Many investment grade assets and projects fail to realize their financing objectives not because they have marketed their deal improperly but merely due to just not having done their homework well. Understanding and properly executing the Development Process involved in building and therefore selling a Renewable Energy Project is critical to risk management and the Project’s ultimate success. The Development Process of any Project is composed of three  distinct Phases:
- Predevelopment- this Phase begins when a Project is first conceptualized and ends when the Construction Phase begins.
- Development/Construction- this Phase begins when actual physical construction activity is occurring on site and ends when the Project’s Contract Documents [plans and specifications] have been fully executed and all conditions of the job have been met.
- Operations or Sale- begins when the Development/Construction Phase has been completed and ends when the Project is sold or otherwise disposed of.
The Predevelopment Phase & Process
Each Phase has its particular set of tasks and attendant risks. The Predevelopment Phase is the most complex of the three and its outcome defines the other two Phases and is therefore the focus of this article. The anatomy of a “typical” Predevelopment Process includes creating a Critical Path Schedule and Budget. The detailed schedule [functions and their timing] forms the basis of the Predevelopment Budget [the cost of functions and timing].
1. Creating a Critical Path [CP]- the first step of the Predevelopment Phase is to create a CP that will serve as the Project’s “road map”. The CP should reflect the major tasks and functions required to take the Project from its current conceptual stage to breakground and are organized in the sequential order in which they will be met.
The Chart below provides an illustration of how a CP looks and works. It is a simplified version that is meant to show how tasks and functions are identified and sequenced.
The CP and Budget should be constructed to mirror the development process and have the capacity to be easily amended and updated.
One of the first items that need to be accomplished during the Predevelopment Phase is securing control of the Project Land/Site, which ideally should be purchased or leased only when financing, permits and the PPA have been successfully acquired. The terms and conditions of the Land/Site Contract need to mirror the key elements of the Project’s execution so that time and risk exposure relative to Land/Site are understood and contained. For example, the timing and amount(s) of non-refundable earnest money and the Closing Date should match target dates for items that meet Project “Milestones” such as receiving permit and zoning approvals and execution of the PPA.
The greatest risk a Developer faces relative to the Land/Site acquisition is having the Closing Date on the Land Contract arrive prior to receiving Permits, Financing and a signed PPA. If the Closing Date does allow the Developer to meet all of these items, the landowner or some third party becomes the beneficiary of all of the time, money and effort the Developer has invested in the Project since all entitlements run with the land and do not vest with the Development entity. Whenever possible, the Land Contract should allow the Developer to extend the Closing Date even if it means paying additional earnest money and or a higher purchase price. The alternative, as they say, “is gruesome”.
2. Predevelopment Budget- Once the CP has been made; it can be used to create the Predevelopment Budget.
Predevelopment Capital represents the highest risk element of Project funding since it is being spent on items that concern feasibility, obtaining permits, the PPA, funding sources and proving cost and income. No matter who funds the Predevelopment Capital, great care needs to be used to make sure that all required functions can be paid for and that the amounts and timing of incurred costs are reflected and risk mitigation in spending has been applied to budget projections.
If the Developer intends to raise Predevelopment Capital from an Investor/Lender, a complete package needs to be created and presented to the Investor that shows how the requested funds will be spent. The entity that funds these costs may or may not be the same party that provides additional Project Capital in the form of debt and or equity. In any case, the presentation needs to demonstrate overall Project financial performance and articulate the proposed returns to the Predevelopment Capital and how it fits in the total Project.
The need for a complete investment Proposal told in words and numbers and recapped in the form of an Executive Summary cannot be overstated. These are tools that are used internally and to attract third party Investment Capital. A key piece of these tools are found in a well thought out Predevelopment CP and Budget.