[Solar X] Collateral Onboarding Risk Assessment

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Executive summary

Debt Ceiling: $21,000,000 equivalent in Dai (21,200,000 DAI in order to have a buffer)
Stability Fees: 5.8%
Min SPV CR: 133%
Min Vault CR: 100%
Min Vault Underlying CR: 133%
Liquidation Process: MIP21

Highlights

Project

A proposal to finance the acquisition of 34 acres of existing farmland located in Mattituck, Suffolk County, New York and the construction of a 10 MW photovoltaic solar farm with associated battery storage (“Solar Farm”).

Project Co.

Solar X Group, Inc. (“Solar X Group”) will form Solar X Group Mattituck, LLC (“Project Co”) to acquire the 34 acres and to own, operate and maintain the Solar Farm.

Solar X Group and third party investors (high net worth and businesses and potentially the seller of the 34 acres to ProjectCo) will be the owners of Project Co. These third party investors typically invest in solar and renewable projects to benefit from the federal investment tax credit. Solar X Group will maintain economic and management control over Project Co.

The proposal does not contemplate a REIT structure. This will be a direct loan to a single project.

Project Co will use the proceeds of the first disbursement ($3,285,000) to purchase the site and undertake 3rd party engineering work and pre-development expenses. (See “Implementation Details” below)

Power Purchase Agreement

Once Project Co completes the 3rd party engineering work, Project Co will apply for a 20 year power purchase agreement (“‘PPA”) with Long Island Electric Utility Servco LLC (“LI ServCo”), acting as agent of and on behalf of the Long Island Power Authority (“LIPA”), which is a corporate municipality and political subdivision of the State of New York.

LI ServCo is the buyer under the PPA and LIPA, as principal, has ultimate and full liability for the obligations under the PPA (including payment obligations). LIPA is rated A2 (Stable) by Moody’s and A (Stable) by Standard and Poor’s. https://www.lipower.org/wp-content/uploads/2021/08/LIPA-June-2021-unaudited-financial-statements.pdf

PSEG Long Island, a wholly-owned affiliate of Public Service Enterprise Group (NYSE: PSEG), has managerial responsibility for the day-to-day operational maintenance of, and capital investment to, the transmission and distribution system owned by LIPA.

The PPA will have two tariff rates:

  1. A “Full Requirement Period” rate for the hours of 1 pm to 9 pm on all days.

  2. A “Dispatchable Period” rate for all other hours of the day.

Solar X Group anticipates that the “Full Requirement Period” tariff will be between $55.96/MWh to $83.94/MWh. Solar X Group used a conservative $44.77 (a discount of 20% from $55.96/MWh) as an input in its model.

Solar X Group anticipates that the “Dispatchable Period” tariff will be between $13.99/MWh to $16.49/MWh as of the first half of 2021. Solar X Group used a conservative $13.99/MWh tariff as an input in its model.

Solar X Group blended the Full Requirement Period tariff and the Dispatchable Period tariff inputs to arrive at a final tariff rate of $21.69/MWh for purposes of the model.

Solar X Group will co-locate 6MW of lithium-ion battery storage to enhance the Solar Farm’s revenue stream. The lithium-ion storage will allow Project Co to store excess electrical energy generated during daytime hours for sale during other parts of the day.

The table below shows the annual electricity production (including battery storage) that Solar X Group anticipates Project Co will sell to LI ServCo under the PPA. This includes a degradation factor of three quarters of one percent (0.75%).

Solar Farm Construction

Solar X Group anticipates that it will have a construction contract with AECOM. AECOM (NYSE: ACM) is an American multinational engineering company. AECOM’s senior secured bank credit is rated Baa3 by Moody’s and its Corporate Family Rating is Ba2. AECOM has extensive experience in the design, engineering, and construction of hydrocarbon, wind and solar power generation projects.

Source: https://www.aecom.com/wp-content/uploads/2019/07/23_ENV_POW_BR_0001_RENEWABLE-ENERGY_8.5x11_email.pdf

Specifically, AECOM has helped deliver more than 15 GW of solar projects globally.

Solar X Group will engage Koch Engineering to serve as “owner’s engineer” to supervise and advise on matters during the construction of the Solar Farm. The engineering, procurement and construction contract should provide for a standard allocation of risks and mitigations.

Solar X Group partners with the Cornell University Department of Engineering to support its environmental management of the project site.

Financing

MRWA Lending Company, LLC (“MRWA LendCo”), a Delaware limited liability company whose sole member will be MRWA Foundation Company (“Foundation Co”), a Cayman Islands foundation company, will purchase from Uprets US LLC, an unfunded construction and term loan agreement (“Construction Loan Agreement”), outstanding principal and interest owed by Project Co under such Construction Loan Agreement, and related collateral security interests (collectively, the “Financing Agreements”).

It is presently expected that MRWA LendCo will receive a true sale opinion from Uprets US LLC’s external legal counsel. The receipt of the true sale opinion will be a key condition precedent to the disbursement of any funds from the escrow account to Project Co (see “Implementation Details” below).

The true sale opinion represents a qualified attorney’s conclusion that the transferred financial assets (in this case, the Financing Agreements) have been sold and are beyond the reach of the transferor’s (Uprets US LLC) creditors. MRWA LendCo’s receipt of the true sale opinion is important given the weakened financial condition of Uprets US LLC’s ultimate parent company, Xinyuan Real Estate Co., Ltd. (see “Asset Originator Analysis” below).

Upon the acquisition, Uprets US LLC will not retain an interest in the loan or have any further involvement in the finance or the Financing Agreements. MRWA LendCo will be the sole lender to Project Co under the Financing Agreements.

The Construction Loan Agreement will provide for the following:

The loan proceeds will be disbursed in two stages: first, from MRWA LendCo into an escrow account at US Bank, and second, in accordance with a defined disbursement schedule, from the escrow account to Project Co. The disbursement schedule will be as follows:

  • Draw on the Construction Loan Agreement at its execution and fund $21,000,000 into escrow. This amount will accrue interest upon deposit into the escrow account. The $21,000,000 includes a budgeted 12 months of principal and interest (“Debt Service Funds”) that will be used to pay principal and interest on a monthly basis during the construction period.

  • The Escrow Agent will release funds to Project Co in accordance with the following schedule (subject to other conditions precedent to be negotiated with Solar X):

  • Month 0 - $3,285,000 to finance a portion of (1) Month 0-3 pre-development expenses and (2) acquisition of the project site ($3,000,000 acquisition cost). MWRA LendCo will have security over existing Project Co assets, which will principally consist of the site (value of $3,000,000).

