EP.2 Is Your Solar Project Bankable, with Russell Cramer of 1st Source Bank

EP.2 Is Your Solar Project Bankable, with Russell Cramer of 1st Source Bank
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[00:00:00] Russell: If there's not a burning platform this project or this portfolio projects needs, construction financing starting in three months, then, reaching out to us seeing if there's, initial alignment as to the types of projects you're doing. that, That goes a long way just cause you're able to hit the ground running when that opportunity actually does come up.

[00:00:14] Bart: It's time for banking on solar. This is your host, Bart Frischknecht. Solar developers, investors, and lenders risk losing projects when they bog down during financing. Banking on Solar is the podcast community where energy-transition project-financing stakeholders share lessons learned so that more projects get built.

Today on the show, you'll hear my chat with Russell Cramer, Vice President of Solar Financing at 1st Source Bank. 1st Source is a regional bank headquartered in South Bend, Indiana that has made a name for itself with its innovative three part financing for low megawatt solar projects. Russ joined 1st Source shortly after they made their first solar investment and has been there ever since.

Fast forward six years to today, and you'll hear from Russ, his views on what makes a bankable project, how developers can keep transactions costs down with efficient data rooms, and how the industry is evolving from a financier's perspective. 

Now onto the show.

Russ, it's great to see you today. Thanks for coming in. You're the one who introduced me to the solar industry, so I'm really excited that we can take this opportunity to talk a little bit more about bankable projects and banking in solar. I'd love to hear a little bit more about your background, how you came to 1st Source and what got you into the solar industry. 

[00:01:26] Russell: Oh, absolutely. Thanks for having me here. I appreciate it. I've got a variety of experiences in my background that led me ultimately to solar. I did a finance and accounting MBA at Notre Dame here in the Midwest. You wouldn't think of Midwest as being this mecca for for solar activity, but it actually has turned out to be a great area for solar. So my background again , came to Notre Dame, MBA in finance and accounting. Went to Whirlpool, had experiences in M&A and in corporate strategy. That actually led me, it was recruited a way to go work for Rivian electric vehicle automotive manufacturer, which turned me onto battery technology in a big way.

And then 1st Source Bank had asked me to come over and really lead a startup startup line of business for the bank, which was solar financing. I hadn't previously, again had specific experience in solar. But the combination, again, the finance, the strategy, the execution and sales side of all those aspects came together into this specific role.

So been with 1st Source since 2017. And we've been focused on the solar finance, specifically the solar industry, financing solar projects really since then. It's been a wild ride and, we joke around about the solar coaster that it is. But what a interesting industry to be a part of and, and certainly high growth industry as well. 

[00:02:40] Bart: As I understand it, 1st Source got into solar around 2016, 2017, around right around the same time that you joined, so you've really seen that develop as an offering and as a line of business for the bank. I'd love for you to talk a little bit about how that arc has been and today, what is the bank looking at in terms of types of projects, things that you're looking at on a day-to-day basis? 

[00:03:01] Russell: Sure, we started out, and this was a little bit before my time, we started out with our first project being a situation where the bank was a construction lender, the permanent lender, and also the tax equity investor in a project in in Indiana here actually. So that was the first project we did, which was in 2016. That was the end of 2016. Since that time we've focused on small utility projects. We're relatively small bank eight, about 8 billion in assets. So, We're not doing the a hundred megawatt projects. We are doing projects that are five megawatts to 20 megawatts in size generally. And again, since the early days where we thought we were gonna be doing a lot of small utility projects. And we did do some. We've now expanded into community solar projects and we're across about 15 states and community solar is a nice size of project for us. In a lot of states, it's required that individual sites are one megawatt or two megawatts, in some cases, up to five megawatts, that's dc per site, and so, for a small bank like us, we we're able to partner well with clients that are doing projects of those sizes. We're excited to partner with our clients on solar primarily here in the Midwest and in the northeast, Minnesota and Illinois being two big states that are community solar states. They're somewhat right in our backyard. 

