Solar Photovoltaic System Valuation Techniques

Transcription

1 Solar Photovoltaic System Valuation Techniques James F. Finlay VP, Commercial Real Estate Appraisal Manager Wells Fargo Bank RETECHS Los Angeles Chair, Real Estate Finance Committee, USGBC LA Southern CA Chapter of the Appraisal Institute Northwest Branch Meeting, Santa Monica February 21,

2 Practical Valuation Tools & Techniques Short overview of a solar photovoltaic [PV] system Valuation Issues Quick Case Study 2

3 U.S. has vast solar energy 3

4 Solar PV System Components 4

5 Ownership Options Owned by property p owner Higher upfront capital requirement, capture all gains Leased Low/no down, different versions Market value analysis different than owned PV PPA Power Purchase Agreement, complex tax equity and credit energy user Rooftop lease Just income from roof rent 5

6 Electricity rates vary (a lot) U.S. Energy Information Administration form EIA 861, revised April

7 The Valuation Process

8 Value Influences Different points of view: As first user/investor As loan collateral As the next t buyer What about incentives, rebates & tax situation? What is the local electricity cost, building use level? Complex with real time energy pricing SRECs Solar Renewable Energy Credits value 8

9 3 Approaches to Value Income DCF, direct cap, saving multiplier Sales comparison data (if any) + survey Cost Review published data, better at setting floor than point value Reconcile; conclude solar PV contribution 9

10 Classic Due Diligence: Essential Docs + Information Due diligence documents for equipment t& warrantees; information from owner & installer Gather data for income cap approach (DCF) Verify equipment, warranties, maintenance Historic energy use & average annual $/kwh, utility rate sheet 10

11 DSIREUSA.org Incentive database 11

12 Local interviews are key Hard local data may be difficult to find, so survey market professionals Interview the solar champion Eco agents, green MLS listing brokers Local US Green Business Council Local solar companies, electric utility Report solar market acceptance opinions i 12

13 PV Value Tool New solar PV Value tool released 1/31/2012 by Sandia National llb Labs & Solar Power Electric Excel based NPV discounted cash flow Estimates solar array output, annual savings Connects to NREL databases with overrides Designed to work with AI Residential Green and Energy Efficient Addendum 13

14 Reporting the Appraisal

15 Reporting format First report appraisal of real estate without solar PV, in the normal way Then, in its own section, report solar PV scope of work, value analysis & conclusion Final total value is sum of building, land & solar 15

16 Market Value definition Parties assumed to be acting knowledgeably and to be well informed or well advised Assuming parties Don t know or Don t understand contradicts marketvalue definition Presumption is best practice techniques are applied Null hypothesis is not valid, value is not zero 16

17 Incentives, Rebates, Tax Issues After average annual energy cost & use level, incentives are largest demand driver Incentives waste quickly; ikl tax benefits & depreciation might be owner specific Best case with depreciation shows whether investment makes sense to first owner Banks want value in exchange (no depreciation) 17

18 Energy Cost Savings Multiplier Very easy calculations: Annual Cost Savings times XFactor = value Basically the inverse of a direct cap Used in 1998 Appraisal Journal and same general multiplier range confirmed in LBNL report x to 20x multipliers equal to 5% to 10% OAR LBNL report landmark study shows importance of neighborhood in value 18

19 Discounted Cash Flow NPV Allows input of multiple influences DCF analysis is sophisticated, but can be a black box Sandia National Labs PV Value Easy to include depreciation, sensitivity Shows annual reversion values Most accurate, defendable NPV of a stream of dollars over time is a universal concept 19

20 Income Approach Most valid, most commonly used in cash flow based analysis Direct capitalization & annual cost savings multiplier are simpler, create confidence Discounted cash flow Net present value most detailed and used by sophisticated investors 20

21 Cost vs. Value Approach Remodeling Magazine annual Cost vs Value survey by Hanley Wood with assistance of Natl. Assoc. of Realtors 35 popular remodel projects, 9 regions, 80 cities 16 building envelope: Windows, doors, roof, siding US U.S. national range: 49% 102% 102%, median 72% Los Angeles range: 50% 112%, median 87% Window replacement: Nti National l68% 68% 73% For long lived upgrades, lowest is about 50% 21

22 Three Costs: 3Costs Solar PV DCF 1. GrossCost no offsets 2. Net or Effective Cost after rebates, incentives 3. Cost after depreciation against ttaxable income Four page excel Workbook Inputs worksheet: # panels, output, inverters, warrantees, panel degradation rate 3 Costs Summary worksheet Solar PV DCF with and without depreciation 22

23 3Costs Summary Worksheet 23

24 Cast Study DCF 24

25 DCF Details #1 25

26 DCF #2 with depreciation tax advantage 26

27 Conclusions Classic appraisal techniques applied, with extra qualitative market research Lots of research published with best practice techniques Watch market acceptance and avg $/kwh Comply with USPAP Competency Rule Appraisal Fee: Extra 10% 15%, 15% extra 5 7 days Newest approach for homes is leasing 27

28 THANK YOU!! James F. Finlay Wells Fargo Bank RETECHS Los Angeles, CA ll Chair, Real Estate Finance Committee, USGBC LA I m Im LinkedIn 28