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Ep356: How Developers Can Turn Land Into Growth Capital
00:21:26
In host Jim Berger’s first episode, Laura Pagliarulo, CEO of SolaREIT, discusses how solar and battery storage developers can use real estate assets as a source of capital to fund project development, construction readiness and pipeline growth.
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- [00:04]
A
Welcome to Currents, a Norton Rose Fulbright podcast. Before we get started today, I wanted to introduce myself. My name is Jim Berger and I'm a partner in the Projects Group in Los Angeles. I help clients acquire, build and finance renewable energy projects across the United States. I'll be taking over the hosting duties for the podcast from Todd Alexander. I want to thank Todd for all the great work he has done with the podcast. Today we are recording with Laura Pagliarulo, founder and CEO of Solar reit. Solar REIT is a real estate company focused on providing flexible capital solutions for solar and battery storage real estate. Thank you for joining us today, Laura.
- [00:43]
B
Thanks for having me, Jim.
- [00:44]
A
So I want to first talk a little bit about what solariit does. I understand you operate at the intersection of real estate and energy finance, which isn't necessarily where most people's minds go when they think about the capital stack, for example, for a project. So can you explain a little bit about what you do for developers who never really thought about their land as a financing tool?
- [01:06]
B
Yeah, absolutely. So essentially what solarit does is. You nailed it. We work primarily with developers across the country and we help them monetize the land or the leases under solar and battery storage projects. So. So what we found historically, we've been around for a little over five years, is that developers historically have overlooked land. It's mostly perceived as just an asset to manage in terms of cost. What we help them do is actually turn that asset into liquid forms so they can use it for alternative sources of development capital.
- [01:43]
A
Great. And I saw on your website, I think you have kind of three main products. Could you just touch on those a little bit so that people understand how they can turn those solar assets into or the land assets into cash?
- [01:56]
B
Yeah. So primarily, you know, we have a, obviously a land purchase product, we have a easement purchase product, and we also have a solar and battery land loan. Essentially, if you have a solar project, for example, that's at ntp, will buy that parcel of land or easement or do a loan based on the lease value of the project. So. So we're not looking at land comps or appraised value. We're basically assigning upfront payment for the value of the lease itself and giving that cash to developers. So one example would be if there's a developer out there who has a purchase option, and let's say the purchase option's for a million dollars because potentially they locked it in a few years ago, we can occasionally pay multiples on that because the lease value is Worth more. So our business is very simple. We deploy cash on day one and collect rent payments over time.
- [02:54]
A
And one thing I've seen in my practice, and we touched on it during our annual cost of capital, is that the lending market for the clean energy industry is deep, but it's increasingly selective. There's capital, but it's not equally available to everyone. So what does that actually look like on the ground for the developers that you work with?
- [03:17]
B
Yeah, I mean, I think everyone's feeling it right now. Capital is obviously very much available to the largest and most established players across the board. Everyone's pulling forward construction timelines. So construction spend that was out there over a year or two, they're pulling forward those timelines. And unless you are small to mid sized developer that has a relationship with a very established sponsor or obviously you're a larger player, you're going to have trouble accessing financing right now. So you know the costs are real. We're seeing a lot of our partners using the funds from the real estate to pay for things like interconnection costs, equipment down payments a lot to support their safe harbor strategy. But no, it is, there is definitely the same capital is available, but everybody needs more of it now. So we're seeing that very much across the board.
- [04:20]
A
Okay, I can see the attractiveness of your products for these smaller and mid sized developers. Do you also see it as attractive for some of the bigger players, those with a lot of sponsor equity behind them?
- [04:35]
B
Yeah, it really depends on how they're set up. So we're seeing a lot of interest right now from operational projects where the developer owns land underneath those projects. Essentially. Some of those have been operating for years. Some of them are coming off of that tax period. And you know, when we started this business five years ago, I will say that, you know, it was only the large scale utility players that knew how to leverage real estate as part of their capital stack. Now more developers have an understanding of this.
