Horizontal Dev Fees…Key Contract Points

Horizontal Dev Fees…Key Contract Points

Based on my experience most if not all Developers and ECP’s would jump at the chance to have a long-term equity interest in at least a portion of their sites

This article gives some ideas on how to set up an environment for both the Developer and the Purchaser that will allow them to flourish as long term business  partners. 

But first, a quick primer on the concept.

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 site ends up being sold in a distress sale. 

The Purchasers are caught in the dilemma of bidding too much or too little for a site.  

If they bid too much, their returns suffer. And they will end up with a portfolio of projects made up of returns at the two extremes of the return spectrum. If the sites with the high returns slide, the remaining portfolio of sites will have marginal returns.

If the Purchaser bids too little, they will lose sites to the competition and not be able to pull together a large enough portfolio to make it attractive to the financing community.

The Developer and the Purchaser are always caught in the “push and pull” between how to split the return (Dev Fee) and it 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%). 

While it is an easy concept to understand, like everything else, the “Essence is in the details” 

Following are suggestions on how to set it up to support a long term partnership:

  1. The cornerstone of the concept is the ability to allow the Developer to own from 5% to 20% of each site. Having a long term partner in a site is extremely beneficial to the Purchaser.  
  2. If the Purchaser sells the site in the future, require the Developer to sell their portion at the same price.
  3. If the Developer needs to sell their portion of the site, require it be sold back to the Purchaser using a pre negotiated pricing model.
  4. Allow the Developer to sell sites to the purchaser using the “Vertical Dev Fee” model. The Dev Fee will be a prescribed “formula” for any and all sites. This will help the Developer partner maintain cash flow in their business.
  5. All sites will use the Purchasers financing structures including Development loans.
  6. Require the Developer to manage the Development process thru NTP. It would be funded per the % ownership of each site, but the Developer would work the process to completion.
  7. Build in flexibility around the responsibility for the Construction portion of the site. Developers have  different skill sets and may be able to supply valuable resources as site construction ramps up.
  8. Set up a method to monitor each of the “Horizontal Dev Fee” sites as they are being brought to COD.
  9. Have “Rinse and Repeat” contracts to be used on all “Horizontal Dev Fee” sites.

The “Horizontal Dev Fee '' concept can be a big benefit related to both volume of sites and return on the sites. But like anything else,  if it is not thought through and set up carefully, it can be a disaster!

Hopefully this article helps you get closer to taking the actions necessary to start using the “Horizontal Dev Fee” structure.

We wrote a series of articles to help you better understand this pioneering concept.

  1. A  New Concept for Solar Dev Fees - “Horizontal” vs “Vertical”
  2. “Horizontal Dev Fees”…a Primer for Developers
  3. “Horizontal Dev Fees”…a Primer for Purchasers
  4. Top Ten Reasons to Use a “Horizontal Dev Fee”
  5. Top Ten Reasons to Stop using a “Vertical Dev Fee”
  6. “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!




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