  • Month 4 - 50% of remaining funds in escrow (excluding the remaining Debt Service Funds) upon execution of the PPA and issuance of the Notice to Proceed to the EPC contractor.

  • About Month 6/7 - 25% of remaining funds in escrow excluding the remaining Debt Service Funds) for outstanding construction costs.

  • Project Completion - 25% of the remaining funds in escrow (excluding the remaining Debt Service Funds).

Solar X has provided an estimated breakdown for the use of funds:

Solar X Group anticipates a 9 month project schedule, which includes 6 months from the notice to proceed for the construction of the Solar Farm to grid connection and commercial operation. The chart below is indicative as of July 2021.

Major risks

The Solar X transaction presents a number of risks. Broadly, the risks fall in the following categories:

  1. Risk that PSEG Long Island does not approve Project Co’s PPA application

  2. Construction Risks associated with an unconstructed solar farm

  3. Operational risks associated with the operation of the Solar Farm

  4. Loan administration risks

  5. Single Project Concentration Risk

  6. Environmental Concerns

Project Co’s PPA Application

Project Co will borrow approximately $3,285,000 to fund the acquisition of the 34 acres and fund 3rd party engineering and development costs. The 3rd party engineering and development work is necessary for Project Co to submit a PPA application to PSEG Long Island. There is a risk that Project Co does not make a satisfactory application to PSEG Long Island for the PPA and/or PSEG Long Island does not approve the application. In the event that PSEG Long Island does not approve the PPA application (even after resubmissions), Solar X will not be able to develop the Solar Farm.

Solar X Group has mitigated this risk by assembling a team of consultants with solar design, engineering and planning experience.

For MRWA LendCo, it will have a security interest over the land in the form of a mortgage. Without the PPA, Project Co will be unable to access any additional funds from the Escrow Account and, if MRWA LendCo accelerates the loan, it will have the ability to sell the land to a third party and potentially recover all or a portion of the $3,285,000.

RWA LendCo will receive a broker price opinion in respect of the project site prior to the initial advance. The broker price opinion will opine on the value of the project site.

Construction Risks.

The Solar X financing is for an as-yet constructed and pre-operational solar farm. As a result, MRWA LendCo and FoundationCo will have exposure to construction-related risks.

Broadly, Project Co, as a reasonable and prudent operator, should seek to mitigate construction related risks through its contractual relationships. Typically, in similar transactions, contracting parties will endeavor to allocate risks and the associated mitigations to the party best able to mitigate the particular risk. Project Co and MRWA LendCo will be aligned in respect of risk identification and mitigation. Schedule delay and/or increased costs are the two key adverse impacts of risks arising during the construction stage.

Solar farm projects will have exposure to a common set of technical and non-technical risks during the construction period.

Technical risks, include, as an illustration:

  1. PV equipment performance that is below the guaranteed performance parameters

  2. Accelerated degradation of the PV equipment

  3. The actual solar resource is less than the estimated solar resource

  4. Poor system design

  5. Site characterization and access risks

  6. Delays in manufacturing, transport and/or installation of PV equipment

Non-technical risks, include, as an illustration:

  1. The delay in the acquisition of permits and/or other regulatory authorizations

  2. The EPC contractor does not have the necessary construction and installation experience

  3. The negotiation and execution of the interconnection and power purchase agreement is delayed or not on commercial terms

  4. Higher costs and/or lack of availability of insurance (general liability, property risk, environmental risk, and/or business interruption)

  5. Site control

  6. General events of force majeure

Solar X Group models an installed cost of $2.55 watt/DC. The modeled cost is on the higher range of the installed price for similarly sized solar farms.

Source: Lawrence Berkeley National Laboratory, Utility Scale Solar Update: 2020 Edition, Nov. 2020.

Solar X Group has indicated that the Construction Contract will include the following terms to address common construction related risks:

  • A fixed completion price
  • A fixed completion date
  • Restrictions on the ability of AECOM to claim extensions of time and additional cost
  • Solar Farm output and performance guarantees
  • Liquidated damages for schedule delays
  • Liquidated damages for performance deficiencies
  • Procedures for change orders
  • Allocation of permitting responsibility between AECOM and Project Co
  • Security and guarantees from AECOM
  • Termination rights
  • Single, point responsibility of AECOM as contractor

While we have not reviewed the Construction Contract, the points above are typical in construction contracts for power generation facilities.

Operational Risks

Once the Solar Farm achieves commercial operation, MRWA LendCo and FoundationCo will have exposure to operational risks.

As with the construction period, Project Co, as a reasonable and prudent operator, should seek to mitigate operations related risks through its contractual relationships and allocate risks and the associated mitigations to the party best able to mitigate the particular risk. Project Co and MRWA LendCo will be aligned in respect of risk identification and mitigation.

Solar farm projects will have exposure to a common set of technical and non-technical risks during the operational period.

Technical risks, include, without limitation:

  1. PV equipment failures or defects that result in higher maintenance costs and/or lower electrical production

  2. Solar resource inadequacy that results in lower electrical production

  3. Inadequate operations and maintenance budgets that result in actual costs being higher than the modelled assumptions

  4. Delays in PSEG Long Island’s integration of the solar electricity into the grid

Non-Technical risks, include, without limitation:

  1. LI ServCo’s non-performance under the PPA

  2. Weather risk

  3. Power price risk

  4. General events of force majeure

At the present time, Solar X Group has not finalized its power purchase agreement with LI ServCo. Solar X Group has indicated that it anticipates that LI ServCo will use the standard power purchase agreement found at https://www.psegliny.com/aboutpseglongisland/ratesandtariffs/tariffs/-/media/FA416619D4A34149A7B4E28FA9413777.ashx

The average annual solar radiation for the area surrounding the Solar Farm site is 4.07 kWh/m2/day. Solar X Group provided the monthly average of solar radiation, anticipated kWh production associated with such solar radiation, and the estimated value based on a per kilowatt tariff of $0.2168 per kWh. The table below includes revenue associated with kWh production made available under the PPA as a result of the availability of battery storage.

The map below graphically represents the solar radiation for the part of Suffolk County where the Solar X Farm will be located.

Solar X Group models operational and maintenance costs of $32.40/kW. While this figure may be higher than the national average, the figure does include a measure of contingency and, in the event that actual amounts are lower, will improve the cash available for debt service.

Source: Ryan Wiser, Mark Bolinger, and Joachim Seel, “Benchmarking Utility-Scale PV Operational Expenses and Project Lifetimes:Results from a Survey of U.S. Solar Industry Professionals” Lawrence Berkeley National Laboratory, June 2020

Loan Administration Risks

MRWA LendCo will rely on a 3rd party service company for the general administration of the Financing Agreements. MRWA LendCo will not be responsible for the day-to-day administration of the Financing Agreements.

