How investors decide under what mechanism they are going to offer their capital

When putting a C&I project up on CleanFi,  the resulting proposals are divided into different mechanisms. Each of those mechanisms offers the participating investor a particular method of “securing” their investment.  

For example, a lender using institutional money that wants a long term annuity product might use C-PACE to leverage the long-term security provided by that mechanism: placing a tax assessment on the property until the debt is paid off.  Another lender might use bank lines of credit that have to be paid off quickly.  So they will chose a mechanism sought by portfolio buyers who look to buy “portfolios” of loans (a large bunch of loans that have very similar profiles) .

In all mechanism options,  a borrower must first and foremost be deemed to be creditworthy by the funder.  This process is called “underwriting”, an analysis of the profit/loss over recent years, balance sheet and obligations, the management team, the robustness of the business, value of assets, the verification of ownership.   Different mechanisms vary in the emphasis they place on these various aspect of the borrower’s profile.

But a strong financial picture alone does not mitigate risk.  The longer the loan, the greater the risk.  So the investor/funder looks for other ways to charge for that risk.  They do so by calibrating rates and terms, which most people are familiar with.  But they also use the “lien” (or claim) offered by the lending mechanism of their choice, as illustrated in the chart below.

 

Different mechanisms have different types of liens

In property improvement financing, there are two fundamental risk-securing methods:
1. -Real Estate  – the land and building that the improvement sits on – current valuation less the balance of any liens on the property
2. -The Improvement Itself (solar, HVAC, storage, chargers, etc.) – a UCC-1 lien would allow for the funder to repossess the asset if defaulted on.  In “third-party-owned” financing (TPO), the owner has total control of the equipment.

 

Everybody wants first position on a lien.

Like in most competitive and business scenarios, lenders always want to be in first position on a lien.  In fact, mortgage lenders forbid any lien senior to their own.  That’s also true for UCC-1 lien holders who lien the equipment they are leasing.  If there’s a default on a machine, being in second position on re-possessing that machine is almost worthless.  C-PACE may be the exception to that, because the property tax collection system will generally treat multiple improvement-related debts on a tax bill as one obligation.  For that reason, C-PACE is an excellent mechanism to couple with tax equity on a pre-paid PPA: the c-pace loan pre-pays the PPA and files a tax assessment, and the tax-equity investor files a non-conflicting UCC-1 lien for 5 or 6 years.

 

Some funders want multiple liens

There is no rule that says that a funder cannot require both methods to secure a property improvement loan.  For example, one non-profit specialty funder on CleanFi that provides loans to organizations it wants to support will extend a 25-years financing amortization schedule, but requires both a first lien (mortgage) and a UCC-1.

Generally speaking, for non-profits, the picture is the same.  For the municipal market and for tribal projects, the Real Estate liens do not apply, but liens against the improvement have some similarities.

 

Why is this important to contractors or building owners?

It’s good to have a basic understanding of the mechanism options you find on CleanFi.  Each impacts the underwriting process that the borrower will have to go through, the documents that are requested.  In the case of TPO’s, the developer/contractor as well will be underwritten.

Note that these methods are specifically for commercial property improvement loans.  Business loans, which are typically much shorter term loans like 24-months, are often unsecured and usually entirely determined by credit evaluation.  As a result, they often have a much higher interest rate (capital cost) than the financing methods discussed here.

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