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Appraising building mounted solar PV [photo voltaic] systems presents challenges as this feature is still an uncommon feature. However a significant body of research and practical experience exists such that a reasonable valuation can be reached. No new or "creative" appraisal process is required. This presentation examines the fundamental research and value techniques and addresses what property owners and appraisers should consider when considering the value of a solar PV system.
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Solar photovoltaic system valuation
Recent Research and Techniques
James F. Finlay y
VP, Commercial Real Estate Appraisal Manager
Wells Fargo Bank – RETECHS Los Angeles
Ch i C i l RE & Fi C i USGBC L A lChair, Commercial RE & Finance Committee, USGBC-Los Angeles
1st Valley Green Building Education Conference
CA State University Northridge, June 23, 2011
Wells Fargo Bank and sustainabilityg y
July 2005: 10-point environmental commitment, July 2005: 10 point environmental commitment, creates the Environmental Initiative team
Now Environmental Affairs My role: Primary appraisal manager, risk analysis, trendsy y pp g , y ,
More than $3.7 billion in loans for high-performance $ g pdesigned real estate – LEED, Energy Star
V5 1
Wells Fargo Environmental Finance Report
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Presentation goals :
Valuation techniques for solar photovoltaic (PV) systems
Review past and recent research
Show an example
f h How to prepare for the appraiser
M b k d i i l b t t My background is commercial, but most ideas also apply to residential
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What this talk is NOT about An endorsement of any particular appraisal method
Info is not one size fits all – every situation is differento o o a y ua o dBE PRUDENT, UNDERSTAND THE NUMBERS
Before you invest consider a whole building audity g
EE [Energy Efficiency] investments might be better
Solar PV leasing : no money downSolar PV leasing : no money down
Group pricing (like 1 Block Off the Grid - 1bog.org)
Rooftop leasing for others to install PVRooftop leasing for others to install PV
PPA [Power Purchase Agreement]: multiparty, tax equity, high credit qualityequity, high credit quality
Solar thermal, hot water systems or just EE upgrades4
“Investing” consists of 4 major versions
Capital Expenditure budget - you pay, your cash, get rate of return; investment must make sense and you must KNOW it makes sense.
Traditional financing - via banks; some your Traditional financing via banks; some your money + loan. Uses USPAP appraisal process
Public/Private - SBA 504, Utility programs, credit enhancement CA SB 77. Some of your cash
Creative – Energy Upgrade Los Angeles, PACE [Property Assessed Clean Energy], group pricing[ p y gy], g p p g
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Solar PV “Cost” is really an “Investment”
Solar PV investment offsets utility expense, might produce incomep oduce co e not an cost/expense like management, taxes, maintenance
Solar PV Investment “Cost” has different levels, is not a simple, single number
ff Gross Cost, Effective Cost, True Cost
Different based on tax situation location property etcDifferent based on tax situation, location, property, etc
Incentives, electricity, gas expenses always changing
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Case Study – 20,000 SF Commercial Building
Information needed to “run the numbers” Solar installer contact info, sale packet, p
PV panel make, model, # panels, warrantee
Energy output estimates by installerEnergy output estimates by installer
Inverter make, model, warrantee
System monitoring email interruption notices System monitoring, email interruption notices
Maintenance contract
Utility rate Time of Use tier average annual rate/kWh Utility rate, Time of Use, tier, average annual rate/kWh
Annual energy bill saving estimate
E t l ti / Energy cost escalation/year
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System size - 30kWatt DC system
Gross Cost = $161,838
Effective = $107,655 (after incentives)
True Cost = $ 57,881 (after depreciation)
$0.15/kWh, energy +5%, CPI 3%, Loss -0.4%
Maintenance 0 25% inverter replace @ yr 15 Maintenance 0.25%, inverter replace @ yr 15
W/out depreciation repaid in year 13
30 yr DCF, 9% discount rate (conservative)
@ Y 13 NPV f i i i $128 693 @ Year 13 NPV of remaining saving =$128,693