Uprets US LLC has not yet selected the servicer. To mitigate against any risks associated with the administration of the Financing Agreements, the 3rd party servicer contract will specify, among others, the exact rights and responsibilities of the servicer, on-going monitoring of the servicer, and MRWA LendCo’s right to terminate and replace the servicer. Uprets US LLC and the RWA Core Unit have reviewed several potential candidates but have not yet aligned on the servicer. The servicer should have sufficient experience, loans under management, and a willingness to service a $21 million loan (considered to be on the small size for many established servicer companies).

MRWA LendCo may elect to retain certain authorities and/or require the servicer to confirm in advance certain actions prior to taking such actions (e.g., satisfaction of disbursement conditions, amendments, waivers, notices of default and events of default, acceleration of the loan under the Financing Agreements).

Single Project Concentration Risk

The proposed financing will be made to Project Co. Project Co will not have any additional sources of revenue other than the PPA. As a consequence, there is concentrated risk in a single borrower and project. In the event that Solar X Group and Project Co are unable to successfully develop, operate, and/or maintain the Project, there is a material risk that Project Co will be unable to repay the Loan. The proposed 12 month debt service funding will provide assurance of repayment during the pre-development and construction stages. Further, RWA LendCo will have a mortgage on the 34 acres as collateral security.

Environmental Concerns

Notwithstanding the general public support for solar farm development in New York and its benefits in producing carbon-free electricity, there is a risk of environmental protest against the conversion of existing farmland for solar development. This risk is mitigated by New York State’s preference to develop solar electrical generation.

Outline

  1. Industry analysis

The State of New York seeks to accelerate the development of solar power throughout the state. New York’s Climate Leadership and Community Protection Act (2019) calls for installing 6,000 megawatts of solar by 2025 and 3,000 megawatts of energy storage by 2030. New York has established an extensive legal, regulatory and financial framework to support the overall development of solar power generation.


Source: www.seia.org/state-solar-policy/new-york-solar

The Solar Farm will be located in the Town of Mattituck, Suffolk County, New York. As of March 31, 2021, Suffolk County has 539.7 MW of installed solar production capacity across 35,364 projects. See Statewide Solar Projects - NYSERDA

The US National Renewable Laboratory identifies the following industry challenges and opportunities in its “H2 2020 Solar Industry Update” released in April 2021:

Source: www.nrel.gov/docs/fy21osti/79758.pdf

  1. Asset originator analysis

UPRETS originated the Solar X Group loan. UPRETS is a DeFi CRE lender and a wholly-owned subsidiary of Xinyuan Real Estate Co., Ltd. (“Xinyuan”), a NYSE-listed real estate developer and property manager primarily in China and recently in other countries. In China, Xinyuan develops and manages large scale, high quality real estate projects in over ten tier one and tier two cities, including Beijing, Shanghai, Tianjin, Zhengzhou, Jinan, Qingdao, Chengdu, Xi’an, Suzhou, Dalian, Zhuhai and Foshan. Xinyuan was one of the first Chinese real estate developers to enter the U.S. market and over the past few years has been active in real estate development in New York. Xinyuan aims to provide comfortable and convenient real estate related products and services to middle-class consumers.

UPRETS is focused on simplifying investment in real estate using Blockchain.

Currently, Xinyuan has a high bankruptcy risk due to its outstanding debt obligations.

Further, in April 2021, Xinyuan delayed the filing of its 2020 audited financials (20-F) as Xinyuan’s audit committee, with the assistance of external advisors, was conducting an independent review of certain transactions to assess their potential impact on the Xinyuan’s 2020 financial statements. As of August 20, 2021, Xinyuan had not yet filed its 20-F with the Securities Exchange Commission.

To address the bankruptcy and insolvency risk of Xinyuan (and indirectly, Uprets US LLC), MRWA LendCo will receive a true sale opinion from Uprets US LLC’s external legal counsel (see Highlights: Financing above).

Solar X Group will control and manage Project Co.

Solar X Group management includes the following:

Andy Strott - Founder/Managing Partner: Andy has 25 years experience in finance, including as senior executive with top-tier investment managers, Blackrock, Alliance Bernstein and MFS Investment Management. He has worked on the European continent, with responsibility to lead new initiatives. Andy has a strong and diverse background in real estate having structured real estate funds and joint venture opportunities as well as performing underwriting for investment in new development, multi-family development, net lease investment, non-performing loans, bridge and mezzanine financing. Andy holds an MBA from Columbia Business School.

John Cuneo - Founder/Managing Partner: John is a 30 year professional in real estate capital markets and lending markets. As well as extensive construction managerial and supervisory experience. He has brod efficiency in real estate acquisition and development financing, holding senior management positions at: JPMorgan Chase, where he was the Real Estate Department Head, Barclays Bank, where he was the Commercial Real Estate Lending Team Leader. John holds a Master of Science in Real Estate Finance from New York University, and a Master of Public Administration from Fairfield University.

Michaela Dibernardo - Managing Partner: Michaela has more than 20 years experience as a senior executive in institutional finance and investment. With an in-depth understanding of investment strategies, as well as brokerage and capital markets, she has worked with some of the largest mutual funds, pension funds, and hedge funds in the US and Canada. As a licensed professional at Alliance Bernstein and on the NYSE, Michaela followed banks, energy, biotech and fintech. She holds a B.A. from Rutgers University. She also holds a pending patent related to a residential renewable investment strategy.

Chris Koch, P.E. - Managing Partner: Chris is Principal Engineer and owner of Koch Engineering, P.C., which provides construction management engineering, construction support services and construction oversight for clients in the NYC metropolitan area. With more than 30 years of engineering experience, his areas of practice include: Plan & Cost REview, Construction Estimates, Construction Schedule Review, Scope of Work Development and Review, Construction Monitoring, Construction Budget Assessment, Construction Requisition Review and Project Equity Rebalance. He is a graduate of Manhattan College.

Robert Penney - Partner: Bob has a solar company that specializes in commercial installations, solar farms, car ports and residential homes. Bob installed a ground mount system of solar arrays (3 MW) on a farm in Virginia. He also installed 796 solar panels on the rooftop of a building in Brooklyn, New York.

Nick Grgas - Partner: Nick has a 20+ year career as a project manager in the construction sector. He has supervised over $600 million in general construction projects.

  1. Token issuer analysis

Not applicable.

