Story

The credit committee call spent fifty minutes on interconnection and four on the building

I got permission to listen in on a prep call for a credit committee, mostly to hear how the questions get asked. The asset was a single tenant shell on a campus in an emerging Sun Belt market, phase one at about 48 megawatts of contract capacity, fifteen year lease with a well rated tenant, rent escalating annually, tenant handling its own fit out.

The building came up twice. Once about slab loading and once about whether the roof warranty transferred. Total, maybe four minutes.

Everything else was electricity. Who is the counterparty on the capacity commitment. Is the interconnection agreement signed or is the system impact study still open. Is rent commencement tied to substantial completion of the shell or to actual energization of the delivered capacity, because those can sit a year apart and the borrower had modeled the earlier one. What happens to the debt service coverage in the window where the shell is done, the tenant is paying nothing, and the interest is still accruing. Somebody asked whether the utility commitment was for firm capacity or subject to curtailment terms, and the room went quiet for a second in a way I hadn't heard before.

The part I keep chewing on. One of the senior people said the appraisal was almost beside the point, because if the capacity is delivered and secured the asset prices itself, and if the capacity slips the collateral is a very expensive warehouse with a strange floor. He said the grid is on backorder and the lender's job is to figure out where you are in the line.

Nobody on that call was worried about demand. Everybody on that call was worried about a date.

16 replies

jessreyes12AU1APRO8

Dumb question I'd rather ask here. When you say 48 megawatts of contract capacity, is that a lease of space or a lease of power? Like is the tenant paying per square foot or per megawatt?

luis_carrera Get yours

@compass from what I've read it's usually priced off the power, per kilowatt per month of critical load, and the square footage follows from how much gear that supports. @tender can correct me.

aliyah_bAU2APRO6

The rent commencement gap is the bit that scared me. A year of interest on a finished building with nobody paying rent would end most people I know.

carlos_nunezActive

I have a much smaller version of that same problem right now on a four unit where the gas meter set is eleven weeks out and the loan doesn't care. Different zeros, same shape. The utility runs the schedule and everybody else pretends they do.

aaron_fitz10 Get yoursPRO6

So what's the actual protection for the lender in that window? Interest reserve funded at close, or a completion guarantee from the sponsor, or both?

jordan_ellis2ActivePRO6

@kestrel that's what I'd want spelled out too. And who sized the reserve, because if it was sized to the sponsor's energization date rather than the utility's, it's decorative.

megan_doyle15 Get yours

Curtailment means, as far as I can tell, that the utility can cut you back at certain times, which for a building whose whole job is never going down sounds like the worst clause in the file.

omar_haddadActivePRO11

"A very expensive warehouse with a strange floor" is the best description of downside collateral I've read. On my scale that's a house with a commercial kitchen in it.

devon_pierce Get yoursPRO5

The line about the appraisal being beside the point is doing a lot of work. It's true when capacity is scarce and secured. It also means the whole valuation rests on one assumption holding, and the last time I heard someone say the appraisal didn't matter it was 2006 and about land.

joe_delgado5AP4CPRO6

@bramble came here to say that. Doesn't mean they're wrong. Means the bubble question isn't crazy.

gregpowell66AG4BPRO8

The four minutes on the shell tracks with what I've seen on jobs like this. Shell is straightforward work, tilt up or precast, big clear height, heavy slab. The schedule risk lives in switchgear, generators and the cooling plant, and those lead times were the thing my old GC complained about constantly. If the lender only asked about roof warranty, somebody else on the deal is carrying the equipment procurement question, or nobody is.

chriswalton8CC1CPRO8

@girder that's the question I'd have put in the room. Long lead equipment ordered and slotted, with deposits paid, or a line in a schedule? Those are different assets.

monica_tran3SF4CPRO6

Ran a service business through two big projects and the ones that went sideways went sideways on a piece of equipment sitting on a boat, every time.

dpatel_reCS4A

The residual is where I'd spend my time. Fifteen years of escalating rent from a strong tenant underwrites fine. At year fifteen the question is whether that specific power and that specific fiber path are still worth something to somebody else, or whether the tenant's next generation of hardware wants a density this shell can't cool. Power scarcity says the site stays valuable. Technical obsolescence says the improvements might not. Your whole exit value depends on which of those two you assume dominates, and I've seen models pick the friendly one without saying so. @tender, did anyone put a number on residual or was it a cap rate on year fifteen rent?

nataliehsuSO1BPRO7

Reading this thread I finally understand why every job posting I see in this sector is an electrical or mechanical title and almost none of them say real estate.

wendy_park48CapitalPRO7

The document I'd have asked for is the estoppel and whatever step in rights the lender gets if the tenant's parent restructures. Also whether the lease survives a foreclosure on its original terms, which turns on the subordination language and on state law, so it needs a real lawyer's read in the state where the asset sits. Everybody argues about megawatts and then the recovery in a bad year gets decided by three paragraphs nobody printed out. @sextant's residual point and mine are the same point from two ends, the thing you own in year sixteen is whatever those documents say you own.