- [05:05]
A
So.
- [05:05]
B
So we work with all different types of partners and it just depends on the unique situation. So across the board we're financing deals at ntp, but the liquidity we are creating at NTP is then used to fund other projects that are earlier in the pipeline. And that's true for the larger players as well as the smaller players because it's just about what their cost of capital is.
- [05:28]
A
Okay, that makes a lot of sense. You mentioned operating projects. So let's talk a little bit about the developers who have operating projects and come to you. So they've got the Land under their assets that are already generating revenue. What can they be thinking about how they can monetize that land and what can they actually do with it if they come to you?
- [05:51]
B
Yeah, so if a developer came to us with a parcel of land with an operating solar asset, we don't see that as much with batteries. But our first step is really to get the parameters of the lease itself, if there is a lease. Otherwise we can put one in place and really determine what we could pay for that parcel of land. So we'll look at things, you know, obviously what the cost is per acre, what's the escalator, how many years are left on the lease itself, are there extensions? And then, you know, nine times out of ten would that developer paid for the land years ago were able to pay a much higher spread on that property. So, so they're taking this. Essentially, if you think of a lot of these developers or even sponsors, a lot of times they've just bought land over time because it was just a necessary thing to do. It's not basis eligible. They just had to buy the land in order to get the project done, which is where their focus should be. We're now coming in and saying, hey, you're sitting on a pile of assets that we can help you liquidate and you can use that cash however you want. So that's the easiest transaction we do because obviously operational projects carry very little risk.
- [07:02]
A
Okay, and what is your experience in terms of going through this process once you have an operational project in terms of lenders and tax equity? Because I know I have to imagine every debt deal and tax equity deal out there would require consent for this to be done. Do you find lenders and tax equity investors generally open to sponsors doing a transaction with you?
- [07:28]
B
Yeah, what we found is they're very much agnostic. So, you know, in terms of who the landowner is, you know, our, you know, we don't touch a lease. We step into an existing lease. We're not changing the terms of the lease. So, you know, our business is really based on, you know, from day one and very much carries through to today, making it very simple for developers to work with us. And that means we're not changing the terms of the lease. We make it very easy for easements to be signed, estoppel's to be given, which is just a function of asset management over time. So no, we haven't received pushback. I think the only time where it could get complicated is if we're brought in right before financial close and you're introducing a third party into the discussion. Typically what we say is we have done those transactions. Typically though it's better to bring us in earlier or to wait until after close. So the whole business is based on, we understand that developers and sponsors, their focus is bringing projects to cod and we don't interrupt that process at all. So it's better to bring us in earlier, have us step in later.
- [08:40]
A
Okay, that makes a lot of sense. I've seen that exact dynamic play out in transactions and would tend to agree with that.
- [08:47]
B
Yeah, I mean I think one other point there is, you know, we're baking deals now that will NTP 12 to 18 months from now. And that's typically, you know, our preference. We obviously, you know, also have plenty of deals that sign in the same quarter and close in that same quarter, which is also not surprisingly typical of the development community. You know, they're focused on it at the last minute, but you know, I'd say it's 50. 50.
- [09:14]
A
Okay, so you mentioned how you sign deals that often don't NTP for several months, 12 to 18 months. I assume a lot of the developers who are doing those kinds of transactions with you need that capital up front. And we've seen things like fiat compliance and other constraints that are forcing developers to front load the capital well before construction. You got to vet supply chains, place equipment deposits, try and lock in those contracts early, not to mention could be big deposits for interconnection, things like that. So describe a little bit how real estate capital fits into that pre construction crunch and what have you seen from developers who are navigating it especially?