Industry analysis

Provide an overview of the industry where the SPV asset will be, especially what are the risk, benchmark, and historical behavior. A market comparison with other lenders can be useful as well.

How do those assets respond in the event of a particular major economic event?

Solar projects that have long-term power purchase agreements and credit worthy offtakers can be considered very stable. As the solar farm does not have any moving parts (unlike a natural gas fired or nuclear power station), the operational and maintenance risks may be considered lower than other forms of power generation. The most material economic event to impact Project Co and the Solar Farm would be: (1) a material credit event for LI ServCo, LIPA, PSEG Long Island, and/or PSEG (i.e., bankruptcy), and (2) a material and negative change to New York’s current policies in favor of solar electricity.

What remedial measures might be undertaken?

In the event of a material credit event for LI ServCo, LIPA, PSEG Long Island and/or PSEG during the term of the power purchase agreement, it will be important to assess LI ServCo and LIPA’s willingness, as offtaker, to continue to purchase solar electric power from the Solar X Farm. In the event of a LI ServCo or LIPA credit event, there is a legal and commercial risk that LI ServCo or LIPA might determine that the power purchase agreement is out of market and “reject” (as permitted in bankruptcy) the power purchase agreement. The risk that either LI ServCo or LIPA, as instrumentalities of the State of New York, file for bankruptcy may be considered low.

A PSEG Long Island material credit event, as operator for the transmission and distribution system in Suffolk County, may have a material impact on the operations under the PPA. PSEG Long Island credit risk is mitigated by the fact that LI ServCo and LIPA are the contractual counterparties under the PPA.

A material and negative change to New York’s current policies in favor of solar electricity is unlikely to require any specific actions unless LI ServCo or LIPA defaults under the PPA.

What are the historical default rates in this industry?

No public information on aggregate historical default rates for solar developers is available.

Asset originator analysis

Focus on the asset originator and the kind of business that will be conducted in the SPV.

When was the asset originator incorporated?

May 13, 2019 and Project Co will be formed proximate to the execution of any necessary project and/or financing agreements…

What is the background of the asset originator managers?

See “Asset originator analysis” in paragraph 2 under “Outline”.

Solar X Group has engaged the following external advisors to support its development and financing of the Solar Farm:

Legal (Energy/PPA)

  • Gregory Lavigne, Partner - Allen & Overy (New York)
  • Brendan Keene and Dennis Mensi, Partners - McGuire Woods (New York)

Legal (Corporate, Real Estate, Regulatory)

  • Andrew Auerbach, US Regional Leader - Bryan Cave Leighton Paisner (New York)
  • Jay Yamamoto, Partner - Sichenzia Ross Ference (New York)

Land Acquisition

  • Steve Kirschner, Founder & COO - Principals Direct Group

Owner’s Engineer

  • Koch Engineering P.C.

Battery Consultant/Supplier

  • Fluence (a Siemens and AES company)

Environmental

  • K. Max Zhang, Professor - Cornell University - Engineering Department

Accounting/Auditing

  • PriceWaterhouseCoopers

Further, Uprets US LLC, as originator, engaged the law firm Gilmore & Bell, P.C. to prepare the underlying Financing Agreements.

How many deals has the asset originator already done? What is the notional amount?

Solar X Group management members and partners have been involved in the installation and operation of over 1,000 acres of solar panels at sites in Brooklyn, NY, Warren, PA, Mt. Olive, NC, Palmer, MA, Jetersville, VA, Wantagh, NY, and Hicksville, NY.

Has the asset originator experienced a default? What is the plan in case of default?

No. Uprets US LLC will sell the Financing Agreements to MRWA LendCo. From the date of such sale, Uprets US LLC will not be involved in the transaction and MRWA LendCo will not have any credit exposure to Uprets US LLC.

What is the due diligence they use to accept an asset?

Solar X Group will undertake an extensive due diligence prior to commencement of a solar project development. Solar X Group provided its internal due diligence checklist / workflow which addresses the following:

  • Regulatory support and tariffs, especially the duration and timeline for any incentives for solar power.
  • Suitable site identified taking account of site constraints.
  • Grid access (proximity, capacity, and policy provisions for access).
  • Identification of off-taker and available infrastructure to take the power generated.
  • Assessment of the site and boundary areas including access permissions and restrictions.
  • Approximate costs for land, equipment, delivery, construc- tion, and operation identified along with predicted revenue.
  • Indicative energy yield completed.
  • Identification of anticipated electricity tariff to be received, and review of expected terms/conditions of PPAs in the relevant market.
  • High-level financial analysis completed.
  • Cost and likelihood of achieving grid connection in the required timescales identified.
  • Main environmental constraints identified along with other potential “deal breakers.”
  • Assessment of current and potential future regulatory environment completed.
  • An initial concept of the project’s legal/corporate structure.
  • Solutions to project challenges.
  • Permitting requirements/costs identified.
  • Preliminary project timeline/workflow showing spacing of key activities drafted.
  • Solar resource assessed including assessment of shading.
  • Identify environmental characteristics that may affect performance.
  • Detailed review of environmental and social considerations conducted.
  • Detailed review of required permits and licences undertaken.
  • Assessment of Capex for technology and supplier options; cost/benefit for options and project location completed.
  • Pre-application discussions with relevant consenting authority undertaken. Initial consultations with key stakeholders including from the community completed.
  • Grid connection assessment completed.
  • Predicted energy yields established.
  • Further assessment of anticipated electricity tariff undertaken. Financial analysis carried out.
  • Preliminary financing planned.
  • Project implementation plan developed.
  • Options agreements for land access (where required) secured.
  • Evaluation and concept of the commercial structure of the project and project company(s) carried out.

What is the valuation model used?

EPC Phase: Market Valuation Model - Regression analysis of 279 solar farm transactions (globally) by Deloitte. https://www2.deloitte.com/content/dam/Deloitte/dk/Documents/pardot-downloads/Deloitte_Valuing_Solar_PV_Farm_Assets_Global_Mar2018.pdf

Operating Phase: Discounted cash flow model.

What is the nature of asset defaults for the originator, and the possible solutions?

The loan will be secured by a first priority security interest on all of the Project Co’s assets, including the land, improvements and the Solar X Farm equipment.

What are the historical default rates of the originator?

None.

What explains the difference in default rates between the asset originator and the industry?

Not applicable.

Issuance platform analysis

The assets remain fully off-chain and there is no on-chain issuance platform used.

Implementation details

Some details on the implementation are still worked on and some changes may occur until the closing of the transaction.

