By almost any measure, 2020 has been an astounding and tragic year, with the entire world having to live through a deadly pandemic that we’ve never experienced before in our lifetimes. Mass shutdowns and stay-at-home orders in most countries strained economies and highlighted the importance of emergency-service workers.
COVID-19 also stopped the long expansion in U.S. commercial real estate that followed the Great Recession. Assets that rely on public gatherings, such as retail malls, restaurants, hotels and even offices, have been hurt badly. Even for businesses that have managed to reopen, social distancing has restricted the use of space in these facilities. What’s more is that there is no foreseeable end to the crisis and its impact on traditional commercial properties.
In this down environment, commercial mortgage brokers should use their time to establish a niche in essential industries that are not dependent on crowds of people. One such growing industry is renewable energy. There are opportunities to finance commercial wind and solar-power projects, waste-to-electricity processing plants, recycling operations, and renewable energy projects that can be sited on capped landfills and brownfield sites that require environmental cleanup.
Renewable energy projects tend to be large and complex. For the individual developer, the cost of constructing these facilities can be staggering.
High hurdles
As a mortgage broker, there is a steeper learning curve with these projects and more financing hurdles. One difference is size: Renewable energy projects tend to be large and complex. For the individual developer, the cost of constructing these facilities can be staggering. The sponsor will typically need a combination of debt and equity financing. The transaction costs alone can easily run into the seven-figure range, depending on the size of the project or the need to operate in multiple locations.
As a broker working in the renewable energy space, you also will run up against unrealistic proposals and developers who are not prepared for the challenges. Many principals incorrectly believe that their debt and equity will result in 100% financing, and that they won’t be required to contribute any of their own cash to the project. Nothing could be further from the truth.
Renewable energy projects are often on the cutting edge of technology and the developers can be startups. Commercial mortgage brokers often encounter project sponsors who literally have no money. This is especially true for smaller projects of $10 million or less. The principals often don’t have the necessary $1 million to cover the funding gap on a $5 million project with 80% debt financing, or to cover the considerable costs for due diligence and other ancillary activities as needed.
In some respects, it is easier to put together the financing for a much larger renewable energy project in excess of $500 million. The principals who’ve been offered 95% ownership in a billion-dollar project have to come up with millions for site visits and commitment fees, but they are determined to succeed.
Success stories
For commercial mortgage brokers to conduct successful transactions for these clients, they first must assess whether the client has enough money to see the transaction through to its conclusion. To start with, the principals absolutely must be prepared to contribute a reasonable amount of their own finances relative to the size and cost of the project.
Renewable energy projects can, however, be exciting and lucrative. There are many forms of renewable energy and they will typically be viewed as highly desirable wherever they are proposed, from small villages to major metropolitan areas.
One exciting niche energy project involves the conversion of solid waste into electricity. Landfills are growing all over the world and about half of the landfills in the U.S. are privately owned. Many landfills today, however, are far more than just places where people dump their trash. They often have sizable recycling operations attached to them. Recent technologies have been developed that can convert solid waste, tires, medical waste and sludge to electricity and other usable products.
These projects bring several social and economic benefits. The waste stream is reduced to produce electricity and is sold to the local power grid to create an additional revenue stream. Theoretically, large-scale waste-to-energy operations could power large cities of the future. The principals receive tipping fees from local trash haulers and recycled products also can be sold in various markets.
Renewable energy attracts investors because it can involve highly lucrative projects with upside growth potential that are on the right side of history.
Making deals
Although renewable energy projects can be tremendously expensive to get off the ground, there are several ways that developers can work together to accomplish them. As a broker on the debt side, you can expect to work with multiple equity partners. These deals can be structured in various ways, but they will typically involve a partnership. Each of the partners will assume a percentage of the ownership, which can vary considerably. There also may be an opportunity for the project sponsor to buy back equity after a specified number of years.
Renewable energy attracts investors because it can involve highly lucrative projects with upside growth potential that are on the right side of history. Projects at landfills, for example, are viewed as progressive and humanitarian in nature, which can open the door for a favorable review by government regulators and municipalities. They may even draw financial support from governments and other public entities.
On the other hand, these projects are not for those who want to quickly close on a land or property deal and move on. Again, the cost is the single largest barrier for an investor. Aside from attracting multiple equity partners, the sponsors typically need to bring in consultants and advisers who are established players in renewable energy. In some cases, these parties can join as equity partners, but they often remain paid consultants. The cost of their services can run into the hundreds of thousands of dollars, particularly if these third parties need to visit multiple sites.
The cost for large-scale energy projects can run into the billions of dollars and take years to get off the ground. A lender or equity partner will almost always require a commitment fee to ensure that the investor plans to stay the course until closing. Although this is refundable upon closing, the fee can involve an initial outlay of anywhere from $1 million to $5 million, depending on the size and complexity of the project.
Despite these high hurdles, renewable energy represents the future and tends to repay the initial investment many times over. Patience and careful planning are required of those brave enough to wade into the waters. These projects can make their participants wealthy while serving a public good. Consider all of the large polluting utilities that power our homes and cities today. They will have to be replaced one day if we wish our planet to remain livable. ●