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Income Approach: Direct Capitalization
Quick and simple, sometimes rightBusiness investment approach vs debt reliefBusiness investment approach vs debt relief
No accounting for inverter replacement g pAccuracy varies depending on system age
Energy costs are rising faster than CPI
At 10% capitalization rate becomes a 10x rule
Cap rate is RE rate per PPA buyout contracts
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This is conservative per the cash flow durability
Solar PV Value including depreciation
Tax basis is beyond typical appraisal scope
B t i t i ll id d i b i But is typically considered in business
Tax rates in pro forma: 28% Fed, 8% CA
Now solar PV repaid in year 9
PLUS resale value in year 9 PLUS resale value in year 9
Reduces: investment payback period 4 yrs+risk
Determining value at sale = several techniques
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Market value is the “value in exchange”
Three appraisal approaches: cost, sale, income
Solar PV not just ROI stream of payments,
“# of years until payback” is not enough
Asset value at sale, called the “reversion”
Yield Capitalization is discounted cash flow + sale
Cost is also a factor, but not dollar for dollar
Sales comp is weakest, but most common12
Research: Solar PV Valuation
“Evidence of Rational Market Valuations for Home Energy Efficiency”e gy c e cy
By Rick Nevin, Gregory Watson
The Appraisal Journal Appraisal Inst October 1998The Appraisal Journal, Appraisal Inst. October, 1998
Supported by US EPA
Value range 10x to 25 times annual energy savings Value range 10x to 25 times annual energy savings
Looks at advantage via mortgage relief from energy cost saving cost saving
Uses a 5% mortgage rate
Basis of famous “The 20 Times Rule” Basis of famous The 20 Times Rule
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PV Value based on Cost
“More Evidence of Rational Market Values for Home Energy Efficiency”Home Energy Efficiency
(also) by Rick Nevin
The Appraisal Journal, Appraisal Inst Oct,1999
Remodeling Magazine Cost vs Value studyg g y
Energy savings per window replacement cost
Confirms general range of 20x rule
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Cost verses Value – Using the Cost Approach
“Remodeling Magazine
Annual Cost vs Value Study 2010-2011”
35 popular remodeling projects, 80 US cities
16 are building envelop relatedg p
Windows, doors, siding, roof, backup generator
Cost verses % of value at resaleCost verses % of value at resale
US National range: 49% to 102%, Median 72%
Los Angeles range: 50% to 112% Median 87%Los Angeles range: 50% to 112%, Median 87%
Window replacement: National 68% to 73%
Back-up generator: National 49% LA 62% Back-up generator: National 49%, LA 62%
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Important recent documents & research
DOE and The Appraisal Foundation M d f U d t diMemorandum of Understanding
June 10 2011June 10, 2011
• Part of Obama Better Buildings Initiative, Part of Obama Better Buildings Initiative, commercial bldgs more energy efficient
• Encourage appraisers to more closely examine value impact of energy efficiency
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Landmark solar PV value study“An Analysis of the Effects of Residential Photovoltaic Energy Systems on Home Sales Prices in California”
Ben Hoen, Peter Cappers, Mark Thayer, Ryan Wiser
Lawrence Berkeley National Laboratory, April 22, 2011
Support by Office of Energy Eff and Renewable Energy Support by Office of Energy Eff. and Renewable Energy, DOE, Clean Energy States Alliance
Core Logic & Fiserv RE data, sales; matched to solar financial incentive program recipients
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CA Solar Initiative per home re-sales and new homes
Lawrence Berkeley Labs study overview
• Home sales 1999-2009 : matched market data of70,425 non-PV homes to 1,894 PV homes
• Repeat sales 27,919 non-PV matched to 394 PV homes
• Results robust across study, 25 variables
• Market value premium of $17K• Average PV system size 3.1 kW DC
• Market value: $3.9-$6.4/watt DC•coalesce around $5.5/watt
• Existing homes $6 to $6.5/Watt DC• New homes $2.3-$2.6/watt DC
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• 14 – 22x annual energy savings, 20:1 existing homes
USPAP Appraisal Competency Provision
A i tAppraiser must:1. be competent to perform the assignment;2. acquire the necessary competency to perform the assignment;3 d li ithd f th i t3. or decline or withdraw from the assignment.