The implementation will follow MIP58 RWA Foundations (still in RFC). A Cayman Foundation (“Foundation Co”) will be created which will have a member-managed Delaware LLC (“MRWA LendCo”). MRWA LendCo will hold the construction and term loan note from Project Co. Further, MRWA LendCo will be the secured party under the security agreements.

Foundation Co

The RWF Core Unit is using the help of Ogier, a Tier 1 law firm for Trusts in the Caymans, to set up the Cayman Foundation. It is designed so MakerDAO can keep much flexibility. There is nevertheless a provision so the Foundation Co can continue to operate even if MakerDAO goes “dark” (governance attack, smart contract issue, Emergency Shutdown, …). A STAR Trust structure was also analyzed but was offering less flexibility for no additional benefit. A comparison between some Real-World Asset legal structures can be found here.

Foundation Co documents:

The director role will be filled by a global firm (~600 employees). The director will have a fiduciary duty to the Foundation.

The supervisor role and secretary position will be filled by a smaller Cayman Island firm. The Secretary is a qualified person under Cayman law.

MRWA LendCo

Foundation Co will establish MRWA LendCo, a member managed Delaware limited liability company to hold the asset (the Financing Agreement). It will be member managed by Foundation Co, thus inheriting the same security level as set forth in the FoundationCo organizational documents.

MWRA LendCo will retain an independent third party servicing firm to service the Solar X financing and manage the day-by-day operations associated with the financing (below is a non exhaustive list of duties for the Servicer):

  • Send invoices to the Borrower for payments due under the Financing Agreements
  • Review tax, insurance and replacement reserve escrows on an annual basis and adjust required monthly escrow payments
  • Confirm satisfaction of the conditions precedent to each disbursement from the Escrow Account
  • Send notices of default and events of default (subject to a DAO Resolution)
  • Coordinate, on MWRA LendCo’s behalf, modifications, work-outs and restructuring of Loans as may from time to time be required (in case of default)

Subject to FoundationCo and MRWA LendCo’s satisfactory completion of KYC, it is anticipated that US Bank, a subsidiary of US Bankcorp (NYSE: USB, $82.55 billion market cap) will serve as the escrow agent.

The escrow agreement will identify the conditions precedent required for each disbursement (including the initial disbursement into the escrow account).

The more general conditions precedent will likely include, without limitation, the following:

  • Project Co has received its required equity contributions to ensure the contractually agreed debt-to-equity ratio.

  • No default or event of default exists or is continuing.

  • Project Co’s representations and warranties are, as of the date of the disbursement request and the date of the disbursement, true and accurate in all respects.

  • Each of the Financing Agreements executed as of such date are the legal, valid, binding and enforceable obligation of Project Co.

  • Project Co does not have knowledge of the breach of any covenant.

  • All Financing Agreements required to be executed at that time, have been executed, and all security interests intended to be created by such time have been perfected.

  • The servicer will have received each of the legal opinions required by the Financing Agreements, which will include opinions from Project Co’s counsel.

  • Project Co will have delivered such documents to the escrow agent as required by the Construction Loan Agreement, including, a zoning report and a broker’s price opinion.

Each disbursement may include, in addition to the above, such other conditions precedent appropriate for the relevant disbursement date (i.e., execution of the PPA and issuance of the notice to proceed to the EPC contractor).

The Servicer will review and confirm satisfaction of each of the conditions precedent required for disbursements from the escrow account. The servicer will instruct the escrow agent when the servicer is satisfied that Project Co has satisfied each of the conditions precedent to the disbursement.

A broker will be used for the DAI (MIP21 conduit) <-> USD (US Bank escrow account). Either Foundation Co or MRWA LendCo will be the named account holder with the broker. To address any leakage from the broker account, there are a few protective measures to be discussed with the broker, including, one or all of the following:

  • The dollar account number and DAI wallet address will be specifically referred to in the broker account agreement.

  • The broker agreement will expressly provide that upon receipt of any dollars to the account of Foundation Co or MRWA LendCo (as appropriate), the broker shall automatically, without further instruction, convert such dollars into DAI and direct the DAI to the DAI wallet address.

  • The Foundation Co or MRWA LendCo organizational documents will expressly provide that no director, supervisor, officer, secretary or other authorized person may amend the broker account agreement without an affirmative DAO Resolution.

  • Foundation Co or MRWA LendCo (depending on the account holder) will provide the broker with the organizational documents referred to above together with a certification to the broker that no director, supervisor, officer, secretary or other authorized person is authorized to make amendments to the broker account agreement.

The express references to the dollar account account number and DAI wallet address, the requirement for automatic exchange and transfer of DAI to the DAI wallet address, the contractual restrictions on amendment of the broker agreement, the express limitation of authority in the organizational documents, and the certification delivered to the broker, will ensure that the broker only follows the terms of the broker agreement and that dollars are converted into DAI and sent to the DAI wallet address. Any amendment to the broker account agreement will require a DAO resolution.

Based on the above, it is our view that control by third parties over the cashflow (including DAI) is quite limited. The destination wallet address is under control of MakerDAO. Any change of the broker agreement would need a MakerDAO Resolution. The escrow account will be under supervision of the escrow agent.

In addition to concluding whether Project Co has (or has not) satisfied each of the conditions precedent to disbursement from the escrow account, the Construction Loan Agreement will require MRWA LendCo to administer the loan. Thus, even though MRWA LendCo will engage a service company to undertake non-commercial tasks in respect of loan administration, it is anticipated that commercial decisions in respect of the Construction Loan Agreement (waivers, amendments, defaults, and the like) will require MWRA LendCo to make a decision.

Acting through DAO Resolution is one solution but Governance might delegate such decisions to a RWA-focused Parameter Proposal Group or a RWA Core Unit specialized in RWA management. That will lead to a fully autonomous vehicle and keeping MakerDAO remote from the management. MakerDAO, through a DAO Resolution, will retain the ability to step in when/if needed.

The types of decisions that Governance might delegate to a RWA-focused Parameter Proposal Group or a RWA Core Unit include:

  • Notifying the borrower of a default
  • Authority to take time sensitive measures to project lender rights
  • Immaterial (non-monetary) waivers under the finance agreements
  • Immaterial (non-monetary) amendments of the finance agreements
  • Administrative matters to maintain MWRA LendCo’s security interests
  • Authorize payments of administrative fees, costs and expenses for loan management

More importantly, Governance might retain certain decisions for a DAO Resolution:

  • Approving MWRA LendSo’s execution of finance agreements
  • Notifying the borrower of a event of default
  • All other measures to protect MWRA LendCo’s rights
  • All other waivers and amendments under the finance agreements
  • Initiate and enforce rights and remedies under any finance agreement (e.g., loan acceleration, collateral enforcement, etc.)