- [10:01]
B
Well, yeah, our business is very much a relationship based business. So 80% of the deals that we do are from repeat developer partners, which is what we had intended on day one. It's pretty satisfying to see that come to fruition. Like I mentioned, we don't step in until ntp, so we're not taking risk around that particular project. How we typically see our financing used is if you have a project that is NTP ready, we'll close on that deal and then the proceeds from that deal are used to fund future pipeline that the developer has. So and we ask the question because I'm always curious, you know, what's the intended use? And it's never, you know, it's never I'm going to go buy myself a boat. It's always we're going to use it to fund interconnection deposits or make EPC deposits. So we're not taking that early stage project risk but we are very much seeing our capital used as pre construction capital.
- [11:02]
A
Okay, and for developers who, who are doing a transaction with you on an operating asset, is it similar that the proceeds are often also still being invested in other pre NTP assets?
- [11:15]
B
Yeah, I think it's pretty consistent across the board right now. I mean, I think given the crunch in the financial market and you know, the cost of dev capital, which is very expensive because we're basically investing in either, you know, a parcel of land or an easement over a parcel of land or doing a loan similar to a bank issued mortgage. Our assets are sound and it always, you know, 90% of the time creates additional liquidity for the developer above the value of the land itself, what they paid and then they're using those funds to, you know, keep the business alive. And I think right now it's quite a change from where we were two years ago. All of those funds, you know, you see more desperation in the market. And we just come back to if you have a real project that's at ntp, we can fund that deal and then whatever you want to do for future deals is kind of up to you. But largely you're right.
- [12:08]
A
And then so do you have a condition to your funding that NTP has actually been given?
- [12:15]
B
So when I say we work, we make it really easy for developers to work with us. We really only need, you know, five things. We obviously need a lease. We need to see clean title. We want to see that interconnection is in place and that deposits have been made. We want to see a clean phase one. And if applicable, either there's a PPA or not as relevant if you're in a community solar market or selling into a regulatory program. What's also very important to us is understanding the path to construction finance. So we really want assets that have construction finance in place. And that's even more critical right now because a lot of the construction financiers who may have committed early on might not have the capital now to fund those projects. So I say that's probably one of the bigger changes in our business over the past six months.
- [13:10]
A
Yeah, I can imagine. Ensuring there's the money there to construct the project is very important to help de risk your position.
- [13:19]
B
Yeah, absolutely. The last thing we would like is a stranded land asset. Our diligence is simple, but everything needs to be there.
- [13:26]
A
You said a stranded land asset?
- [13:29]
B
Yeah, as in, you know, like our business model is very basic. You know, deploying cash on day one, collecting rent over time. But the worst Case scenario for us, of course, would be deploying that cash for land and then not have a project come to fruition. And certainly in our collective experience in the market, we have never seen a project reach true NTP and not reach code. So that very much. I think it's a little bit of a different industry right now than, of course, when we started five years ago, but that thesis is still very true.
- [14:04]
A
Okay, that makes sense. So I want to talk a little bit about, or ask you about kind of your process and how quickly it moves. When developers need cash, they often need it quickly and they need it flexibly. So I understand that you guys can close in 30 to 45 days. Can you kind of expand on that a little bit, how your timeline works and what makes a fast timeline possible?
- [14:31]
B
Yeah, so our diligence process really only takes three days, assuming that all of the data, all the detail is there. So we might have a data room complete. Except for interconnection. Well, we're not going to close until interconnection has been received. So we have never not closed a deal when, you know, because of, or met a timeline or not failed to meet a timeline, I should say, based on our speed is just dependent upon, you know, at what point the developer has all the necessary information that we feel it's appropriate to step in.
- [15:07]
A
And do you, I assume you use form documents for all of your transactions?
- [15:11]
B
Yeah, everything's off the shelf. Yeah, Very, very basic. I mean, it's the idea of this business model because the executive team at Solar reit, we've all been. I've been in solar for more than 20 years. We've been financiers, we've been developers, we've been aggregators. The idea is developers don't have an abundance of time to think about real estate. And the model of the business is they don't need to have time. They just need to provide what they already have to us and make it as simple as possible. So that's still fundamentally the core of our business, and I think the reason why we have such a robust pool of repeat partners.
