Solar PV Valuation -Valley Green Bldg Conf 06 23 -2011


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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 PV Valuation -Valley Green Bldg Conf 06 23 -2011

  1. 1. Solar photovoltaic system valuation Recent Research and TechniquesJames F. Finlay y VP, Commercial Real Estate Appraisal Manager Wells Fargo Bank – RETECHS Los Angeles Chair, C Ch i Commercial RE & Finance Committee, USGBC-Los Angeles i l Fi C i USGBC L A l1st Valley Green Building Education ConferenceCA State University Northridge, June 23, 2011
  2. 2. Wells Fargo Bank and sustainability g y July 2005: 10-point environmental commitment, 10 point creates the Environmental Initiative team Now Environmental Affairs  My role: Primary appraisal manager, risk analysis, trends y y pp g , y , More than $3.7 billion in loans for high-performance $ g p designed real estate – LEED, Energy Star V5 1
  3. 3. Wells Fargo Environmental Finance Report 2
  4. 4. Presentation goals :Valuation techniques for solar photovoltaic (PV) systems  Review past and recent research  Show an example  How to prepare f the appraiser for h  M background i commercial, but most My b k d is i l b t t ideas also apply to residential 3
  5. 5. What this talk is NOT about An endorsement of any particular appraisal method Info is not one size fits all – every situation is different o o o a y ua o d BE PRUDENT, UNDERSTAND THE NUMBERS  Before you invest consider a whole building audit y g  EE [Energy Efficiency] investments might be better Solar PV leasing : no money down Group pricing (like 1 Block Off the Grid - Rooftop leasing for others to install PV PPA [Power Purchase Agreement]: multiparty, tax equity, high credit quality Solar thermal, hot water systems or just EE upgrades 4
  6. 6. “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 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 pp g 5
  7. 7. Solar PV “Cost” is really an “Investment” Solar PV investment offsets utility expense, might p oduce co e produce income  not an cost/expense like management, taxes, maintenance Solar PV Investment “Cost” has different levels, is not a simple, single number  Gross Cost, Effective Cost, True Cost ff Different based on tax situation, location, property, etc situation location property Incentives, electricity, gas expenses always changing 6
  8. 8. Case Study – 20,000 SF Commercial BuildingInformation needed to “run the numbers” Solar installer contact info, sale packet , p PV panel make, model, # panels, warrantee Energy output estimates by installer Inverter make, model, warrantee System monitoring email interruption notices monitoring, Maintenance contract Utility rate Time of Use tier, average annual rate/kWh rate, Use, tier Annual energy bill saving estimate E Energy cost escalation/year t l ti / 7
  9. 9. 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 0.25%, W/out depreciation repaid in year 13 30 yr DCF, 9% discount rate (conservative)@Y Year 13 NPV of remaining saving =$128,693 f i i i $128 693 8
  10. 10. 9
  11. 11. Income Approach: Direct CapitalizationQuick and simple, sometimes rightBusiness investment approach vs debt reliefNo accounting for inverter replacement g p Accuracy varies depending on system ageEnergy costs are rising faster than CPIAt 10% capitalization rate becomes a 10x ruleCap rate is RE rate per PPA buyout contracts This is conservative per the cash flow durability 10
  12. 12. Solar PV Value including depreciation Tax basis is beyond typical appraisal scope B t is typically considered i b i But i t i ll id d in business Tax rates in pro forma: 28% Fed, 8% CA Now solar PV repaid in year 9 PLUS resale value in year 9 Reduces: investment payback period 4 yrs+risk Determining value at sale = several techniques 11
  13. 13. 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 common 12
  14. 14. 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, 1998 Journal Inst October Supported by US EPA Value range 10x to 25 times annual energy savings Looks at advantage via mortgage relief from energy cost saving Uses a 5% mortgage rate Basis of famous “The 20 Times Rule” The Rule 13
  15. 15. PV Value based on Cost “More Evidence of Rational Market Values for Home Energy Efficiency” Efficiency (also) by Rick Nevin The Appraisal Journal, Appraisal Inst Oct,1999 Remodeling Magazine Cost vs Value study g g y Energy savings per window replacement cost Confirms general range of 20x rule 14
  16. 16. 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 related g p Windows, doors, siding, roof, backup generatorCost verses % of value at resale US National range: 49% to 102%, Median 72% Los Angeles range: 50% to 112% Median 87% 112%, Window replacement: National 68% to 73% Back-up generator: National 49%, LA 62% 49% 15