Proposed covenants

The Construction Loan Agreement will set forth affirmative and negative covenants customary for transactions of this type, including limitations on change orders under the EPC Contract. The Construction Loan Agreement will also set forth events of default and cure periods customary for transactions of this type.

Allowed investments

At this stage, only one investment is contemplated as detailed in this risk assessment. Additional investment in a similar SolarX project will require a Maker Governance action (increasing the Debt Ceiling).

Minimum SPV CR ratio

For this section, the SPV is “Project Co”. At MRWA LendCo level, there will be a security interest in the assets of the SPV.

SPV Collateralization ratio formula

This project use the loan to cost metric (LTC):

Loan to cost = loan principal amount / expenses & investments at cost

This formula will be inverted in order to obtain a collateralization ratio (collateral being evaluated at cost).

Collateralization ratio proposed threshold

133% (equivalent to a 75% LTC)

Minimum Vault CR ratio

The vault CR is 100% as there will be no overcollateralization at the token level.

Minimum Vault Underlying CR ratio

This is the result of SPV CR * Vault CR if all the SPV debt is used as Vault Collateral. Check the RWA Documentation for more information.

133% (100% for Vault CR ratio and 133% for SPV CR.

Concentration risks

There is only one investment so the concentration risk is high.

Stakeholders rules

There is only one direct loan so there are no stakeholders.

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Are there alternative sources of cash flow? Because this chart only gets to around 300k/year at the $21.69/MWh. Later there is this:

This does get to a level of revenue to cover interest + principal on a 20 year amortization. But shouldn’t the kilowatt rate be $0.02168 rather than $0.2168 if a megawatt rate is $21.69? Or is the megawatt rate $216.80?

I believe that’s per acre. Assuming yes, 34 acres X 300,000 = $10M+
But yes, from my readings this type of business yields somewhere around 10%-15% annually. So, nowhere near as crazy daisy as crypto.

Thanks for the write-up @christiancdpetersen!

I want to echo what @PaperImperium has mentioned:

A typo might have slipped somewhere misrepresenting the price. IMO it is highly unlikely that anyone would accept $0.02/kwh as projects usually achieve some sort of breakeven around $0.15/kwh, $0.21/kwh making hence a lot of sense.

Of course there is a ton to unpack, but I really wanted to emphasize this:

It is very clear that solar, in its current state, is vastly uncompetitive ($/kwh) in most areas of the world for commercial energy production. A favorable PPA is by far the most important component of a successful site. I am very happy to see that the actors seem to understand this.

This is also quite encouraging.

If I understand correctly, the actors would still go forward with buying the land without having secured a PPA and given a failure of agreement, land would fall in the hands of MRWA, which is a Maker-controlled entity? Could you just explain a bit what would be the process given this scenario regarding governance and decision-making i.e. who would decide on the course of action?

Overall, I think the project is awesome, not only from a financial perspective (solar is a great business given good conditions), but also from a social/reputational perspective for Maker. I hope this will be reflected accurately in our marketing strategy (even if we don’t have a Marketing CU at the moment), because it would boost popular opinion of the DAO significantly IMO.

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300K per acre is probably no longer a farm

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Am i reading this right that there is zero down and basically relying entirely on a real estate broker opinion and a DCF?

It’s definitely not. A slide error occurred at least in some of the graphics, since they match up perfectly other than being off by a difference divisible by 9. Also, just visually you can tell.

The question is whether the slide error is just in the graphics or if it’s at an earlier stage in the material. If it’s earlier, then this section may also be fairly different:

If it’s just in the graphics, then we need to know which one is incorrect. The first graphic is consistent in units of MWh<>kWh with the latter one, though, so the discrepancy is likely with the price and not the units produced.

My guess is the blended rate is actually supposed to be $216.90/MWh, since $21.69 doesn’t provide enough revenue to service the loan without significant alternative sources of revenue. But $216.90/MWh would also mean a lot of the inputs before it all suffered from a slide error at the same time.

Anyway, let’s wait to see what the scoop is.

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My apologies the error. @PaperImperium is correct, the blended final tariff rate is $219.90/MWh. The Full Requirement Period tariff is $447.68/MWh and the Dispatchable Period tariff is $139.90/MWh. Solar X anticipates ~$3 million in operating revenue in year 1. The operating revenue decreases slightly each year thereafter based on the degradation factor of 0.75%.

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@jameskmccall Solar X Group has indicated that, based on both guidance from independent third party brokers and comparables, the 34 acres has a market value in excess of $3 million. Solar X Group has requested a broker price opinion from Brown Harris Stevens. Solar X has also indicated that, to make up the difference, Solar X Group will pay the landowner with a portion of the tax credits generated by the Project.

@NH98, you correctly note that the disbursement of a portion of the loan to Project Co in advance of an executed PPA is a material risk. It would be customary in a traditional project finance structure that Project Co have signed the PPA as a condition precedent to the 1st disbursement. Having said that, MRWA LendCo will have a mortgage over the 34 acres in the event that Project Co does not sign a PPA.

We structured the Articles of Association of Foundation Co to require an affirmative DAO Resolution before MRWA LendCo can (a) issue a default or event of default notice or (b) exercise rights and remedies under the relevant financing agreement. As FoundationCo will manage MRWA LendCo as a member-managed Delaware limited liability company pursuant to a simple single member operating agreement, the decisions will rest at the FoundationCo level.

Technically, if there is an affirmative DAO Resolution to take a specified action, the Director of FoundationCo will cause FoundationCo to cause MRWA LendCo to take the relevant action. (see clause 4.12 of the draft Articles of Association and Schedule A of the draft Articles of Association).

In terms of the “on-ground” actions to sell the property, the Servicer will be acting for MRWA LendCo.

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I’ve actually worked on a quite a few of these projects (including for AECOM), but have never seen under the hood for the financing relationships. So bear with me if I ask a stupid question.

If this is standard practice, is there a reason why we are deviating from it?

Also, just to confirm, the exchanging of DAI for USD occurs on our end rather than the borrower? This deal is denominated in USD rather than DAI?

I am generally inclined to support this project. It would be a good test of this foundation structure, though I do not want to see lots of projects under the same entity. I’m not stoked about the 5 year term, but with the rate pegged to SOFR it’s not really fixed. I’m on the fence leaning yes, in case anyone wants to point out pros and cons that have not yet been voiced.