[00:04:13] Bart: You talked a little bit about how the bank has changed and evolved with the market. What else have you seen in terms of how developers are working to get financing, and especially recently, what are some of the things that you see emerging or changing in how people are looking to get deals done, get projects built?

[00:04:29] Russell: Right. Certainly over the last number of years, even to a greater degree in the last, call it 18 months, we've seen a lot of equity players coming into the market. Whether they're putting sponsor equity into the platform, I think they call it platform investments, or they're actually investing in the corporations, the developer, or whether they're actually just buying the developer. There's the Inflation Reduction Act, which I'm sure we'll chat further about. It's kind of the One of the main areas of focus in solar here certainly over the course of the next 10 years, but that, that's really prompted a lot of this additional investment. So equity players coming in, banks that are now getting comfortable with it, whereas, five years ago, there weren't really that many banks, at least that, that for, for, for the project sizes that we were doing, that we were kind of running into in terms of our in terms of our clients.

So you got equity coming in, you got, banks coming in as well. And developers our much more savvy I think nowadays as to, okay, this is, this is what makes for a bankable project, this is what makes for kind of a streamlined transaction. All those types of factors that that apply here.

But I guess in terms of the specific transaction structures tho those types of things, I think you've got, a confluence of a lot of different a lot of different things. Equity being one of them. Again, a new entrantns on the bank side as well. And then this longer runway through the Inflation Reduction Act of having the tax credits that's good for 10 years. 

[00:05:51] Bart: So you said the magic word, you said Bankable. Bankable projects. And as I've talked to people, I think some people use that word, and what they really mean is a broader sense of investible projects. 

[00:06:01] Russell: Mm-hmm. 

[00:06:02] Bart: And you just talked about how, especially today, there's a lot of private equity coming in and buying up majority shares in developers so they can take more ownership role or infusing capital into those developers so they have more equity available for themselves to fund those projects.

But banks are still a really important part of this, especially because a lot of times they're the lowest cost of capital option. Right. If you can get it right. And so that's like the magic with this renewable energy, energy transition is how can we get as much capital deployed at the best terms, and banks are, are really one of the best places to do that because the bank is looking at this from a, a de-risking perspective and it seems like a safer bet than someone who's gonna come in and, put a bunch of equity to own a stake in the company.

So I, I'd love for you to think of, just share with us a little bit. What does that mean in your seat in terms of a bankable project? Like what, what are the kinds of criteria you're thinking about or what makes, what makes a good project from the bank's perspective? Cause I think that would be really helpful.

I think developers, Have a sense that they think they know, but not a lot of developers have sat in your seat. 

[00:07:05] Russell: Sure. No, exactly. And, and we, we continually try to understand what it's like, what it's like to be on the developer's side as well as we partner again with our clients. Right. But to your specific point, I mean, every equity player, whether it's, tax equity, whether it's debt, they kind of have their own box as to what makes for an ideal project for them. We have a specific view on that certainly at the bank as well. That said, there are some kind of key kind of table stakes items, right? 

You gotta, well, lemme take a step back. You've got early stage developers that are putting projects together. You've got some tho those folks are, are putting the permits together. They're getting the site agreements in place. They're getting a PPA, at least a structured or some kind of revenue agreement in place. Then you've got the sec, what we call second stage developers that oftentimes are partnering with that early stage. The early stage folks oftentimes don't have the balance sheet to come to a, come to a bank and say, Hey, provide us with x number of million dollars for a construction loan or permanent loan. So that second stage developer really helps a lot, I think with regard to the balance sheet, with regard to the experience perhaps going through a financing process. And so oftentimes we're working with the second stage. developer that has a, a bit of a better understanding as to what bankable means as to what they need to have in place in order to get through a financing process. 