  17. 17. Important recent documents & researchDOE and The Appraisal Foundation Memorandum of Understanding M d fU d t di June 10, 2011 10• Part of Obama Better Buildings Initiative,commercial bldgs more energy efficient• Encourage appraisers to more closelyexamine value impact of energy efficiency 16
  18. 18. Landmark solar PV value study“An Analysis of the Effects of Residential PhotovoltaicEnergy 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, Eff. EnergyDOE, Clean Energy States Alliance Core Logic & Fiserv RE data, sales; matched to solarfinancial incentive program recipients CA Solar Initiative per home re-sales and new homes 17
  19. 19. Lawrence Berkeley Labs study overview• Home sales 1999-2009 : matched market data of 70,425 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• 14 – 22x annual energy savings, 20:1 existing homes 18
  20. 20. USPAP Appraisal Competency ProvisionAppraiser must:A i t 1. be competent to perform the assignment; 2. acquire the necessary competency to perform the assignment; 3. 3 or decline or withdraw from the assignment. d li ithd f th i tIf the appraiser determines that he or she is notcompetent prior to accepting an assignment, theappraiser must: 1. disclose th lack of knowledge or experience to the client before 1 di l the l k f k l d i t th li t b faccepting the assignment (or at that point in the appraisal process atwhich the deficiency is discovered);2.2 take all steps necessary or appropriate to complete theassignment competently (such as through expanded personalstudy/research or consulting with an expert); and3. describe in the report the lack of knowledge and/or experienceand the steps taken to complete the assignment competently. 19
  21. 21. USPAP Appraisal Competency ProvisionCOMPETENCY RULE’s Comment section about“Being Competent , which states: Being Competent”“Competency may apply to factors such as, but not Competencylimited to, an appraiser’s familiarity with a specific typeof property or asset, a market, a geographic area, anintended use specific laws and regulations or an use, regulations,analytical method.If such a factor is necessary for an appraiser to developcredible assignment results, the appraiser is responsiblefor having the competency…” competency… 20
  22. 22. Utility connection : a major future issue• Demand response payments – utilityload reduction tied to smart grid andmeter• Will be tied to smart home energymanagement; not ready yet• Electric vehicle growth & Vehicle to Grid• Power grid can’t always accept power can t• Track in newsletters, blogs of PikeResearch, Boulder h ld 21
  23. 23. Conclusions: Recent research supports past PV value claims Energy 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) Still early, owners need to help (maybe a lot) Will grow as more buildings become Net Zero 22
  24. 24. Thank You !!James F. Finlay a es ayVP, Commercial Appraisal ManagerWells Fargo Bank – RETECHSW ll F B k707 Wilshire Blvd, 11th FlLos Angeles, CA 90017310 821 I’m LinkedIn ’ k d 23
  25. 25. The Economics of Green Building Piet Eichholtz, Nils Kok, John M. Quigley Univ of CA, Berkeley – April, 2011 Inst of Business and Economic Research, Fischer Center forRE & Urban Economics Support by RICS European Center for Corporate RICS,Engagement, Univ of CA Energy Institute Green office b ld ff building h have llower market volatility k l l Higher rent & asset value, both EE & sustainability----------------------------------------------------------------------www.OnGrid.netOnGrid Solar; excellant financial analysis under Papers,Publications, By Andy Black, software d lP bli ti B A d Bl k ft developer, consultant lt t 24
  26. 26. Integrating Sustainability and Green Building into g g y gthe Appraisal Process Timothy Runde, Stacey Thoyre Journal of Sustainable Real Estate, Oct, 2010 Markets have different values for “greenness”-----------------------------------------------------------Understanding the Solar Home Price Premium:Electricity Generation and “Green” Social Status Green 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
  27. 27. Market Value and Cost of Solar PV ElectricityProductionP d i By Severin Borenstein Center for the Study of Energy Markets, Jan 2008 Markets Jan, Looks at solar PV relative to grid power Since solar output matches peak demand potential withtimed pricing to increase output value Build into B ild i t PV value savings on construction, di t ib ti cost l i t ti distribution tand loss of energy : Newsletters, high-end researchon solar, innovation in energy & efficiency 26