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Solar X requested the disbursement of funds in advance of the PPA so that it may (a) acquire the 34 acres, and (b) have adequate funds (both debt and equity) to complete the preparatory work (e.g., engineering) required for the PPA submission.

From a risk perspective, Solar X’s inability to secure the PPA is mitigated by MRWA LendCo’s mortgage over the 34 acres. Further, Project Co will not be able to access any further funds from the escrow account.

While the pre-PPA disbursement may not be typical in a more traditional project financing structure, an alternative view may be that the 1st disbursement is equivalent to a secured working capital loan.

Yes, the deal will be denominated in USD. We will be converting the DAI to USD.

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I am still digesting this but what sticks out.

  1. Does anyone have a stake they will lose here. If so who, how much, where, and when could they lose it?

I read this but no parties or amounts are listed.

When, who and how much shows up to fund this how?

  1. Who holds the property currently and what is the property transfer history, dates, parties, amounts?

  2. I have serious concerns over the control of costs with the operational intermediary.

  3. There is something that doesn’t sit right with me here about the total loan $21M basically paying up front for everything and asking for their first years interest to boot. This sticks out like a sore thumb that again there are no parties with any risk here.

My biggest issue is the property ownership history at this point. Is there any way we can get a prospectus on this whole deal. This looks like something that should go to high risk investors but I am thinking this is so high risk that maybe if we wait we can do better. Find someone looking to do solar that will have 5-10% skin in the game as this helps us buffer our risk profiles and make sure RWA borrowers have interests aligned with Maker as the creditor

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The owners of Solar X Group will be required, as a condition to the initial disbursement from the escrow account, to fund Project Co with equity so that the debt-to-equity ratio is maintained (i.e., debt and equity are funded on a pro rata basis). Solar X Group will only be able to demonstrate satisfaction of this condition precedent by showing evidence of the equity investment in Project Co. This could range from audited to unaudited financials (or other satisfactory evidence). If Project Co does not have the equity contribution to meet the debt-to-equity ratio requirement, there will not be any disbursement.

The same concept will apply for each subsequent disbursement.

Most solar projects in the US are driven by the tax credit generated by the project and potential “tax credit” investors will invest closer to the start of commercial operations. We do not have the names of such “tax credit” investors. Solar X is unlikely to provide us with such names.

We have not, as part of this initial diligence process, investigated the current status or past history of the property (owner, etc.). However, the Construction Loan Agreement includes conditions precedent to the initial disbursement, among others, that (A) MRWA LendCo received the Title Policy insuring the Mortgage, (B) the property will be acquired by ProjectCo free and clear of liens and defects, (C) MRWA LendCo received the broker price opinion and a zoning report (all being satisfactory to MRWA LendCo). We can certainly request the historical information on the property at this stage, but we structured the Construction Loan Agreement to provide us visibility on these points as part of the disbursement process.

By “operational intermediary”, do you mean MRWA LendCo or ProjectCo?

The $21 million will be funded into escrow with US Bank and subject to conditions precedent for disbursement to Project Co. In the worst case, Project Co never satisfies the conditions precedent for disbursement from escrow in accordance with the proposed disbursement schedule, and the full $21 million is returned to MRWA LendCo.

Of course, we could time the funding of amounts into escrow in accordance with the proposed disbursement schedule. In this case, DAI is only created when Project Co satisfies the conditions for each disbursement.

As RWA financing via DAI is reasonably novel, Solar X Group may have concern that it has made financial commitments and satisfied the conditions precedent for a specific disbursement, but the DAI is not forthcoming for whatever reason in respect of that disbursement.

We have sought to address this concern by locking the funds (USD) in escrow until such time that Project Co satisfies the relevant conditions precedent for release in accordance with the disbursement schedule.

In terms of “skin the game”, Project Co will have to satisfy and then maintain the required debt-to-equity ratio as a condition to access the escrow amounts. By definition then, there will be “skin in the game”.

The point is noted. If the acquisition of the property is an issue, Maker could seek to delay the 1st disbursement until the property is acquired and the PPA is executed.

My observations regarding maintenance of debt-to-equity ratios will continue to apply, but in this case, we will require a larger portion of the equity upfront. This is a perfectly reasonable approach and common in some projects (e.g., LNG liquefaction project financing for example).

As presently structured the debt and equity is funded on a pro rata basis. This is also an acceptable approach.

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Barring any startling new information, I will be supporting this when it goes up for a vote next week.

I’m nervous about project finance and the term, but the pared-down scale and my personal familiarity with the construction process for these farms makes me think this is a good risk/reward. The biggest risk in my eyes is prior to getting the PPA, and the value at risk is quite low at that point.

It will also be a reasonably sized bite of the apple to kick the tires on this RWA Foundation structure, though my support for this one-off project should not be construed as an expression of support for it generally. In particular, I do not like the idea of stacking lots of projects into a single entity.

We should also be cognizant of the optics of this project. This would be proof that crypto can provide jobs + green energy, and be a sound rebuttal to those stating crypto is only a casino for speculation. Additionally, this is a Republican district in a Democratic state that is the most important for financial activity and regulation within the US. There are lots of constituencies that are likely to be happy about this if we make them aware of it. While not worth the cost of the project in total, for the amount at risk before securing an agreement with an investment-grade counterparty for the PPA, the cash at risk for the initial land purchase is in my opinion worth the risk.

The rate is also not really 5.8% according to the summary PDF. It is 550 bps over SOFR. SOFR has been nailed to the floor since March of 2020, and this is a number that can (but not necessarily) go up substantially over the life of the loan. March 2020 began with around 160 bps for SOFR, which is fairly typical. That gives us positive exposure to higher interest rates, which is why I think the term of 5 + 5 is acceptable.

I think we should all also — myself included — thank @christiancdpetersen and especially @SebVentures for shepherding this proposal for months to get to this point.

Disclosure: I have performed cultural resources consulting services in the past on multiple projects for AECOM.

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I’m not an electrical engineer so forgive me if I’m wrong on technical issues. My experience with PV systems is older, it is possible that the system you are designing may already be immune to these problems common to older solar systems.

What I am missing from your description:

  • It mentions the radiation values and the annual degradation of the system, but I couldn’t find any data on other efficiency-degrading weather parameters such as average area cloud cover and temperature. Both cause significant production losses. In cloudy weather the radiation decreases while in high temperatures the efficiency of solar cells decreases. These must be taken into account. The data given in the solar cell data sheet is valid for an ideal situation, which will be lower in the actual operating conditions.

