Seminole Financial—A portrait of a middle-market renewable lender and community-solar financier

Written By: Stratton Report
July 15, 2016

Stratton Report recently learned from our contacts at Seminole Financial Services LLC that they are in the community solar financing world in a fairly dramatic way. According to Joe Ritter of Seminole, the company has recently approved 11 community solar deals in Massachusetts and has another 13 on deck at the moment in that same state and Colorado.

In our many discussions with active players in the community solar space, there have been remarkably few mentions of specific lenders who were financing deals. So we’re eager to learn more about Seminole’s involvement, their lending philosophy, and the general state of play in terms of financing “middle market” projects. We were lucky enough to speak at some length on these topics separately with Joe Ritter, senior vice president of business development, and Chris Diaz, Principal, at Seminole.

Our first goal was to learn a bit about this “middle market” financing company and how it got involved in financing renewables.

“Seminole Financial Services grew out of a predecessor company, the Midland Company, that had been very active in the low income housing tax credit finance and loan syndication, investing on behalf of several pension funds,” observed Joe Ritter. “Midland had provided construction, permanent debt and equity for real estate deals. After Seminole Financial was established in 2009 with the backing of those same pension funds, Chris Diaz brought in a very interesting deal. Chris had worked at Midland and went on to Credit Suisse and was seeing energy deals getting done. So Chris brought us a small wind deal that was in Southwestern Washington State that was too small for major banks and said, do you know anybody that’ll do a this deal with all these energy credits? That was the first deal we did, because we certainly understand tax credits. The word got out shortly thereafter that there’s a finance company willing to do smaller deals. We started out just doing construction lending for renewables then we started doing construction and permanent debt financing and now we’re providing tax equity as well via our investment partners.”

For a while, it seemed, Seminole largely had this lending niche to itself. As Diaz explained, there was a noticeable lack of competition from established energy bankers in the company’s early years: “A lot of big financial institutions don’t want to mess around with this smaller stuff. So when we first got in this area we were the one of the few, in fact, we were the only one that was doing construction lending for these smaller deals on a national basis.”

Of course, doing a lot of smaller deals eventually adds up. “We have financed just under half a gigawatt worth of projects,” mentions Ritter. “Something around $730 million has been deployed by Seminole on renewable energy.”

So how did this operation get involved specifically with community solar lending, looking at its first deal back in 2012?

Diaz believes that it was a natural progression. “Our focus has always been on the smaller side,” he notes. “Most of what we do is five megawatts to one megawatt, I would say is probably 90 percent of what we do. So these community solar deals fit nicely in that. We’re small, we’re nimble, we try to keep the documents consistent, we keep the attorney’s fees low. What we’ve found very attractive about these community energy deals is that you often have one developer doing multiple deals. And the deal structures will be very similar, the project sizes are similar, and the PPAs are similar, especially if they are done under the same net metering regime. So that makes things very efficient. As a result, we are happy to be dealing with a number of developers on community solar transactions.”

So how does Seminole decide whether or not to participate in financing a particular community solar project?

Well, they ask a lot of questions. “My first would be is it a pay-go CSG or are the members buying the panels upfront?” remarks Ritter. “I’m going to ask who are the project’s subscribers, what is the project doing with the SRECs? What’s the pricing strategy? Is it a discount to the net metering rate? Is it a fixed rate? Is there an escalator? Is there a floor – you know, that type of stuff. And, of course, who’s going to build it and how financially strong are they?”

Diaz mentions a number of other points for discussion: “Does the lease for whatever site the project will be on have good ingress and egress? Are the PPAs with the off takers good and solid? Are the off-takers creditworthy? Now what I regard as credit worthy and someone else’s notion of credit-worthy could be different. Go to a big bank with off-takers that are not credit rated triple B or better and there is a high probability that they won’t want to look at the deal.“

A number of community solar projects have off-taker subscriber pools that mix residential members with C&I customers–municipal offices, private businesses, educational institutions, etc. We asked Diaz and Ritter if they found C&I customers–who don’t have a FICO score and rarely have rated credit—to be a problem.

