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Duplex with on-grid solar power

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Gina Martin

Thread Starter
Freshman Member
Joined
Jul 21, 2006
Professional Status
Licensed Appraiser
State
California
Ok everyone, I need a "little" help! Subject is a duplex with an on-grid solar power system. Putting aside the solar issue the subject is appraising by the market comparison at about $435,000. Of course there is no data to give value to the solar system by comparison. But here is my need for help...
Actual rent and market rent are right on at about $1,050 per month per unit. ($2,100 total) But due to the tenants not having to pay for gas or electric to the company itself, the owner charges a flat rate of $150 per month per unit which brings rent to $1,200 per month per unit, $2,400 total. Using my best grm of comp 1 which is 205.88 x rent $2,100 (if owner was not collecting for gas and electric) the value by income approch is $432,000. But since this an income property and income includes the charge for gas and electric rent is $2,400.
$2,400 x grm of 205.88 is $494,000 by the income approach. That is $62,000 more by the income approach. (The solar system if purchased today would cost about $80,000.) There is value to this solar system from an income producing property standpoint but I'm needing some advise.
My brain hurts. I have never given more value to the income approch over the sales comparison. Is that a possiblity in this case?
 

Randolph Kinney

Elite Member
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Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
Ok everyone, I need a "little" help! Subject is a duplex with an on-grid solar power system. Putting aside the solar issue the subject is appraising by the market comparison at about $435,000. Of course there is no data to give value to the solar system by comparison. But here is my need for help...
Actual rent and market rent are right on at about $1,050 per month per unit. ($2,100 total) But due to the tenants not having to pay for gas or electric to the company itself, the owner charges a flat rate of $150 per month per unit which brings rent to $1,200 per month per unit, $2,400 total. Using my best grm of comp 1 which is 205.88 x rent $2,100 (if owner was not collecting for gas and electric) the value by income approch is $432,000. But since this an income property and income includes the charge for gas and electric rent is $2,400.
$2,400 x grm of 205.88 is $494,000 by the income approach. That is $62,000 more by the income approach. (The solar system if purchased today would cost about $80,000.) There is value to this solar system from an income producing property standpoint but I'm needing some advise.
My brain hurts. I have never given more value to the income approch over the sales comparison. Is that a possiblity in this case?
Your GRM analysis should break down the typical costs that are paid by the landlord. If your subject is the only one that has both gas and electric paid to the landlord as part of the rent, then you are going to be making an across the board adjustment for the value of a typical utility bill.

You can give more weight to the income approach in the reconciliation if it is appropriate and shown in your analysis. The lender may not agree with you but that's why you are the appraiser. :icon_mrgreen:
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Retired Appraiser
State
California
The extra $300 per month is reimbursement to the owner for his expense not rental income. Tenants typical pay for utilities. The landlord is being his own utility company. I'd back out the payments for solor power from the rental income.
 

Gina Martin

Thread Starter
Freshman Member
Joined
Jul 21, 2006
Professional Status
Licensed Appraiser
State
California
Thanks Mike, different view. That $300 is not "rental income", it is the owner being his own utility company. That is true. So you would not give value to this solar system in the appraisal? You are saying this would be income as operating your own utility company and not really "rental income" even though it's all in one payment? So you are saying there is no value as "rental income" in having this solar system? There is value in the system as running your own utility company but has nothing to do with rent? Since he collects it as rent I was viewing it as rent. But it's not really rent. It is the use for gas and electric that the owner has prepaid kinda. I am on the right track, right??? I'll be glad when this one is done!
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
Thanks Mike, different view. That $300 is not "rental income", it is the owner being his own utility company. That is true. So you would not give value to this solar system in the appraisal? You are saying this would be income as operating your own utility company and not really "rental income" even though it's all in one payment? So you are saying there is no value as "rental income" in having this solar system? There is value in the system as running your own utility company but has nothing to do with rent? Since he collects it as rent I was viewing it as rent. But it's not really rent. It is the use for gas and electric that the owner has prepaid kinda. I am on the right track, right??? I'll be glad when this one is done!
If you do the analysis on NOI and GIM, you can get the value of operating your own utility company as it contributes to the net income.

The problem with a GRM, there is an implicit assumption that all other comparables have the same expenses or expense ratios as would any other rental property to operate and therefore the gross monthly rent multiplier represents a true comparison.

In reality, it is the net operating income that has the true comparison to sales price.
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
The extra $300 per month is reimbursement to the owner for his expense not rental income. Tenants typical pay for utilities. The landlord is being his own utility company. I'd back out the payments for solor power from the rental income.
On the 1025 form, on the rental analysis page, there is a line for utilities. On the 216 page, there is also lines for utilities.

Some rentals rent furnished, some do include utilities in the rent. You have to compare like with like or make adjustments to the effective rent for comparison.
 

Mztk1

Senior Member
Joined
Dec 3, 2006
Professional Status
Certified Residential Appraiser
State
Florida
I'm with Greg. Let's say total economic life of a typical heating system is 15 years and it costs $8,000 to replace and $80K on the solar. Replacement reserves would have about $45 for the standard system and about $445 on the solar. So the owner is actually behind $100 per month compared to the system if all he is collecting in $300 per month. Perhaps the economic life on solar heating systems is longer, and perhaps the grid pays him back for electricity fed back to the grid. I'd have to look into it more deeply. But on the surface, it appears a wash.
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Retired Appraiser
State
California
On the 1025 form, on the rental analysis page, there is a line for utilities. On the 216 page, there is also lines for utilities.

Some rentals rent furnished, some do include utilities in the rent. You have to compare like with like or make adjustments to the effective rent for comparison.

Gross Rent Multiplier. Not Effective Rent Multiplier. The Simple Simon income approach for small residential proeprties.

The adjustment is made by not including the utility income with the rental income. Besides, isn't "effective rent" already the rent adjusted for concessions such as free rent, excessive TI's, leasing incentives, etc., etc.
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
Furnished rentals have included in the rent an adder for the furniture. They rent for more than unfurnished rentals. That is the same for rentals that include utilities; they rent for more than rentals without utilities, which is intuitive. So the case is made that rents do reflect a benefit to the renter.

All I am saying, in the SCA, you should have like properties to have their GRM representing the same. Since the original poster is saying the landlord collects $2100 as rent plus $300 as an adder for the utilities, the total rent is $2400. He has a problem in that none of his comps are rentals with utilities included in the rent.

I am suggesting that he should reconcile to equivalent rent; with and with out utilities. The 1025 form on page 2 has a place in the rental comparison section that details out "utilities" and check boxes to include which utilities are included in the rent. It also has unfurnished and furnished. It has actual rent and opinion of market rent.

You can adjust for the difference and call it equivalent rent.

The only problem the OP will have, he does not have any sales with utilities included to demostrate the market adder for same or how that relates to the sales price with its own GRM.
 

CANative

Elite Member
Joined
Jun 18, 2003
Professional Status
Retired Appraiser
State
California
The $300 per month isn't really "income." The property owner paid for 22 years worth of his tenant's utility costs in advance and they are paying him back.
 
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