End Of Life Solar

[Meandering]

Marion, you can trivialize my efforts

Not trivializing your efforts at all.
All efforts toward greater education and experience are deeply appreciated.

But a DCF is by design, a forward looking instrument, so the Casandra thing was out of line.

I actually posted some decent boiler plate to cover the issue, without making any suggestion of how to address it in a DCF or a Pro-Forma, or even in a Sales Comparison Approach.

I did say get the specific regulations concerning the net metering that impact each specific property and include them in your estimate of future income, risk and applicability to any new owner. If the new owner does not receive the "benefits" of net metering then you have a waste disposal and roof repair issue, not a DCF of income that can't be received.

I did provide the data concerning toxic heavy metals and solar panels, as any potential market buyer could find on the internet. I only said make a note that it is something you are aware of, but do not have data for yet, a CYA.

Sorry if you took my posts to be attacks. They weren't meant to be that. They were only meant to be information for consideration. You deal with it however you feel best suites your client's needs.

Me? I'm looking at lots of parking lots underneath solar panels on commercial properties and colleges. If the EPA decides to make any moves, I expect it will happen on those types of installations first - because that's where the money is, but, the first move that makes headlines, will send the residential sector screaming that the information was available and the appraiser did not address it.

Just a heads up.

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[Meandering]

However, I used the DCF for my own "reality check" and the DCF results were consistent with the paired sales. When I say "consistent", I mean most systems indicated a NPV of $20k to $40k which was pretty consistent with the 2% premium the study found, and certainly within the range (near zero to 3.5%) that the individual pairings indicated.
I now have a 'peer-reviewed' data base that I can use as supplementary support. It won't be good forever unless I update it.

But there is the thing D,

You, as an MAI have at least the minimum 95 hours of classes in income capitalization.

Every CG has between 30-60 hours of classroom work in income capitalization, depending on when they got their certs, and any follow up classes they have taken.

But for someone to "develop" a class about the value of an income feature of residential property and suggest that a DCF "could" be a tool for residential appraisers and then provide maybe 2-3 hours of DCF "introduction", well, beyond the comments I can't post, let's just say, no one had a bright idea of teaching DCF analysis to residential appraisers if the subject property was rented. And to a point, residential software for income properties does not include a DCF form, and NOBODY talks about the income potential of renting the excess garage spaces - yet we know that owners sure do, in some areas.

It is wonderful you have upgraded your license and are now at the top of the profession, Renee and many others have spent valuable time and money to take additional classes and learn new things. All good, all appreciated.

But the political agenda on this issue of residential solar panels, should be screaming out at everyone. It is very sad that the issue is not a 30 hour class for all appraisers. A class of 30 hours might have enough time to thoroughly address all the issues of solar panels including the inverters, replacement, which is on-going maintenance, changes in the technology, toxicity and disposal, changes in the regulations - Can I say Regulatory Risk one more time?? But really, I just want to say that just because you have a "tool" does not mean that everyone can have the "tool" you have, even if you did tell them what you call it and when you use it.


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[Renee Healion]

I am sorry I offended you, Marion. You did provide some disclosure remarks and that was generous. I started off addressing you but was also addressing George but failed to add his name later in my post.

I do not agree that that the appraiser is imperiled by using a tool to value the buyer's expectation of savings. You may disagree with the use of it, but to me we valuing their anticipation of income, we are not guaranteeing them that income. What do buyers and seller think today about tomorrow as of our effective date, as with other behavior we analyze.

I reject that we are liable for future pollution. Cassandra was right, the tragedy was that no one listened. You may well be right. And I did listen. But I do not think it is germane to the appraisal assignment today. I just disagree. I was saying we both worry about everything, or being blamed for everything. But for me, not this.