- [15:51]
A
Okay, so your company's name is Solar reit. I understand you also do battery storage projects. We do, and those are increasingly important. And there's a lot more of them in the market now. They also have a longer tax credit Runway. There's more demand on the grid, higher fiat pressure. Can you talk a little bit about the land story, specifically for storage developers as opposed to solar developers?
- [16:19]
B
Yeah, I'd say over the past 18 months, batteries have become a large part of our portfolio, probably about 50% of our portfolio, and that spans all different types of projects. DG projects, utility scale projects, merchant projects, contracted revenue. I share your perspective. Batteries are very exciting. It's critical for load growth and it's an exciting market to be a part of the story for batteries. We're seeing our capital deployed certainly in urban areas for urban battery storage projects. New York City, urban Houston, Dallas. We're seeing a lot of demand there. Battery projects are also quite expensive. So we're seeing with our repeat partners, we come in at a similar point in time. I think the main difference is for utility scale batteries, we are looking for an IE report as well in a market study just to sort of validate revenue assumptions. But the cash we're providing because it's, you know, we're basing our deals based on rent values and revenue streams. There's a lot of revenue projected for a number of these battery deals, with the exception of merchant Texas batteries at the moment, which are, you know, are difficult to finance. I think across the board that were being utilized quite a bit by the battery storage community.
- [17:45]
A
Do you think there is more potential in the battery storage market or the solar market, or is there sort of. Doesn't really matter to you?
- [17:55]
B
It doesn't matter to me. I think that the battery market is. There's more momentum there at the moment. You know, I think for the reasons that you explained longer itc, there's definitely more fiat considerations. But I think it's exciting to see new battery programs popping up across the country as well. So historically a lot in Texas, California, New York, now we're seeing other states unroll not only Solar plus, but a lot of standalone battery programs as well as. So I expect that to be a growing part of our portfolio.
- [18:29]
A
Are there other sectors in the energy market that you could see your company expanding to beyond solar and storage?
- [18:37]
B
You know, it's interesting because we have dappled in substations and transmission and I think that, you know, those are great assets to finance and we do finance those types of projects. I'd say it's very much the minority. The total addressable market for battery and solar financing goes really deep. And I find that, you know, as a business owner, we're far more successful if we just focus on the things that we're really good at, which is solar and battery real estate. And it sounds very basic that we have three product options, but really they take so many different flavors. You know, every deal is different. And one of the things that, you know, really makes us stand apart is because we all come from the industry. Developers have all kinds of problems they're looking to solve. And we can ascertain very quickly, yeah, can we, can we be a value add here or not? And then there's sort of different flavors for how we structure deals around the real estate. So, yeah, I think battery's, you know, very much a growing market. I don't think solar is going anywhere. I think that it's a tumultuous time in the industry. However, when I look back at different years, it's been tumultuous before.
- [19:52]
A
That is true. Kind of goes up and down.
- [19:54]
B
Up and down. Yeah. All right.
- [19:55]
A
I think one more question for you. If you could get one message to every owner of an operating solar or storage project listening, what would it be?
- [20:05]
B
I think my message would be not only to those that have operating projects where they control the real estate, also those that have purchase options or landowners who just don't want to have a long term lease. They want to be cashed out. If you're not considering the real estate as part of your capital stack, you're really leaving money on the table because that is something that the developers that get it are really leveraging the real estate to help fund their business. And I think the key obstacle right now is people are very, very busy and they think it's complex when in reality it's just there. It's a missed opportunity.
- [20:47]
A
Great. Well, I appreciate you joining us today, Laura, and thank you for all of your insights.
- [20:52]
B
Thanks, Jim. It was great to be here.
- [20:55]
A
You can find us online at www.projectfinance.law or send us an email at currentsordondonrosefullbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the Currents.