So at a high level, having your permits in place, having your project agreements in place. There's a lot of organization, obviously. There's so much that goes into from a development perspective. There's so much that goes into these projects long before any ever crosses my desk. So, props to all the developers out there that are doing all this legwork before, before it even comes to the bank, right? But certainly, thinking long and hard about what, what does the offtake situation look like? Who, who, who's, who's buying, who's buying the power. Obviously that's one of the very first things that you're focused on as a developer. But are all the kind of financing provisions in place in, in a, in a PPA? Do you have do you have the legal counsel that can give you advice as to, hey, this is what the banks could be looking for in terms of this specific agreement.

So there's a lot of organiza or organization involved. And I think, for, for us, I know one of the major, major factors is again, the offtake profile. What's the revenue contract look like? Are there merchant assumptions that are built into the revenue assumptions? Is it a situation where you've got, community solar where you've got lots of different subscribers. Who's subscribing those? Who's actually signing up those subscribers, who's managing that on an ongoing basis. All those things factor heavily into the bankability for, us as a bank. I think we talked offtake, we've talked some of the kind of organizational aspects of, of the project developers, we want, we would love to work with developers that have prior past experience that, that have proven that they can, they can develop good projects that are operational and that meet kind of their operational expectations as well. So those are a lot of the factors. I don't know that we're super unique in terms of like yeah. How we view a project and what's bankable versus other banks, but we've tried to be very commercial in terms of the way we work with our clients. Relationship is a major focus for us. And so we view this as a partnership with our developers. 

[00:10:04] Bart: Yeah. So one thing that we've talked about before is how what you just talked about actually gets communicated to the bank. So, you know some of these things, right? Do they have the permits in place? Do they have the land use all set? Do they have the offtake set? Are all those things in place? 

[00:10:20] Russell: Mm-hmm. 

[00:10:20] Bart: And someone may feel like they do, but that may not necessarily be communicated to you in a way that you can digest. And then that. I'm sure, leads to a whole bunch of back and forth or just even maybe potentially even walking away from the project. I'd love maybe to get a compare and contrast in terms of some of the best practices, if you've got a hypothetical past experience in mind, someone who just really knocked out of the park in terms of. how they demonstrated that they were ready for financing and then maybe versus some other one that, that either led to the whole thing unraveling or, or was a major headache.

[00:10:49] Russell: Sure. 

[00:10:50] Bart: On your part or on the developer's part? 

[00:10:52] Russell: Absolutely. I think it, it certainly best practice. We all, all of our data rooms, right, in terms of communicating information back and forth. But certainly for, for what we do and then I think for a lot of investors and, and. And financiers the clarity of the communication is, is critical in terms of having a, an efficient transaction.

So, all the different kind of usual suspects of diligence. You'll get a term sheet in place with a bank as, as a developer, and that kicks off pretty in-depth diligence. Again, depending on the size of the project and complexity in all the rest of it. But, the usual suspects in terms of diligence, if that can be organized in a really kind of clear way it saves on transaction costs. You don't have lawyers that are searching for information. It's clear. 

So, compare and contrast, we, we've, we certainly had clients that are, are excellent in, in, in those ways. And in some cases where we're, we're chasing some of that information, it just, it kind of prolongs a transaction, right?

So the earlier the better in terms of that that organization and that communication. If you can add a term sheet phase or even before that if client has their documents together. It again, streamlines everything. It gets to a much more efficient closing as well. 

So your clients that are able to put all the diligence efforts together in a clear and efficient manner for us to review and specifically for our attorneys to review. They have the environmental studies done. They're in the data room. They've, got, again, their permits in place. They've got their offtake agreements, they've got their interconnection agreements. All of those things are laid out with a lot of clarity. 

Other circumstances, perhaps the environmental studies haven't yet been done. You've got an unsigned inter, interconnection agreement. You've got a, a PPA that's perhaps in process, but there's still a lot of back and forth that needs to go to go with the the offtaker.

