The Basics

Below is a list of basic issues that when discussed early on, allows the FourPoints evaluation process to go smoother and faster. There are many more documents, agreements, opinions and certifications that are required to complete a project, in addition to the few described below. But this list of “Basics” is a good place to start, even though not all of these issues apply to every project.

1. Proof of Concept. The project/technology/process has been proven by a test plant, which provides evidence that the design/process/business is feasible and valuable.

2. Proof of Manufacturing. The process to produce the product(s) has been proven to be scalable to a commercial operation.

3. Proof of Product Market (Off-Take Contract(s)). Offtake contracts to purchase the products, have been entered into. The length of the term of the contract, the price and escalators of the price, the payment terms, and the delivery requirements must all support profitability. The credibility, track record, and creditworthiness of the buyer(s) must also be evaluated.

4. Informal Approval of Long-Term Funding. Documentation of the consent/willingness of third-party to pursue or provide long-term funding. Typically, these are non-binding Letters of Intent or ‘best efforts’ letters, until full commitments are secured closer to the closing of long-term funding.

5. Debt Service Coverage Ratio. A debt service coverage ratio of at least 1.5 is preferred. Generally, the Debt Service Coverage Ratio is calculated as follows:

[Gross Revenue – LESS Costs of Operation] / Debt Service = 1.5 or more.

EXAMPLE: where debt service is $18 million annually.

Gross Revenue: $50,000,000

LESS    Cost of Operations ($15,000,000)

GROSS PROFIT $35,000,000

$35,000,000/$18,000,000 = 1.94 DSCR

6. Output Warranty. The General Contractor or a credible third party, must provide the owner and funders, with a meaningful warranty, which guarantees that the completed project will produce the agreed upon products meeting the stipulated specifications, in stipulated volumes, over a stipulated period of time. In some circumstances this warranty is provided through a Performance Output Warranty insurance policy. In other situations, this guarantee is provided by the Licensor of the technology if that licensor is sufficiently credible, and has sufficient resources to support such a long-term guarantee.

7. Control of the Site. The site for the Project must be secured for construction and operation, through outright ownership, option to purchase, lease or other method of control. If a long-term lease is proposed (rather than ownership), the lease of the site must be substantially longer than the life of any bonds used for funding the project. A survey, and Phase I environmental report are required.

8. Land Use Issues. All platting, zoning, and special use permits from all local governments with jurisdiction over the project, (and any required easements) must be in place at least before any funding is closed. Separate agreements are sometimes required with the local community allocate the obligation to maintain or pay for the maintenance of streets. A detailed description of each of these issues and the expected timeframe for their completion is needed.

9. Permitting. Initially, a detailed description of all required permits and licenses for the project, and the expected timeline for securing them, is required. Any permits or licenses required by applicable local, state or federal authorities with jurisdiction over the Project (environmental, air quality, water use or discharge, water well permitting, etc.) must be in place before the funding can close.

10. Welcoming Host. The acceptance of the Project by the local community is imperative. Depending upon the actual activity of each Project, and the uses of the immediately surrounding areas, citizens and community leaders may support a project at varying levels of intensity. Resolutions and letters of support from local governments, officials, associations, business leaders, and citizens are valuable when assessing this issue.

11. Feedstock Contracts. Having long-term, executed feedstock contracts in place with credible, experienced, substantial feedstock vendors are required. The pricing mechanism for feedstock should be easily calculable, and free from price volatility to the greatest extent possible. The vendor should have sufficient capacity to provide feedstock for any expansions. Having sufficient stockpiles of feedstock on the project site, to handle reasonably anticipated weather, transportation or other disruptions in feedstock delivery, is also required. The vendor must have the resources, facilities and personnel to maintain as sufficient backlog of feedstock on the vendor’s premises.

12. Credible Management. The key management of the owner/developer should have documentable education and/or experience to justify reliance upon their judgment in their respective disciplines (Management, Finance, Operations, Human Resources, Information Technology, etc.).

13. Credible Operator. The operator of the project must have credible documentable experience in the operation, maintenance and management of the same or substantially similar facilities or operations. The operator must have documentable financial strength to fund operations and the needed solutions to problems that may arise.

14. Credible General Contractor. The General Contractor must have the experience, relationships with sub-contractors, and financial capacity, to complete the project on time and within budget. The General Contractor must act as the one single point of contact, for the information and problem-solving that funders and owners prefer. Documentable successful experience with the same or substantially similar projects is imperative.

15. Credible Financial Analyst. This is an Independent 3rd party, whose opinions as to the technical and financial feasibility of the Project are readily acceptable in the financial industry. Proof of their opinions supporting prior successful projects in the same or substantially similar industries, is required.

16. Required Construction Contract Terms. In the construction (or Design/Build) contract, the General Contractor must agree to a fixed Guaranteed Maximum Price, and must set a date certain for substantial completion (full operational capability) with, no extensions. Additionally, the contract must set liquidated damages (in an amount equal to the daily debt service of the long-term funding) for each day of delay past the date certain for completion. The contractor must also provide performance and payment bonds, from a credible issuer, for the full amount of the contract.

17. Separate Operational Reserve. The projections of project cash flow and its use, must include funding of a separate operational reserve fund. This fund is used when there is insufficient project revenue to pay debt service or operational expenses. A revenue shortfall can occur when products do not sell as projected, prices do not meet the estimated levels, or any other time that operating revenue drops below the level required to pay for debt service and the cost of operations, including unexpected operational or capital costs. This fund, typically in the amount of one to three years of debt service.

18. Appraisal. When acquiring an existing project (or refinancing an existing project) a full appraisal is required.

19. Assumptions and Projections. Full disclosure of each of the assumptions underlying the financial projections is required. Credible projections utilizing reason-based conclusions are expected.