If the appraiser determines that he or she is not competent prior to accepting an assignment, the appraiser must:
1 di l th l k f k l d i t th li t b f 1. disclose the lack of knowledge or experience to the client before accepting the assignment (or at that point in the appraisal process at which the deficiency is discovered);2 take all steps necessary or appropriate to complete the 2. take all steps necessary or appropriate to complete the assignment competently (such as through expanded personal study/research or consulting with an expert); and3. describe in the report the lack of knowledge and/or experience
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3. describe in the report the lack of knowledge and/or experience and the steps taken to complete the assignment competently.
USPAP Appraisal Competency Provision
COMPETENCY RULE’s Comment section about “Being Competent” which states:Being Competent , which states:
“Competency may apply to factors such as, but not Competency may apply to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use specific laws and regulations or an intended use, specific laws and regulations, or an analytical method.
If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency…”
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for having the competency…
Utility connection : a major future issue
• Demand response payments – utility load reduction tied to smart grid and load reduction tied to smart grid and meterWill be tied to smart home energy • Will be tied to smart home energy
management; not ready yet
• Electric vehicle growth & Vehicle to Grid• Power grid can’t always accept powerPower grid can t always accept power
• Track in newsletters, blogs of Pike h ld
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Research, Boulder
Conclusions: Recent research supports past PV value claims
Energy efficiency and resource monitoring firstEnergy efficiency and resource monitoring first
Null Hypothesis is invalid;
“Don’t know does not equal zero”
Appraisers feeling pressure to be Competent
Sales Comparison Approach not only method
Value impact varies by location (maybe a lot) Value impact varies by location (maybe a lot)
Still early, owners need to help (maybe a lot)
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Will grow as more buildings become Net Zero
Thank You !!Thank You !!James F. Finlaya es ay
VP, Commercial Appraisal Manager
W ll F B k RETECHSWells Fargo Bank – RETECHS
707 Wilshire Blvd, 11th Fl
Los Angeles, CA 90017
310-821-8111310 821 8111
James.F.Finlay@WellsFargo.com
’ k d
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I’m LinkedIn
The Economics of Green BuildingThe Economics of Green BuildingPiet Eichholtz, Nils Kok, John M. QuigleyUniv of CA, Berkeley – April, 2011Inst of Business and Economic Research, Fischer Center for
RE & Urban EconomicsSupport by RICS European Center for Corporate Support by RICS, European Center for Corporate
Engagement, Univ of CA Energy Institute
ff b ld h l k l lGreen office building have lower market volatilityHigher rent & asset value, both EE & sustainability
----------------------------------------------------------------------www.OnGrid.netOnGrid Solar; excellant financial analysis under Papers, P bli ti B A d Bl k ft d l lt tPublications, By Andy Black, software developer, consultant
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Integrating Sustainability and Green Building into g g y gthe Appraisal Process
Timothy Runde, Stacey ThoyreJournal of Sustainable Real Estate, Oct, 2010Markets have different values for “greenness”
----------------------------------------------------------------------------------------------------------------------Understanding the Solar Home Price Premium: Electricity Generation and “Green” Social StatusElectricity Generation and Green Social Status
Samuel Dastrup, Joshua Graff Zivin, Dora L. Costa, Matthew E Kahn
CA Center for Population Research, UCLA Dec, 2010
Valley Green Conf, Northridge , CA - 06-2011 pg 25
Market Value and Cost of Solar PV Electricity P d iProduction
By Severin BorensteinCenter for the Study of Energy Markets Jan 2008Center for the Study of Energy Markets, Jan, 2008
Looks at solar PV relative to grid powerLooks at solar PV relative to grid powerSince solar output matches peak demand potential with
timed pricing to increase output valueB ild i t PV l i t ti di t ib ti t Build into PV value savings on construction, distribution cost
and loss of energy transmission
--------------------------------------------www.PikeResearch.com : Newsletters, high-end research on solar, innovation in energy & efficiency
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