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 financing required to bring them to COD and revenue generation. The sites end up being sold in a distress sale.
To add salt to the Developers wounds, in the current method of Large-Scale Solar valuations, the value of a business is limited to the size and development stage of their sites. Not much value is left after a portfolio of projects is sold.
This same concept applies to an EPC. Unless an EPC has a “Backlog” of projects, the value of the company is very low.
The best way to maximize value in any company is to have recurring revenue.
The only way a Developer or an EPC can achieve a recurring revenue valuation in the Large-Scale Solar business is to own Solar Assets.
Let me say that again.
The only way a Developer or an EPC can achieve a recurring revenue valuation in the Large-Scale Solar business is to own Solar Assets
Having transformed a company from a Developer to a Purchaser, I have seen first hand that the obstacles facing a Developer trying to own assets are almost impossible without a significant amount of money.
Some of the obstacles:
- The Tax Equity Partners will only invest in large portfolios backed by a well funded Sponsor.
- The new IRA concept of selling Investment Tax Credits will not help because banks will not lend to a portfolio unless it is backed by a Tax Equity Bridge Loan.
- The Legal, Tax and Consulting Fees required to pull a financeable portfolio together are in the millions of dollars.
- The cost of getting a large portfolio of sites to the stage where they are financeable is in the tens of Millions of dollars.
So, hitting the Dev & Hold business model head on is close to impossible for most Developers.
The Current Dev Fee structure keeps Developers trapped in the loop of Develop, Negotiate a Sale and then start again. To top it off, the “push and pull” between how to calculate the Dev Fee on the site is always a Win/Lose situation.
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”.
The “Vertical Dev Fee” means the site is split at NTP.
The “Horizontal Dev Fee” split happens on day one but splits the ownership of the project at an agreed upon ownership split (e.g. 80%/20%).
The “Horizontal Dev Fee” keeps both the Developer and the Purchaser involved in the project from the time of early-stage development until the solar asset is finally retired. Both partners’ interests are aligned as they share equally in the risk of the project outcomes.
With the “Horizontal Dev Fee”, the Developer invests in the project and receives long term recurring revenue. Talk about Win/Win!
With the “Horizontal Dev Fee”, the Purchaser invests less in the project, but receives the same return as if they initiated a “Greenfield” Site themselves…the other side of Win/Win!
There are many advantages to the Developer. Below are some of the key benefits to the
Developer:
- Long term recurring revenue.
- The ability to attract investors to their company.
- Higher Valuation of their company.
- Access to standard industry financing.
- No more negotiating Dev Fees. Each site will stand on its own financial return merits.
- Access to a partner willing to take on all sites with a pre negotiated return threshold.
- Access to a partner with significant industry resources.
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