As for hours of classes. Let me mention this. I was very ill-advised as a young appraiser and so, pursuing what interested me, and waiving all pre-reqs, I signed up for my first two Appraisal Institute classes. They were Income Cap 201 (I think it was called) and then the Applied Cases Studies 202. I passed them. By the way those were the last two times that those versions were held because the fail rate was so high. They were reconfigured as Cap A and Cap B which were more drill oriented and shorter, only a week each, if I remember right. My two classes left me with the impression that appraisal was interesting and pretty tough at times.That was in 1991. So I have had some time to think about what I learned. It was scorched into my brain in fact from that experience.

The reason I point you to the current material, not the classes, but studies you can read (at the leisure we appraisers are known to enjoy!) is because some, if not many, of the concerns you raise have been addressed by others and incorporated into valuation method.

 

[hastalavista]

But really, I just want to say that just because you have a "tool" does not mean that everyone can have the "tool" you have, even if you did tell them what you call it and when you use it.

I appreciate what you are saying (as I understand it), which I'll paraphrase:

Look, just cause you think you can do it you shouldn't advocate others do it that way because you didn't fall off the truck knowing this stuff; it took a lot of time... so please don't say something that another might infer to mean, "great; this is the magic solution... I'll start using this tomorrow!" ***​

In fact, I agree with the above if I've interpreted it correctly.

That tool is well within the wheelhouse of many residential appraisers (IMO) and if a specific appraiser finds it interesting, they should take whatever courses/training they need to learn it and see if it is a tool worth using for their work.
In fact, there's no difference in identifying this as a tool vs. suggesting an appraiser learn how to do site extraction (or allocation) when they post they cannot do the cost approach because there are no land sales in that market.
I can explain how to do site-extraction in less than 10-steps. Hearing what the steps are is not the same as knowing why they are the steps and how they work in concert to solve the problem. One needs to understand the underlying fundamental concepts in order to properly complete the site-extraction process.

Otherwise it is a calculation:

calculation: a mathematical determination of the size or number of something​

and not an analysis (my bold):

analysis: detailed examination of the elements or structure of something, typically as a basis for discussion or interpretation.
​

I can explain how I do the DCF in less than 10-steps. Calculating the result and analyzing the result are two different things.

I think I'm mindful/careful about implying that appraisers do something without first having the knowledge-foundation to do it competently. But, I don't disagree with your comment (interpreted above) so I'll try to be more careful in that regard going forward. And, I can use this opportunity to clearly state what my advice is:

1. The DCF is a tool and only that. It can be used to model a reasonable present value based on the expected savings over a holding period; it can take into account savings (which is income) expenses, and any reversionary value (or cost such as removal). The result is a calculated value.
2. The calculation by itself is not the answer to the value problem. It needs to be interpreted in the larger data set.
3. It is a tool that can be used in any scenario as long as one has the necessary data.
4. It should not be used in isolation; another tool that can be used in any scenario is market-participant survey. If the DCF indicates a positive net value, but the market participants are telling you no one is paying dime-one for such systems, you need to make a judgment. That's why the DCF result is a "calculation" and not the analysis.
5. While not requiring a master's degree in finance, like any other appraisal technique, in order to use it one must be competent in its use. Competency means understanding the fundamentals of the technique. You won't get this from reading an article or a 4-hour CE course.
6. If you are not willing to do the above, or have made a decision that regardless of how the math works, this technique is something you wouldn't employ, use, or have any confidence in, then skip the above. Better for you to make an investment honing your skills in those techniques that you do have confidence in.
7. If you skipped the above due to Step #6, then never, ever use a DCF for a valuation problem in an appraisal.



For what it is worth, I learned the fundamentals of NPV/DCF in school and at a rather late age, before I took the advanced income classes where it was taught.

*** EDIT TO ADD: If I did interpret it correctly, I prefer the way you put it rather than the way I paraphrased it!

 

[Meandering]

That was in English. Interpretation is up to the reader.



But if you want to work from a simple math perspective.

How many places had 100% net metering to the owner and any potential buyer of the property in 2009-2010 versus,
How many places have 100% net metering to the owner and any potential buyer of the property now.

