Energy Project Financing : Resources and Strategies for Success

Key Risk and Structuring Provisions for Bankable Transactions 109

of those payments. In most cases, the lender will assume all respon-
sibilities for billing, collection and distribution of payments. When
debt service payments are bundled with payments to the ESCO for its
operations and maintenance services, the lender will require a lock-box
agreement. The lock-box would be controlled by the lender under the
terms of an agreement that clearly states that all payments received
will be applied first to debt service, next to ESCO receivables, and last
to equity, if any.

Taxes, Insurance and Maintenance
Whether the financing transaction is documented as a standard
capital lease or incorporated into an executory services agreement, the
capital markets will require a “triple net” arrangement. In other words,
the lender will require the end user obligor or the ESCO to:

• Pay all applicable property, sales and use taxes.


• Acquire property and liability insurance in amounts determined
  by the lender and name the lender as a loss payee and/or ad-
  ditional insured under those policies.


• Properly maintain the equipment. The ESCO’s operations and
  maintenance obligations normally cover this requirement.

Title/Security Interest in Assets
Depending on the financing structure used, the lender may or
may not hold title to the financed equipment. However, in all cases,
the lender will require a first priority, perfected security interest in the
project assets. Three key elements must be included in the documents
to satisfy this requirement. They are:

• Explicit identification of the assets as personal property and
  agreement by the parties that the installed equipment will never
  be deemed fixtures or any other type of real property.


• Unequivocal rights of the lender to perfect its first priority security
  interest in the equipment by making any and all UCC and fixture
  filings necessary to document its lien(s) on the equipment. Further-
  more, the end user obligor and ESCO will be required to keep the
  equipment free and clear of liens other than those asserted by the
  lender.