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%).
Following are the top ten reasons to embrace the concept of a “Horizontal Dev Fee”:
- 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.
- 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. Talk about Win/Win!
- With the “Horizontal Dev Fee”, the Developer invests in the project and receives long term recurring revenue…the other side of Win/Win!
- A constant flow of sites for the Purchaser.
- A simple way of receiving “long term” value for the Developer
- An additional funding source for both the Purchaser and the Developer.
- No Development Fees to negotiate or pay.
- Additional resources from the combined teams of the Developer and the Purchaser.
- A standard Co-Develop contract and documents to provide a “Rinse and Repeat” environment for all sites.
- Both the Developer’s and the Purchaser's interests are aligned as they share equally in the risk of the project outcomes.
- Bonus: No need to acquire Developers…Become their trusted partner!
We have 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