Dave:
I am glad you raised this as it's really important for us all to understand the standard solar industry fee structure and the functions and parties that participate in it.
In our business there are three primary fee categories:
1. Development Fees
If a solar developer like ArcStar develops a complete project (from site identification through to system production & acceptance) on behalf of investors the standard developer fee is 5% of installed cost. This is commonly discounted to reflect the degree to which the project is marginal in quality and cost to build. Up to half of the fee (2.5%) takes the project up to the point of investor approval and finance closing. This front end of the ArcStar business is what Allen and I transplanted into our partnership, ArcStar Development Services. I will point out that we hand off to AEC and EDF just at the point the project enters investor due diligence and packaging, so they both overlap a bit into the front-half of the overall process today.
So you probably see why the primary valuation mechanism for ADS will be management's ability to drive pipeline and the pipeline's qualitative and quantitative values.
The other half (2.5%) is paid if the developer manages the EPC process and takes the project through to acceptance and turn-over to the operator. This half of the development process remains where it started, in ArcStar, LLC. There are varying opinions in our larger group of companies about where this should reside, but it wont move until Allen and I see the best place to to put it in terms of valuation (and for now, nobody else is capable of taking it on).
The developer fees are not shared with anyone unless they provide part of the developer's process directly. For example, when we pay referral fees to people who bring us deals up to opportunity/site identification stage ($5000) or all the way to site acquisition ($10,000) stage. Because they are doing part of our job for a share of our fees.
2. Finance (transaction) Fees
In our model you will commonly see a 2% debt fee and a 2% equity fee. These percents vary with source and market circumstances, but they are always there to cover the costs of processing the financial documents and the rewards to the financial origination and multiple source parties that bring the money to the deal. The lions share usually goes to sources (of cash and debt). Some of these fees are paid pre-close, some at closing and some are deferred to keep the cash flow within debt service coverage limits. If you bring no debt or equity directly to the deal you don't get to share in these fees.
The only other financial fee is if you are acting in an advisory role to help a project owner find finance, like Allen and I in California or Swire on behalf of Genesis. In these cases we both get paid a success fee if we find a finance partner for the deal owner. In some cases advisors are also retained to find projects for the money, but the mechanism is the same; they would be paid a success fee by the money. Because in each case that is where the contractual relationship resides. And that is why there should be no expectation that Swire be paid by our side as no agreement to do so exists.
3. Management(GP) and Admin Fees
These are paid to the party who is responsible for ensuring production is maximized, O&M is performed properly and accounting/billing/reporting/taxes etc are done properly under contracts. This role belongs to the party who holds overall management and fiduciary responsibilities on behalf of the investors. In our structure this is AEC and that is why they need to be the GP. They will typically take a management fee that is at least 1% of the managed assets. The admin fees are used to contract attorneys, accountants and other admin service providers and are not a profit center for the GP, but they are all paid under contract by the GP on behalf of the investors.
AEC will build its valuation over several years on their share of the assets and free cash flow. And will cover most of its operating expenses from finance and management fees.
So how does all the above stack up in relation to the Fritz deal?
Given that Genesis is "bringing the deal" only, I think they are being paid quite a lot since they will receive approx. $4,500,000.00 in their split of the cash flows and 50% of the Limited Company share ownership value when the assets are ultimately flipped, without putting in a dime. AEC is giving up a lot to help get this first big deal done, just as XT did to help us in the first opportunity with Walker before AEC existed. This structure was never intended to be a standard offering. And that's why I feel especially strongly that Genesis shouldn't take anything from the developer fees unless you want it to come out of our skins. Or the finance fees where they played no role whatsoever in bringing the money.
And that's why you clearly sense that the further their side gets pushed, the less enthusiasm you (and they) are getting from your money partners and some of your development partners. And if you are worried that Genesis walks, I will ask that you also consider the larger implications if the money walks because they simply don't want to be partners with Genesis or they think this deal is too far out of balance.
Monty
Monty Bannerman
ArcStar Energy
646.402.5076
Monty – I agree with your points as outlined but would like to comment that I don’t think point number 5 was discussed. I could have zoned out however.
As an aside for the record for all the discussion regarding fees in the Genesis/Fritz deal did not originate as a “sharing” of any ArcStar fees. The other side told me that Spire Sharwood was getting 1.5% of the deal as per there agreement with Genesis/Fritz and that Genesis Capital would expect a fee of 0.5%. To this I simply said that to the extent that these fees were going to be coming out of the 50/50 partnership then ArcStar would expect at least a reciprocal fee (good for the goose, good for the gander – to be negotiated). Hence the 2%/2% shown in the pro forma. As part of the agreed upon transparency I told them that as customary in these type of deals (they are very familiar with large financings) there would be a fee paid as part of the debt funding (I did not say who would get this). It was agreed that all fees would have to be discussed by the principals (Jack and Chick). I am going to presume that they(Genesis/Fritz) will, in the spirit of the 50/50 deal ,ask for a share of the debt fee. We also at a high level discussed the ability of additional fees to be paid out at the start of the deal. This is a side issue as we currently are working to make the deal work as-is without adding additional costs. At this point there was no discussion around any “development fee” this would be between AECL and ADSL.
From: Monty Bannerman [mailto:mbannerman@arcstarenergy.com]
Sent: May 14, 2010 1:07 PM
To: 'Allen Draa'; David Guest; 'Robert Willes'; 'Paul Fitzgerald'
Subject: confirming partner parameters we discussed
If we had company minutes I would place these there, but since we don't I'd like to suggest we all concur or disagree for the record.
Using a 250kw rooftop as example:
1. The reward for the property owner comes in the form of rent/lease/cash payment. If it exceeds $15K with no escalator it is an exception and needs a model review as something else is going to have to offset the overage. Asset ownership is not normally considered or offered and would require agreement of AEC.
2. The standard reward for the delivering deals is $5K bounty for qualified leads and $10K bounty for signed deals. The bounty can be translated into an annual annuity payment of equivalent value coming out of our cash flows, but cannot be translated into asset ownership unless approved as an exception by AEC.
3. Equity investment is normally rewarded by a preferred return with no asset ownership. Asset ownership can be considered IF equity investment is present in the deal but is an exception that requires AEC review and agreement.
4. If AEC is prime for finance then they are required by the lenders to be the general partner and hold fiduciary responsibility and liability. Most equity (cash) investor needs can be accommodated within the GP/LP partnership docs but the general management function and primary financial responsibilities reside with the GP.
5. There is no sharing of financing fees without direct (cash) investment by the party and AEC approval.
6. Sharing of development fees for any purpose is an exception requiring partner approval as it is our primary source of company revenue.
The review/exception primary point of contact for review of exceptions is designated as Allen.
Please confirm your understanding and agreement to add these items to our company records.
Monty Bannerman
ArcStar Energy
646.402.5076
www.arcstarenergy.com
