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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2014

Go Green for New Lending Prospects

Alternative-energy projects power a surge of business opportunities

Funding for green-energy projects is fast becoming one of the hottest loan types in the commercial market because of the growing need for alternative-energy sources. These projects are spawning countless financing opportunities for commercial mortgage professionals looking for new leads besides those in the traditional lending market, which is saturated with hungry competition.

Four green-energy technologies are the leading contenders for these opportunities: wind, solar, hydro and biomass projects. They offer global alternatives to increasingly scarce and environmentally unfriendly fossil fuels.

  • Wind farms use windmill turbines, located onshore and offshore, to create clean energy. Recent improvements in blade design and generators have reduced greatly the costs of producing this type of energy, making it especially attractive in areas or countries with limited or dwindling access to conventional energy resources.
  • Solar power is a form of green energy most people are familiar with and even may have used in their homes. Although it has been available for decades, recent advances offer opportunities to harvest the use of the sun’s energy in ways never before imagined. Solar thermal power plants, which use the latest turbine technology to produce clean power, are the wave of the green-energy industry’s future.
  • Hydro power uses the energy from waves and water flow to create energy. Traditional hydro power and ocean power, which generates energy from tides, make this green-energy alternative one of the most exciting in the world.
  • Biomass energy is a renewable and sustainable energy type. It involves this conversion of forestry byproducts, agricultural wastes, municipal wastes, landfill gas and syngas (synthesis gas). This type of energy has relatively few harmful emissions and does not contribute to global warming.

Outlook and obstacles

Alternative-energy projects are lucrative; they require loan amounts from hundreds of millions of dollars to billions of dollars. They also come with a host of challenges, including governmental guarantees, both at home and abroad. Mortgage professionals must be aware of the inherent land value and the client’s credentials when funding a green-energy project, and be familiar with all of the applicable governmental requirements within a given city, county, state or country.

This sector of the market offers sophisticated clients looking not only for optimal terms but also clear assurances that their funding will meet the expected production deadlines required by program developers and governmental sponsors. The financing negotiations in green-energy projects often include governmental representatives or even heads of state.

Although the loan amounts needed by the clients in these booming industries are substantial, they come with a host of intricate bureaucratic hurdles that must be overcome to secure the required financing. Some important components in financing these projects are tax credits for larger startups, government guarantees and well-connected clients, all of which can make or break the project. Governmental support of any given green-energy project may play a huge role in its success, as well.

Funding methods

The majority of financing for these alternative-energy projects is derived from private funding and investment groups. These lenders evaluate the financing needs primarily on the projected cash flow of a startup or the existing cash flow of an established facility. Lenders assess the experience of the borrower’s prior successes. When dealing with clients with limited or no experience, lenders often will joint-venture the project to ensure its success, thereby securing the net proceeds on their investments.

Unlike conventional commercial financing, energy projects work off of the overall loan amount plus future value. For example, for a client looking to build a biomass project, the lender may not charge an interest rate while the project is being constructed. Instead, it chooses to oversee the project using its expertise in the field, thereby creating a net profit after the ramp-up phase. Lenders sometimes will provide a grace period at the end of which borrowers can buy them out for an established, contractual amount, or create a profit-sharing plan to distribute benefits to all involved parties.

• • •

At a time when the funding behind many government projects has dwindled, backing for alternative-energy projects continues to thrive. In a commercial mortgage market inundated with mortgage professionals searching for the cheapest rate and best terms on virtually every commercial property type in the country, now is an ideal time for savvy mortgage professionals to seek out new opportunities and go green. 


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