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”:
Following are the top ten reasons to move on from the use of a “Vertical Dev Fee”:
- The “Vertical Dev Fee” pits the Developer and the Purchaser against each other and causes an adversarial business relationship.
- The entity with the most power is the winner and the other is the loser (Win/Lose).
- A constant hunt for the next site acquisition.
- The Developer is at risk and almost always loses.
- Development Fees need to be negotiated and paid out.
- Reduced returns on acquired sites compared to “Green Field” sites.
- Constantly having to diligence acquisitions sites looking for “Fatal Flaws” in the sites.
- The time and legal expense associated with a complicated “one off” set of contracts to protect against sub par projects.
- The “Vertical Dev Fee” is complicated requires long drawn out negotiations and is “ALWAYS” a Win/Lose structure
- The “Vertical Dev Fee is”a poor model for any industry, but especially for one expected to triple in size in the next five years!
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