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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   December 2010

How to Find Green Funding

Know what projects will get the green light from lenders

Renewable-energy and other green projects have drawn a lot of attention recently. This attention, coupled with the lingering memory of the ethanol boom — when banks, hedge funds, private-equity groups and the like were racing to fund ethanol plants — has led to the misconception that financing for these projects still is easily obtainable.

"There are many amazing technologies in the renewable-energy field, but great ideas alone do not guarantee success, especially in today’s risk-averse lending world. "

The bust of the ethanol industry hit almost simultaneously to that of the economic downturn. The risk profile for lenders and investors lowered dramatically. Couple this with a general fear of the financial viability of commercially unproven green technology, and it’s clear that only the best green projects have a chance.

Commercial mortgage brokers should know what to look for in a successful green enterprise and know what to expect when seeking funding for clients in this potentially lucrative market.

3 things to watch for

There are many amazing technologies in the renewable-energy field, but great ideas alone do not guarantee success, especially in today’s risk-averse lending world. When considering working with a green project, brokers must carefully analyze a company’s fundamentals before taking on the task of securing financing.

For instance, brokers should look for projects that are:

  1. In a proven field: When technologies have yet to be proven on a commercial scale or in this country, most conventional lenders won’t touch them. No one wants to be the first, because the first to move on ethanol got burned. That means no matter how compelling the project is or how profitable the numbers look, conventional lenders won’t move until their peers do. A few rogue private-equity and venture-capital companies may jump on something they really believe in and understand. But that tactic may mean your clients will have to give up about 90-percent equity, leaving them with what should be called  a “project-structuring fee."
  2. Connected with movers in the industry: The more big names associated with the project, the more people will believe it’s a solid project. Having government backing helps, but having one of following is better: big-name off-takers; feedstock from reputable companies or municipalities; a big-name joint-venture partner or technology provider; and either a reputable engineering, procurement and construction contractor or an engineering, procurement and construction management contractor. Anyone with a track record of success in the industry that has a vested interest in the project — with contracts to prove it — takes the project from being a great idea to being a great opportunity. Brokers can help clients structure agreements so that they can use the investment-grade rating of the companies with which they have contracts to enhance the project as a whole and in turn get financing. This mitigates project risk for the lender, which makes otherwise-too-risky projects attractive.
  3. Promoted, but still protected: It is natural, especially early on, for clients to talk about their project to anyone who will listen, and for brokers to send information to everyone just to see who bites. The problem is, no lender wants to fund a project turned down by 300 other lenders or that has crossed its desk in the past. When picking potential lenders and investors to present to, first research which ones best fit the project. Also, make sure your clients’ lawyers write or approve a nondisclosure agreement, and have lenders sign it before you give any proprietary information. If you’ve found a potential lender, make sure you have everything in order and the project is beyond the idea phase. No lenders have the patience to start underwriting a project that is nowhere near ready for funding.

Be realistic

When working with green projects, make sure to set realistic expectations for your clients in terms of time and money.

Everyone would like to put $0 in and keep 100-percent control. That’s great in theory, but not practical. When it comes to commercial banks, investment banks, and private-equity or venture-capital companies funding projects, developers must realize they can’t expect to take millions of dollars without either putting a sizable chunk of their own money on the line or giving up a sizable share of the company, if not both.

Don’t let clients try to dictate terms. Lenders know cash is king. If a borrower is being too difficult, they’ll move on to the next. Ensure that clients are being realistic about their expectations and understand the magnitude of risk they’re asking someone to take on.

Also be aware of the time element. If a project comes to you facing drop-dead dates that are days away (e.g., they’ll lose control of the property, government incentives that make the project profitable, contracts, etc.), you can’t help them at that point. Funding large projects of this kind takes a long time, sometimes years. Pushing lenders, especially private-equity companies, to act is the quickest way to turn them off.

Make sure lenders know deadlines upfront, but don’t try to dictate when and how funding will happen.

Go for the green

Green developers can benefit greatly from working with brokers — something you should stress to clients. Good brokers keep track of lenders’ always-changing appetites and can help clients prepare their projects to maximize success.

You will have an easier time if you source and qualify projects for the lenders with whom you work, not vice versa. It is much easier to pinpoint projects that match what you know your lenders want than to find a lender for everyone who contacts you.

Many groundbreaking technologies are on the brink of changing the way we look at energy, waste and consumption. Unfortunately, the liquidity problem we face today is holding this process up. Financing projects for renewable energy likely won’t be this difficult in five to 10 years.

By then, it’s likely that more players will be actively funding and the parameters and restrictions will be looser. In the meantime, it is important to understand how to play by the rules lenders have set and find projects that already fit their requirements.


 


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