We've, dealt with those circumstances. Again, we, we try to partner with our clients to kinda overcome some of those things. And sometimes candidly, sometimes things come up that are just completely out of the blue, where you've got a, a county that is holding back, a specific permit. For, for some, You, know, for some reason that the developer and the financier don't fully understand, but they, they, one thing you can guarantee in, in solar is there's something's gonna come up that, yeah. That you don't, that You don't expect and you move it forward. But, again, to contrast that the very organized circumstance versus, one that's not quite not quite as organized, it, just makes for a less efficient transaction. 

[00:13:07] Bart: And, and that translates into dollars probably for the developers, right? they've engaged their legal team a lot more And they're spending cycles on it. It's maybe pushing the timeline out, things. 

[00:13:17] Russell: well, yes, exactly. And I think for us because we're focused on smaller transactions in the context of the solar industry, we're particularly attuned to it and our, our developers are as well. Transaction costs for a a two megawatt, portfolio projects is much different than a, a 200 megawatt portfolio project. Yeah. So we, we care a lot about the transaction costs and so do our developers. So as efficiency is key. Certainly. Yeah. And I think a lot of financiers have gotten good, especially if they have, the more experience they have in the space of trying to rinse and repeat and mm-hmm. And use a similar process on the next project Yeah. To, to make everything more efficient as well. 

[00:13:50] Bart: Yeah. So we had solar industry consultant Adam Shor on the last episode, and one of the things that he recommended and emphasized was, building relationships with potential investors, finances early on Mm-hmm. And, as I've talked to different folks, I get different answers. And so I'm curious about your perspective. I think there's one, one thing where someone is coming formally to ask for dollars. Right? 

Right. And, and just like you talked about, they need to have all their ducks in a row. But at what point does someone need to start building a relationship with the bank, and what does that relationship look like if it's not a formal request saying, Hey, we've got a project, we want some money. Is is that the first time you wanna see someone when it, when it's all buttoned up and ready to go? Or, I guess how, how have clients worked with you in the past to balance this idea from Adam of saying build your relationships early, and then the idea of efficiency of see, we got a lot of people knocking on our doors. We, we can only look at so many projects, right? If you're not ready to go, then, then maybe you need to keep working before, before we're ready to talk to you. 

[00:14:48] Russell: Yeah. I mean that can take many forms, right? Right. But I think again, we're, we're not alone in the relationship aspect. as a bank. If there's not a, if there's not a burning platform for, hey, this project or this portfolio projects needs, construction financing starting in, in three months then, reaching out to us saying, Hey, this is what we're focused on, seeing if there's initial alignment as to the types of projects you're doing.

I mean, that, that goes a long way just cause you're able to hit the ground running when that opportunity actually does come up. up Where, there is a live project that needs financing. So having that kind of a conversation early on, I completely agree with, with you, with with Adam around developing those relationships early so you're able to hit the ground running when, when, when the opportunity arises, you know?

Well, let's just say how it is. As banks, we wanna, we wanna understand what the financial situation is of the developers, right? And of the sponsor equity in a transaction as well. So, you know the earlier you can provide the earlier developers can provide us clarity as to what the financial situation looks like for, for your company and then ultimately for again, for where the sponsor equity is coming from, the better as well. Cause you're able to kind of already go through your internal checks with your credit team and say, yep, these guys are experienced, they, they've got the financial wherewithal, kinda check all those boxes such that then you zero in on the types of projects that they're doing and that, that you wanna be focused on as a financier as well. And, and it just makes that, that whole pro the actual financing process faster because you've already kind of jumped in a number, the hoops. 

[00:16:10] Bart: No, that's great. I'd love to switch gears just a little bit and just talk kind of the anatomy of the deal. So as we think about these projects, especially this, one to five megawatt type project mm-hmm that you're commonly seeing. What does the typical capital stack look like? What are the pieces of financing that need to be in place top to bottom? And I'd love it also, if you just highlighted a little bit maybe how 1st Source thinks about this a little bit differently than maybe some other banks because what I've heard from others as I've talked to others in the industry and they've talked about 1st Source is they say that, 1st Source has an advantage compared to some lenders in terms of being able to bundle some of those pieces of the capital stack altogether in one place. So anyway, if you could just talk through, what does a typical cap capital stack look like and then how are you thinking about that at 1st Source and then, maybe how are other people solving those? 

