Solar impact

[TerryRohrer]

I suspect that you missed part of my last post because I pointed out why exactly support from this market (and the same property type) would be needed. I won't repeat myself, but how would you propose extracting a contributory value for a PV system that has differing characteristics than the subject's system and in a location with different rates? Unless you have sufficient data regarding the savings of the utilities and the life of the PV system for the sale, there would be too many variables to simply apply the same extracted amount to the subject property.

It is either an assumption that these characteristics matter (we know nothing of the system acknowledged by the OP), or you have data showing it. I would prefer the latter over the former every time. Nor do I believe such differences cannot be addressed. Again, it is easier to assume they can't be reconciled than it is to find out.

What this seems to boil down to is skepticism of solar. Many commercial owners that are installing these systems are motivated by the utility savings and payback, rather than environmental motivations. The owners of the properties with solar that I've appraised in the past are happy with the savings. I'm sure that skepticism is the reason that more owners haven't installed solar, but the owners can provide utility bills to prospective purchasers to support the savings.

Your guess here may well be correct. They may also be informed and see reports like the above, only about 30% of these systems might break even. What ever the cause, that leaves a market with something probably less than 1% of the buyer pool believing they are a good investment. Lack of demand does not enhance value.

 

[Gobears81]

Your guess here may well be correct. They may also be informed and see reports like the above, only about 30% of these systems might break even. What ever the cause, that leaves a market with something probably less than 1% of the buyer pool believing they are a good investment. Lack of demand does not enhance value.

I am personally skeptical that 30% of systems break even, but have done DCF's on solar where it did not have a contributory value at the level of the initial purchase before tax incentives. The assumption seems to be that if a DCF is done, the solar system will be overvalued. That would require the utility savings projections to be overly aggressive - certainly possible, but not in itself sufficient rationale to reject yield cap as a valuation method.

 

[Terrel L. Shields]

There are accepted methods of deriving adjustments

The DCF analysis sometimes can be only the best you have. And without some evidence of a further discount as some externality or functional resistance to the feature, who can prove that it isn't? So why not do a sinking fund analysis? Hoskold's or Inwood sinking fund. In other words, apply a sinking fund that replaces the panels at the end of the life vs the net income discounted and anticipated from the array. Cost 100k in year zero, worth zero in year 20. Say makes $10k vs deprec of $5k. DCF that over 20 years.

or

 

[Mark K]

The DCF analysis sometimes can be only the best you have. And without some evidence of a further discount as some externality or functional resistance to the feature, who can prove that it isn't?

I've had exactly that same discussion with some reviewers over the years. They didn't care for my analysis and valuation method of a specific amenity. They didn't know exactly why but just didn't like my method. I told them to prove my method wrong and I'd be happy to modify the report. Never heard back from any of them.

 

[TerryRohrer]

I am personally skeptical that 30% of systems break even, but have done DCF's on solar where it did not have a contributory value at the level of the initial purchase before tax incentives. The assumption seems to be that if a DCF is done, the solar system will be overvalued. That would require the utility savings projections to be overly aggressive - certainly possible, but not in itself sufficient rationale to reject yield cap as a valuation method.

If you are attributing that to me, that is unfounded. I am arguing against making assumptions where possible. I have no assumption as to whether it will be overvalued or undervalued or perfectly valued using DCF. What I am certain of is that with enough assumptions and a complete lack of market data, there is no basis to prefer one of those over another.

 

[Gobears81]

If you are attributing that to me, that is unfounded. I am arguing against making assumptions where possible. I have no assumption as to whether it will be overvalued or undervalued or perfectly valued using DCF. What I am certain of is that with enough assumptions and a complete lack of market data, there is no basis to prefer one of those over another.

Fair enough

 

[shrubberyvaluation]

I am personally skeptical that 30% of systems break even, but have done DCF's on solar where it did not have a contributory value at the level of the initial purchase before tax incentives. The assumption seems to be that if a DCF is done, the solar system will be overvalued. That would require the utility savings projections to be overly aggressive - certainly possible, but not in itself sufficient rationale to reject yield cap as a valuation method.

Home buyers would undervalue it based on DCF because they want to pay less than the savings they are anticipated to get. You also have inflation factors and time value of money.

 

[RCA]

Maybe because they want "market value"....what kind of premium are buyers paying for that savings.

Appraisers must compare energy-efficient features of the subject property to those of comparable properties in the Sales Comparison Approach adjustment grid. Appraisers may augment the Sales Comparison Approach in evaluating any impact(either positive or negative) to the value of energy efficiency improvements with either the income or cost approach; however, appraiser's cannot adjust the value of the property
• on a mechanical dollar-for-dollar basis based on equipment and installation cost, or the discounted present value of expected cost savings of the equipment over the useful life of the equipment; or
• solely based on the cost or income approach. The appraiser must also analyze the market reaction to the energy efficient feature.

How many threads do we have to see wondering how to value something that everyone assumes has value, when the market data says... maybe not.

I think the problem stated in the OP was that he couldn't find data to estimate market reaction. As far as going to another state - well, if the utilities don't have the same setup for dealing with solar, then the savings could be different. In California there are in fact different solar plans to choose from for the same area.

In fact, you can opt to buy "solar power" from PG&E's solar power farms, - so you don' t even have to install solar on your rooftop. Then there are waiting lists. So, things can get complicated:

Community Renewable Programs

Explore Solar Choice and Regional Renewable Choice programs.

www.pge.com

 

[WestMichiganCG]

The DCF analysis sometimes can be only the best you have. And without some evidence of a further discount as some externality or functional resistance to the feature, who can prove that it isn't? So why not do a sinking fund analysis? Hoskold's or Inwood sinking fund. In other words, apply a sinking fund that replaces the panels at the end of the life vs the net income discounted and anticipated from the array. Cost 100k in year zero, worth zero in year 20. Say makes $10k vs deprec of $5k. DCF that over 20 years.

or View attachment 97191

We had this discussion in our office last week. I brought up the argument of using the safe rate but the counterpoint was that the buyer was looking for a return on their investment. If I'm financing the solar panels with my purchase at 6% then I'm looking to purchase this income stream from the solar panels at a 7-8% return so I net 1-2%. That is how I would look at it.

 

[shrubberyvaluation]

We had this discussion in our office last week. I brought up the argument of using the safe rate but the counterpoint was that the buyer was looking for a return on their investment. If I'm financing the solar panels with my purchase at 6% then I'm looking to purchase this income stream from the solar panels at a 7-8% return so I net 1-2%. That is how I would look at it.

I'd personally want more of a return than that, especially if they are on my roof looking ugly and potential to damage the roof.