“We routinely finance non-rated credit, down credit and of course we’re happy to do investment grade credit as well,” observes Ritter. “We have the luxury of being a lender that is not a bank so we take a much more entrepreneurial–and what we hope is a common-sense–approach to underwriting credit. We’re fine with narrative credit, by which I mean credit where there’s a story to be told.”

And one of the stories that makes community solar attractive to Seminole is the possibility of rapidly curing off-taker default, always a risk with C&I deals that are in some respects similar to a CSG. “If it’s a straight PPA with a single off-taker on a two megawatt deal and they walk, well guess what? I’ve got nothing,” points out Ritter. “All I can do is sell into the wholesale market at an avoided cost rate or whatever. But if an off-taker leaves that is part of the CSG and they default on a quarter of the CSG I at least have 75 percent that I’m still getting income on.”

Of course, that raises the question of how many C&I customers to put in the membership pool? Apparently too many C&I’s may not be such a good idea, even when dealing with a flexible organization like Seminole.

“I have not seen a community solar transaction with more than three or four C&I customers within the one deal,” mentions Diaz. “We’re not talking about 20 C&I members or anything along those lines. We would probably just pass on a deal like that because it would not be efficient for us to underwrite that large a group of credit off takers for a single deal.”

Of course, solar power lasts a long time, and it’s very possible that a community solar garden may see quite a bit of turnover in its membership over a 20-year span—in that sense, a very different outcome than signing a long-term PPA with a utility. This doesn’t seem to phase Seminole, given its roots as a lending organization in real estate finance.

“CSG to me is nothing more than an apartment building,” notes Ritter. “When you develop an apartment complex you’re going to start leasing up. It’s not 100 percent occupied from the day you put a shovel in the ground and those people are only going to sign leases for a year, and at the end of the year they may walk and you’re going to have to find another tenant to come in and take their apartment. So in comparison, the long term risk of a community solar membership pool looks pretty manageable to us.”

Stratton Report has heard from community solar developers that they pre-consult with lenders to be sure that they build membership pools that will be financially acceptable. We asked Diaz if he has consulted in this manner. “Not officially,” he pointed out, “but on a casual basis we talk with borrowers all the time. People will call me and say ‘What do you think about this?’ It’s quite important to have relationships with lenders and tax equity providers for that kind of give and take.”

Speaking of tax equity, Stratton Report has heard that access to that valuable commodity is limited for community solar. Unfortunately, that seems to be true.

“I get a little bit frustrated about tax equity,” acknowledges Ritter. “A lack of tax equity is the biggest challenge to both C&I solar and community solar. The deals are not big enough to pique the interest of a lot of tax equity shops. If I go to tax equity whether it’s with a one megawatt PPA deal–even if it has Walmart as an off-taker–or if I do a one megawatt community solar garden deal with Walmart as a subscriber, it doesn’t really matter to them. The deal is too small. That’s where the bottleneck is going to occur in the development in CSG. Seminole’s willing to look at unrated credit, down credit, whatever type of credit if there’s a story to tell we’ll listen. Tax equity is not necessarily the same. They want investment grade, triple B or better. They have a very narrow band of what the ideal project looks like. If it deviates even slightly it’s a no go for them. And that’s what frustrates me because there are a lot of good deals out there.”

Seminole’s investors are tax-exempt pension funds and the firm itself has no tax appetite. So only provides tax equity itself via investment partners. Most of them are reluctant to look at transactions smaller than 20 megawatts collectively, and even deals that are going to be bundled together need to be approximately 45 MWs or larger per transaction.

Fortunately, there appear to be a few smaller tax-equity players that think differently. “We have some smaller investors,” notes Ritter. “We have one in Minnesota that wants to deploy tax equity. They’ve come to us and said they want to deploy about five million dollars. So there are some exceptions to the rule.”

So ultimately where does community solar business model fit into Seminole’s overall lending business?

“Community Solar is an important part of what we do,” observes Diaz. “And this year community solar will be a big part of what’s going on in the solar power industry.”

“We’re very bullish on community solar. We love the model”, agrees Ritter. “We’re really excited about the future of community solar gardens. We’ve bought in.”