[00:16:55] Russell: Sure, sure. Yeah, I think it's it's interesting to see the various structures that can be used within solar, right? Whether it's on the tax equity side, you got specific tax equity structuring. You've got Some developers that don't need construction financing at all, they're able to actually just self-finance through construction period. And they'll, they'll get a, a permanent loan and tax equity that comes in. So, there's, there are a lot of different flavors, I think as to, as to way these projects get financed.

What we're able to do, thankfully 1st Source is we're able to provide the tax equity and be the tax equity investor, the construction debt, and the permanent debt. So those are the kind of the three normal buckets, I guess, that a lot of projects financing buckets or investment buckets that that, that developers are looking for. So it's, it's kind of a one stop shop type approach. 

The other bucket is, is sponsor equity. So for, for the way we, the way we underwrite projects, there has to be at least 10% sponsor equity hard cost in the deal before we're able to start our construction loan on.

A lot of lenders are able to do just the construction to perm. Some, some lenders can do just the permanent financing once the projects, become operational and other lenders slash investors can only be on the tax equity side. We, we are hearing that, there are some, some folks that are able to actually then offer kind of that full, call it one-stop shop, kinda the full, full capital stacks, sans the sans the sponsor equity. But it's been a, it's been a, a helpful thing, I think for a lot of our developers just to, to come to one, one spot for, for all those different aspects of the financing structure. But certainly there are a lot of ways to, to get deals done.

[00:18:25] Bart: Right.

[00:18:26] Russell: Relationship I think is, is key, especially on the tax equity side. These, these transactions are, are complex and there's a lot of diligence that goes into it. And so once you've gone through the first deal with you know tax equity folks with debt, debt folks if you're thinking about the developer side with a third party diligence, all of those factors, oftentimes it becomes such that you wanna, you wanna rinse and repeat, you wanna do that again and again such that you're not having to do that over and over and over and over. So I think those are some of the main factors with regard to structuring of capital stack kind of works out and how how the relationships are are leveraged to make that happen. 

[00:19:00] Bart: Yeah. Lot more talk about there. We'll have to come back a different time to talk about how transferability and how all of these other things are gonna affect how the capital stack's gonna evolve. Oh, absolutely. The smallest projects all the way up to the biggest projects. There's still a lot, lot going on there right now. 

[00:19:14] Russell: Yeah. I mean, daily, if not hourly conversations. Right. About all all the changes that are happening in Yeah. In, in solar. 

[00:19:20] Bart: Cool. Well, let me switch into the lightning round really quick. What emerging trends do you see that are potentially affecting your livelihood?

Right? You as a banker what do you see, positive or negative in terms of things that are happening right now? 

[00:19:31] Russell: It's, it's kind of funny that you bring up your transferability in, in some of these factors. I, I do honestly think that, the inflation reduction act and all that, it, it enables is, is such a major factor for solar in the solar industry.

There are specific aspects of that that could, depending on how the industry goes, change the way tax equity is done. How big, how, how big of a, an impact tax equity continues to have in the space. I think, my know personal view is that it will still have, have a, a role to play. I think transferability will also have a major role to play, but that that's, does that affect my livelihood? Not, not so much since we're on the lending side of solar as, as well. Yeah. But I, I do think it's a changing landscape that way. 

The other factor I just bring up very, very briefly is it's been solar plus storage. That's been the conversation for lots of years, and certainly we're seeing a lot of our developers that are getting into storage. We've, we've financed solar plus storage projects as well. Standalone storage is, is has always been the up and comer and, and we're starting to see those projects get financed. I think in terms of how, how those projects continue to get financed, if it's, if it's all merchant that'll be a, a, a question for me moving forward. But, I think battery technology and the improvement of battery technology, as it and, and how it plugs into renewable energy moving forward, for, for our daily lives. Yeah. How we, how we, generate power, how we store power, whether it's, locally at our own homes or whether it's at a, at the community level, whether it's in a kind of a You know mini structure, it's, it's really interesting to see how that's gonna actually impact us moving forward. 

