projects.
And then there was the “push and pull” between how to split the return (Dev Fee) and it was always a Win/Lose situation.
The problem was compounded because the Developer was shopping the site to multiple Purchasers. It always ended up being a race to the bottom and the returns suffered greatly.
The standard “Vertical Dev Fee” is always at risk for cost overruns incurred during the construction phase. It is also at risk for revenue generation of the final design. Most of this risk is pushed to the Developer.
To top it off, the adjustments to the Developers Fee is in the hands of the Purchaser and the Developer has no say in the matter. As Americans, we fought a war over that same concept in 1776.
Does anyone really win with the “Vertical Dev Fee”?
How about a solid alternative…the “Horizontal Dev Fee”.
As I promote the Dev & Hold ERP System, I am constantly engaging with Developers interested in maintaining an Equity Stake in some of their sites.
The “Horizontal Dev Fee” allows for that by splitting the ownership of the site keeping both parties involved in every aspect of each site at an agreed upon ownership split (e.g. 80%/20%).
The Developer and the Purchaser are both involved in the site from early-stage development until the solar asset is finally retired 40 years later.
The model keeps both partners’ interests aligned as they share equally in the risk of the site outcomes. Both partners win if the construction costs are minimized. Both partners win if the revenue generation is maximized..
With the “Horizontal Dev Fee”, the Purchaser invests fewer dollars in the project, but receives the same % return as if they initiated a “Greenfield” Site themselves. Talk about Win/Win!
With the “Horizontal Dev Fee”, the Developer invests in the project and receives long term recurring revenue and a return % equal to the Purchaser…the other side of Win/Win!
We wrote a series of articles to help you better understand this pioneering concept.
- A New Concept for Solar Dev Fees - “Horizontal” vs “Vertical”
- “Horizontal Dev Fees”…a Primer for Developers
- “Horizontal Dev Fees”…a Primer for Purchasers
- Top Ten Reasons to Use a “Horizontal Dev Fee”
- Top Ten Reasons to Stop using a “Vertical Dev Fee”
- “Horizontal Dev Fees” … Key Contract Points.
They can be found on the Financial Blog on our website.
Comments and ideas from fellow Large-Scale Solar Pioneers are more than welcome. Let's work together to accelerate the trajectory of the energy transformation!
Sincerely
Jeff
516-527-8390