@omahalawyer and @paperimperium
Thank you for the questions on the Solar X preliminary risk assessment. For the preliminary risk assessment, my intention was to assess MakerDao’s appetite for a construction loan and the proposed disbursement schedule – specifically lending to a project during the pre-feasibility study phase and then its construction phase.
I did not anticipate each of these helpful questions for the preliminary risk assessment, so my apologies for its incompleteness. We will more fully respond to each of your questions in the more comprehensive risk assessment (Comprehensive Risk Assessment), where we will describe the transaction timing, ownership structure, overall project budget, project schedule, project risks and mitigants and counterparty risk in greater detail.
However, to provide further context for the Solar X transaction:
The borrower (Project Co) will be owned directly or indirectly by third party tax investors and Solar X. As noted in an earlier response, we will discuss with Solar X their expected equity percentage in Project Co. For reference, the debt-to-equity ratio will be 75:25.
We do not expect either Solar X or Project Co to be a Xinyuan Real Estate (Xinyuan) or UPRETS corporate entity. Typically, we will legally confirm this separation via (1) representations and warranties in the loan agreement, and (2) viewing of Project Co and Solar X’s cap table. If our assumption is incorrect, we will review whether there may be any acceptable mitigants to Xinyuan’s credit risk. We will clarify this point in the Comprehensive Risk Assessment.
We had inquired as to whether UPRETS could (or would) make a loan to Solar X or Project Co in connection with the property acquisition. The answer we received was “No” because of UPRETS higher cost of capital. It is for this reason Solar X sought initial financing from MakerDao to acquire the underlying land and fund pre-feasibility costs (Months 0-3).
As we structure the actual transaction documents, we will assess whether or not there will be any impact from Xinyuan’s debt situation. One way to address the risk is to fully keep the loan (as an asset) off UPRETS books. We will discuss this further with UPRETS, Solar X and external counsel. We will address more completely in the Comprehensive Risk Assessment.
In terms of the overall financing, we envision that, as the sole lender to ProjectCo, MakerDao (indirectly through Delaware LLC and FoundationCo) will have a first priority security interest over all of Project Co’s assets (including its shares). The exact form of security interest will depend on the underlying asset. But at a minimum, there will be a mortgage over the underlying land and related fixtures. We would also envision a security interest over contract rights. External counsel will undertake appropriate lien searches to ensure that the property is unencumbered, and that Project Co and Solar X do not have any existing liens over any other assets. To the extent that due diligence discloses any existing liens, such liens will have to be removed prior to any funding. The loan agreement will include appropriate representations, warranties and covenants in respect of liens.
The fair market value of the secured assets will increase over time as the solar farm is developed. At a minimum, the land will have a fair market value equal to its acquisition price ($3,000,000). Solar panels, equipment, etc. will also have an independent fair market value. Solar X anticipates that, typical with other solar projects as evidenced in third party studies, the completed Solar farm will have a value of $32 million as of the commercial start date. For a third-party valuation model, see 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
For this proposed transaction, Solar X does not propose to utilize the REIT structure set forth in its original MIP6 application.
In terms of background, Solar X management includes:
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.
Finally, UPRETS’ role, to date, has been more to facilitate the transaction. It has, for instance, engaged external legal counsel to prepare the underlying loan agreements and been responsible for the day-to-day schedule management. So far, I have been satisfied with external legal counsel. Claymore K. Hardman | GilmoreBell External legal counsel is preparing the documents from a lender perspective, and they continue to interact with me in that process.
Please let me know if there are any further questions.