[00:20:58] Bart: So many technologies coming online and being bankable all at the same time. Yeah, it really is an exciting time. Yeah. Awesome. What do you see as the biggest bottleneck, given all these opportunities? What's the biggest bottleneck you see in the industry right now?

[00:21:11] Russell: So prior to IRA being passed, I would likely say just the uncertainty of when the next cliff was going to be for the ITC. Yeah. Now that we have this runway, in the industry, I think it's really, really exciting that way to, to, to know that there's. Their support, for, for these projects to get done and they're, they're financially viable, all, all those factors in place. 

So that's not my, that's not my answer. The answer to your question would, I think at, at this stage, there's, we have an aging in infrastructure you electrical infrastructure in our country. I think there are, there are so many opportunities to improve that. I think there's certainly commitment from, from what I can tell from, the political side to invest in upgrading that, that infrastructure. But as of now, I think and this is rocket science, a lot of folks have, have talked about just the interconnection process and, and the interconnection queues being long and, and a lot of that has to do with the infrastructure upgrades that need to need to happen.

So, I don't live and breathe that every single day. Yeah. Because I'm not on the dev side. But through our, the projects that we're financing, we, we feel that as well. I know the folks are, are making significant efforts to, to improve that, that that overall structure and every utility is a little bit different, but I think that's a major, a major bottleneck. 

[00:22:18] Bart: Awesome. What does a successful day look like for Russ Cramer, work related or non-work related, but when you get to the end of the day, what, what has a great day been? 

[00:22:26] Russell: Always be closing, right? A, a closed project? No. We, I I highly value the social and the personal interaction with clients, with third parties, with these relationships I have in the industry. So, successful day for me means that we've been able to accomplish something. Ultimately at the end of the day, we're putting solar into the ground, right? Yeah. We're, we're, we're actually generating a renewable power. That's beneficial for, for my family, in indirectly, and then in indirectly if we were able to eventually put solar on our own roofs. But I think it's, it's a successful day when we're able to work together to accomplish something, which I think we all see, think is, is a great thing. 

[00:23:02] Bart: You had, if you had to make one quick comment about something that you believe that maybe isn't a widely held belief by others in, in the industry, what, what's something, a unique perspective you have or something that you think about that maybe is a little bit different than how other people think about this?

[00:23:14] Russell: Yeah. I don't know exactly how unique it is. I think Solar has a major, major role to play in the future of electrical, generation in the United States and, and throughout the world for that matter. In fact, U US is is behind in a lot of ways from, a lot of other countries.

I've been in this space now, what, six years. I don't view solar as the only for electrical generation. I think it's a major part of it. It's not the 95, it's not the 95%, generating capacity that maybe some folks think it is. I think it, it plays a major role. And I think it's in conjunction to your earlier point with a lot of other specific renewable energy opportunities. I think it's a, a basket of, of generating capacity that we, that we need to kind of focus on moving forward. So whether that's unique or not, that's that's kind of my view. I'm very excited about continuing to be a part of the solar industry, and I think, there's, there's a lot to be done.

[00:24:04] Bart: Yeah. 

Well, thanks for sharing your experience and your expertise today. If people are listening to this and they want to get in touch with you, what's the best way to find you?

[00:24:12] Russell: So certainly I'm on LinkedIn. Russell Cramer there. Then, I'm the division head for our solar financing group at 1st Source Bank, so feel free to reach out there. You'll catch me on the website there. My emails certainly on 1stsource.com. 

[00:24:23] Bart: Awesome. That's great. All right. And you'll see that contact information in the show notes as well. 

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Now is the time to be banking on solar. There is money to be made and the planet to save. Until next time, I'm Bart Frischknecht, and this is Banking on Solar.