FINANCING

FINANCING STRUCTURES

In the distributed solar energy industry, the current model for optimized financing of such projects is the combination of a power purchase agreement for the sale of energy to a retail customer, and an investment vehicle owning the solar energy facility, in which a tax motivated investor makes its investment. This model permits a solar developer to deliver green energy to a customer at a price the customer finds attractive and which reflects the monetization of the tax benefits by the investor.

1- DISPROPORTIONATE ALLOCATION PARTNERSHIP:
The solar facility is owned by a partnership or limited liability company in which the developer and the investor are partners, and in which the investor makes its investment. The investor receives a disproportionate allocation of the income and loss (including tax benefits) until a target rate of return is achieved, after
which the allocations "flip" to a ratio more favorable to the developer.
The developer has an option to buy out the investor's interest for fair market value,
determined when the option is exercised.

The advantages of a partnership structure include:
The investor residual value of five percent is significantly less than a lease residual interest.
- The developer will have a cheaper purchase option at the time it is to be exercised.
- A partnership arguably has less default risk than in a lease because there is no fixed rent schedule.
- Typically a partnership is less document-intensive than a lease transaction.
- A partnership can provide greater visibility of the tax investor"s return.
- The investor may not always require an appraisal of the project.

2- LEASE AGREEMENT:
In the lease structure the solar energy facility is sold by the developer to an investment vehicle that either leases the facility directly to the ultimate customer or to a lessee entity, which in turn has a power purchase agreement with the customer. The lessee makes lease payments for the use of the facility, and either keeps the benefits of the electricity or sells the electricity under a power purchase agreement to a third party.
The lease is typically a net, "hell-or-highwater" lease, whereby the lessee is obligated to pay fixed rent (or specified termination value in the event of a loss of
the assets) to the lessor for the term of the lease, irrespective of the actual performance of the facility, existence of force majeure events, etc. Lease rules require that the lease term not exceed a specified portion of the useful life of
the asset and that the residual value be in the range of 20 percent or greater. At the end of the lease term, the lessor becomes the sole owner of the facility, but the lessee is given an option to purchase the relevant assets at the end of the term (and sometimes at one or more specified times before the end of the term) at fair market value at the time.

The advantages of a lease structure include the following:
- The sale/leaseback transaction can be closed within
three months after the facility being placed in service, whereas a partnership transaction must be closed before the
facility is placed in service.
- Financing is available at full value.
- Fixed rent and the ability to stretch out the term of the lease result in the lessee being immediately able to keep the
upside if the project generates greater returns than is anticipated.
- Tax guidance for leasing is generally thought to be clearer and results in greater tax certainty.
The disadvantages of a lease include: - The lessee"s purchase option is more expensive than in a partnership
structure.
- The developer is required to make scheduled rent payments and comply with extensive covenants.
- The developer may not have visibility with respect to the tax investor"s return.
- Leasing deals have traditionally been document- and time-intensive.
- An appraisal is almost always required for each project.