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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2016

Shining a Light on Solar Appraisals

Mortgage originators can help simplify the process of putting a value on photovoltaic systems

Solar photovoltaic (PV) arrays are becoming more and more common, a trend that will likely continue because of expected reductions in project costs and the major assist provided by the 30 percent federal Investment Tax Credit available for solar energy projects.

Because of the many variables that affect the analysis of the their value, however, solar systems can complicate the process of obtaining financing for commercial buildings. Borrowers, lenders and appraisers all have a stake in arriving at an accurate value, of course, and have roles in the process that differ from what they may be used to when evaluating projects making use of more traditional energy sources.

Even though it can be complicated, determining the collateral value of PV systems — which are devices, such as solar cells, that convert sunlight into electricity — is far from impossible, and mortgage originators can provide a valuable service to prospective clients if they understand the steps necessary to determine and demonstrate the worth of solar systems.

Valuing PV projects

Researchers have worked for years, with some success, to demonstrate the ability of solar PV projects to increase the value of commercial real estate, but it can be difficult to apply broad research results to individual properties.

Rather than the comparable-sales method typically used in residential appraisals, an income-approach analysis — based on the present value of future energy-cost savings — is a superior technique in evaluating solar systems. An analysis that makes use of about a dozen variables, including the property’s location and the type of system, among other factors, can be used to accurately calculate the value today of the future cash benefits produced by a solar PV system. This cash-flow scenario is not much different from applying an income approach on the value of, for instance, an extra garage that is leased to a highly reliable tenant at a specified sum per month for the next 25 years.

For mortgage originators and their clients, a key first step is to make sure all of the other parties in the lending process — the seller, lender and appraiser — agree on a method of establishing the value of the solar PV system. One common method is to use the free appraisal software available through the U.S. Department of Energy’s SunShot Initiative.

Document expenses

A typical utility bill presents a dizzying amount of information to anyone attempting to determine the cost of energy and the value of any energy-saving initiative. Prices paid per kilowatt hour (kwh) can vary based on peak rates, variations by season, demand charges, and variable and flat taxes — all of which make the analysis complicated. What’s more, there is no standard energy bill common to all of the 3,200 or so electric utilities in the U.S.

An alternative to analyzing utility bills is to go directly to the applicable utility’s rate-sheet schedule. These are available online and serve as baseline information for the federal government’s SunShot Initiative software No matter how it is done, any analysis of energy investment requires knowledge of the yearly cost per kwh. This is the equivalent of knowing your car’s typical mileage per gallon.

It is essential for the mortgage originator and prospective borrower to know and be able to understand the ownership structure of the solar PV system. Is the system owned outright, or is it leased through a third party or financed through solar power purchase agreement (PPA)?

Evaluation of owned systems is relatively straightforward, while leased or PPA arrangements are more complex. Under a PPA approach, a developer provides the solar equipment to a property owner at little or no cost and then sells power back to the building owner. Cost efficiencies in such a case are documented by demonstrating the savings achieved by purchasing energy through the PPA — versus purchasing it at a higher cost from the local utility.

The sellers of a building equipped with a solar PV system
must be willing to cooperate in the financing process.

A key number for a lease or PPA arrangement is the buyout amount for the system, given a leased or PPA-funded solar system is not paid for as in the case of an owned system. Consequently, because of the outstanding financing, it is possible the system adds little value to the property. For third-party financed systems, a qualified appraiser may need to provide the bank with a lease-analysis consulting letter to show that the lease or PPA arrangement does not have a negative value impact.

Engagement and expertise

As important as documents such as leases, rate sheets and purchase agreements are to establishing the value of solar PV systems, it also is essential to have the cooperation and expertise among individuals involved in the process. Specifically, sellers of a building equipped with a solar PV system must be willing to cooperate in the financing process, and a solar energy “champion” should be identified as a designated contact for questions from lenders and appraisers.

Owners are often the only source of relevant information about solar PV systems. If they are not willing to provide the basic solar system documents, appraisers will be unable to do their jobs, no matter how experienced they are in solar energy evaluation, or how sophisticated their valuation software.

A full collection of owner-provided installation documents for a solar system should show the actual out-of-pocket cost with all tax and utility incentives noted, energy-output projections, a hardware list, and all equipment and labor warrantees. Verify that there is some type of output monitoring, as well as a workable notification system to call in professional help if the solar system malfunctions. The property owner should also provide the last 12 months of utility bills to assist in proving that the system actually saves money.

The solar energy champion could be any one of a number of people involved in the property maintenance and lending process, including the owner, property manager, borrower or solar installer. Whatever this person’s role, the champion should have a solid understanding of solar technology and be willing and able to serve as the go-to person for lenders and appraisers. Simply put, make sure champions are available and that loan officers and appraisers know how to contact them.

Simplify lenders’ work

It is important to convey the relevant information you have collected to the lending officer and underwriter as clearly and concisely as possible. Summarize the key expenses and cost-saving information as well as the relevant facts and conclusions on a single page. Make complex, detailed information available, but do not assume that lenders and underwriters will wade through it, so also provide an understandable factual summary.

To get the loan application on the right track, the completed solar PV document/information package should be delivered to the lending institution as early as possible in the process. This will be the only way the loan collateral will be identified as “complex property,” qualifying it for a more hands-on treatment in the appraisal process. Key people should be given a paper copy and electronic copy, with a requested receipt acknowledgement. This will (or should) oblige the person ordering the appraisal to engage a competent appraiser and appraisal reviewer.

Once the lender has been given notice that a solar PV system exists via the documentation package, it is the bank’s job to arrange for the appraisal and review. Appraisals done for federally guaranteed institutions must comply with the Uniform Standards of Professional Appraisal Practice developed by the Appraisal Institute. The standards require, among other things, that the appraiser completing the assignment is competent and that the report determines an as-is value. Because research has shown unequivocally that solar PV systems add value to a property, if an appraisal determines there is a zero value, there should be an analysis supporting that conclusion.

Where are the competent solar PV appraisers? The Appraisal Institute, the Appraisal Foundation and numerous other organizations list valuation professionals trained in valuing high-performance green real estate, which typically includes solar PV projects. For the extra effort and expertise needed, the appraiser and appraisal reviewer  will charge a somewhat higher fee — perhaps a 10 percent to 15 percent premium — and take more time (a few days to a week) to complete their work. The higher costs are worthwhile, however, when the outcome is a competent valuation — instead of a faster, cheaper analysis that does a poor job recognizing the collateral value created by a solar PV project. 


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