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.

1. Solar photovoltaic system valuation
Recent Research and Techniques
James F. Finlay
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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 l
1st Valley Green Building Education Conference
CA State University Northridge, June 23, 2011

2. Wells Fargo Bank and sustainability
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 July 2005: 10-point environmental commitment,
10 point
creates the Environmental Initiative team
 Now Environmental Affairs
 My role: Primary appraisal manager, risk analysis, trends
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 More than $3.7 billion in loans for high-performance
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designed real estate – LEED, Energy Star
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3. Wells Fargo Environmental Finance Report
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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
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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
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 EE [Energy Efficiency] investments might be better
 Solar PV leasing : no money down
 Group pricing (like 1 Block Off the Grid - 1bog.org)
 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
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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
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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
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 Different based on tax situation, location, property, etc
situation location property
 Incentives, electricity, gas expenses always changing
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8. Case Study – 20,000 SF Commercial Building
Information needed to “run the numbers”
 Solar installer contact info, sale packet
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 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 /
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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
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10. 9

11. Income Approach: Direct Capitalization
Quick and simple, sometimes right
Business investment approach vs debt relief
No accounting for inverter replacement
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Accuracy 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
This is conservative per the cash flow durability
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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
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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
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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
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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
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 Energy savings per window replacement cost
 Confirms general range of 20x rule
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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
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 Windows, doors, siding, roof, backup generator
Cost 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%
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17. Important recent documents & research
DOE and The Appraisal Foundation
Memorandum of Understanding
M d fU d t di
June 10, 2011
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• 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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18. 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,
Eff. Energy
DOE, Clean Energy States Alliance
Core Logic & Fiserv RE data, sales; matched to solar
financial incentive program recipients
CA Solar Initiative per home re-sales and new homes
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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
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20. USPAP Appraisal Competency Provision
Appraiser 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 t
If the appraiser determines that he or she is not
competent prior to accepting an assignment, the
appraiser 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 f
accepting the assignment (or at that point in the appraisal process at
which the deficiency is discovered);
2.
2 take all steps necessary or appropriate to complete the
assignment competently (such as through expanded personal
study/research or consulting with an expert); and
3. describe in the report the lack of knowledge and/or experience
and the steps taken to complete the assignment competently.
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21. USPAP Appraisal Competency Provision
COMPETENCY RULE’s Comment section about
“Being Competent , which states:
Being Competent”
“Competency may apply to factors such as, but not
Competency
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
use, regulations,
analytical method.
If such a factor is necessary for an appraiser to develop
credible assignment results, the appraiser is responsible
for having the competency…”
competency…
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22. Utility connection : a major future issue
• Demand response payments – utility
load reduction tied to smart grid and
meter
• Will be tied to smart home energy
management; not ready yet
• Electric vehicle growth & Vehicle to Grid
• Power grid can’t always accept power
can t
• Track in newsletters, blogs of Pike
Research, Boulder
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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
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24. Thank You !!
James F. Finlay
a es ay
VP, Commercial Appraisal Manager
Wells Fargo Bank – RETECHS
W ll F B k
707 Wilshire Blvd, 11th Fl
Los Angeles, CA 90017
310 821 8111
310-821-8111
James.F.Finlay@WellsFargo.com
I’m LinkedIn
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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 for
RE & 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
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Higher rent & asset value, both EE & sustainability
----------------------------------------------------------------------
www.OnGrid.net
OnGrid Solar; excellant financial analysis under Papers,
Publications, By Andy Black, software d l
P bli ti B A d Bl k ft developer, consultant
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26. Integrating Sustainability and Green Building into
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the 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. Market Value and Cost of Solar PV Electricity
Production
P 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 with
timed 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 t
and loss of energy transmission
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