  • The efficiency of the solar system is highest at medium radiation levels, and most of the energy produced annually is generated in this range. As you state in your table, higher irradiance = higher power output is only true under optimal conditions, which is not always the case in nature. (Rather, it never is…)

Failure to take these into account may lead to a significant overestimation of the actual system performance. Accurate prediction of system performance can reduce the risk of investment, and performing calculations based on accurate models is vital.

  • Is it not possible to feed power directly into the grid at this scale? Building out a battery system is a significant additional cost, plus a source of errors and degrades the overall efficiency of the system (inverter and battery losses).
    Has this option been explored? If so, what is the difference in net present value (NPV) between the two investments?
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My problem with this whole proposal is everything is ‘backended’.

After we put up the 21M - we learn ‘the details’.

Literally Maker takes on ALL of the risk and everyone else gets all the benefit(s).

I honestly think Maker can and should do better than this type of proposal and saying yes to this means Maker lowers the bar on RWA standards even lower than it already has.

Maker should insist on a certain level of up front openness with information and a certain level of upfront equity so Maker knows the stakeholders in the projects actually have a material stake and not just a ‘made up after the fact stake’ of some uncertain value.

I would have to look back to be sure but I think it is ProjectCo basically using PSEG Long Island.

The question is not answered. What is the notional value of these projects?

Again I see nothing of details of what (if any) is the real equity interest being put up by whom here. This is my real sticking point. I see nothing that shows where any party on these deals is going to put up $.01 much less 33% on 21M (6.6M) anywhere and I am being told that this information will materialize once the 21M is escrow’d.

Had the land been purchased and put up as collateral equity on a 18M borrow (to show a 15% equity stake) and the PPA in hand. I would be much more supportive of this.

Based on a number of Solar installations I am aware of - cost vs. return on doing Battery storage is prohibitive. I see nothing in the proposal here even suggesting why this is preferred. I also do not see a real analysis of conditions/situations based on historical weather, cloud patterns that could materially affect the success of this project.

There are so many things about this proposal I simply don’t like. These players say they have done 1000 acres of installations. If these things are so profitable then why can’t they even use SOME of the profits from those installations to fund some of the initial equity here.

Then why if they are going to use the ‘tax credits’ to pay for part of the land is it still listed at 3.285M? 3.0M listed on the ‘detailed cost breakdown’? There is nothing in the listed costs that show this exchange of the 'tax credits against land sale imo). Permitting listed at 21.8K, environmental at 25K and legal at 826.7K…

Also even when I take the 25.5M/21M I get 121% based on cost paid. 1.33 would mean a SPV after all is said and done of 27.9M a lot of these costs will only have value if the project gets the required permit (if this fails I expect the land likely would not be worth as much and the tax credits are useless in this case) performs. A whole 20% of the upfront project cost is for batteries btw. They could cut the project cost by at least 20% doing away with this aspect of the project and improve the overall profitability dramatically.

This honestly looks like the deal is structured so that Maker takes on all the risk as pretty much the sole investor and all the other parties get all the upside. Were I myself looking at investing in this I would personally pass based on a few key points.

  1. investors bear the complete brunt of losses (this basically falls on Maker) while all the other parties participate in upside all for a fixed return at what 5.5%+
  2. incomplete upfront material information on land history.
  3. lack of upfront investment by any party here.
  4. I see zero justification for the $5M for batteries - this part makes no sense to me based on other solar investment projects I am aware of personally.
  5. Project prospectus does not include scenario situations should performance, weather, operational costs exceed the optimal situation.
  6. Project conditional on PPA (this should have been in hand)

Other issues are basically related to Project structure.
What is the path of DAI to USD and back? Who handles the money? Same with equity liens. What is the custody path to the DAO here. Who has operational say so, should this deal fall through at PPA stage of property disposal. Who is on the hook where for the expenses to hold the property while a sale goes through (taxes, etc.). Who decides what to do with equity if at any point this deal fails to perform (exit clauses). Who is the entity that is not just setting up the performance clauses for release of funds, but who is providing the quality assurance performance has been met TO release the funds. I don’t have a good feeling for the ‘disaster scenarios’ here and what happens to the cash against the collateral. I didn’t get into any of the details of the structural issue because my feeling here is the lack of upfront equity and a stakeholder standing to lose some equity if this deal goes south makes this deal a high risk for the reward than I would otherwise like to see coming to Maker.

Based on other investments I have seen as an investor I am rather sure I could take on less risk, get more upfront equity by the players (assuring me some people actually have vested interests in success and will lose their stakes if it fails) and/or get a better return for the investor risk being undertaken here. Maker is basically putting up virtually all of the funds, taking on all the loss risk, for basically a fixed rate of return that isn’t guaranteed by any other equity or investor. I honestly am not even sure a bank would take this on given the way the deal is structured for the returns being offered.

I know team probably has done a lot of work but I am sorry @SebVentures and @christiancdpetersen as this stands I just can’t support this particular project.

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My two cents. I like the PPA concept - the term, the public entities on the other end (mainly LIPA) and the Triple Net type of agreement which this could become. The thing I don’t like is that it’s just an idea, there’s not even an HoT/LOI in place.

If there’s no other way to secure the PPA and we “have to” take this deal forward… then I’d just try to think of the value of the land (what’s it worth if there’s actually no way of getting the PPA and so building the solar farm) and how to mitigate this risk (pro valuation would be helpful). Again, if we have to take this forward, I’d go with a lower ratio, let’s say 60/40 for the land acquisition (so we put in 1,8M they put 1,2M) with first lien mortgage for us. Afterward we could refinance with a higher ratio…

For me the PPA is fundamental here and so my honest recommendation (unless we plan on owning a piece of land here and there :wink: ) is to get the PPA in place first, before making any contributions, which in this case (as I understand) would require them to buy the land (which is a typical case in project finance, sort of skin in the game point).

One additional remark - currently more and more investment firms apply an ESG risk perspective to the transactions. I believe it could be beneficial also for us to take at least the Environmental element into the assessment. Here’s a Climate Check report I ordered for this particular property:

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This is super awesome–thank you for providing this! I just realized this is Wine Country for Long Islanders/New Yorkers.

“This property has a relatively high risk of fooding through 2050.”

Do you happen to know how they determine that in the next 29 years there will be such an event. For Miami I would definitely see this happening – but for this region of Long Island? :thinking:

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I agree that the PPA is fundamental to the overall transaction.

Your proposal to reallocate the debt contribution to 60:40 for the land acquisition is sensible, with a readjustment to 75:25 upon receipt of the PPA.

I agree with this as well. However, it may a challenge at this point to create a general framework that applies to the myriad of to be assets seen by Maker. Real estate vs. cannabis vs …

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