A simple linear chart should give you a supported regulatory risk that can be applied as a discount factor over the life calculated in the DCF.

 

[George Hatch]

I think "learn how to use it" has been conflated with the QE courses for income cap for the CG. That's one alternative but I wouldn't say it's the only alternative. As with any other application, the more you repeat the individual steps the easier they get. A DCF does the same thing a GRM or direct capitalization does - converts an income stream into a value conclusion - Except with more flexibility to handle the individual variables separately.

 

[Renee Healion]

It was not QE for CG licensing, it was MAI path.
Who could disagree that practice makes better.

 

[hastalavista]

That was in English. Interpretation is up to the reader.



But if you want to work from a simple math perspective.

How many places had 100% net metering to the owner and any potential buyer of the property in 2009-2010 versus,
How many places have 100% net metering to the owner and any potential buyer of the property now.

A simple linear chart should give you a supported regulatory risk that can be applied as a discount factor over the life calculated in the DCF.

I'm not sure why you introduce net metering (getting paid by the utility for excess energy produced). I've never included that in any of my calculations and would advise others to exclude it as well (if they want to try to forecast a risk-factor and include that in their discount rate, that's up to them). The logic is simple: The risk of losing such income is too unpredictable and uncertain.

Unlike some of the off-the-shelf software (which typically values the system for its expected life) I don't value the savings past the point of the average occupancy for the home (there are two average occupancy rates; one for new homes and one for resale homes). The logic is simple: ;The risk of the next buyer paying anything for a system that will be dated is too uncertain.

So what we have is effectively 13 years of utility savings, less the expenses and including a degradation factor for the system. No value for what it cost (that's irrelevant). No value for what one might think it will be worth (reversion) at the resale (too uncertain it will be worth anything). No value for any net-metering income (could disappear tomorrow).

If I had my HP-12c with me, I could do that calculation right now.

A generic tool to value a system which takes into consideration all the risks you identify.
It isn't the value answer... it is a tool used as part of the the value-answer process.

But I'll tell you this: I'd rather run the model, disclose what its result is, and they reconcile that given all the uncertainties, the system has no market value vs. not running the model and making the conclusion without that data. That's me. If another wants to make the conclusion without the model (which considers the savings translated to a present value) they are free to do so.
No client/intended user, or non-intended user (owner/buyer or their agents) has ever argued with me in an appraisal-context that the analysis was flawed or that the judgment I made (some value/no value/not material... and those have been my conclusions regardless what the model indicates) was unreasonable or non-credible. A main reason why they don't argue is because it isn't the only tool in considering that component. It augments the analysis-process; it isn't "the" analysis-process.

But I've said everything there is for me to say on this. I'm fine with anyone arguing it isn't useful on this forum.
If I start to hear that from the clients/intended users, then I'll pay attention.

And I won't make the mistake of trying to paraphrase your statements when I think I'm in agreement with them from now on.

 

[Meandering]

I'm not sure why you introduce net metering (getting paid by the utility for excess energy produced).

Getting paid for excess is Carbon Credits, which did not exist everywhere.

Getting your electric bill reduced $1 for $1 retail price, for the electric you generate is net metering.

So if you did not use net metering in your DCF, what did you use as the basis for "income"?

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[hastalavista]

Getting paid for excess is Carbon Credits, which did not exist everywhere.

Getting your electric bill reduced $1 for $1 retail price, for the electric you generate is net metering.

So if you did not use net metering in your DCF, what did you use as the basis for "income"?

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As I said, it is the savings in the utility bill by virtue of having the system.

2,000sf house: average monthly electric bill $175.
Bill with system (excluding any net-metering payment for excess energy) $85.
Net savings = $90/month. I "earn" that savings because I'm not buying as much energy from the utility company. If they pay me $100 on top of that for excess energy they buy from me, I don't consider that in my model.
That "savings" ($90/month) is the income used in the model. Only the savings. I've said this repeatedly, and you and I have discussed this often (but not recently... except for now) on this forum.