Standardizing Appraisals for PV Installations
Geoffrey T. Klise
1
, Jamie L. Johnson
2
, and Sandra K. Adomatis
3
1
Sandia National Laboratories, Albuquerque, NM, 87185, USA
2
Energy Sense Finance, LLC, Punta Gorda, FL, 33980, USA
3
Adomatis Appraisal Services, Punta Gorda, FL, 33951, USA
ABSTRACT — As PV installations increase across the U.S.,
there will be a point when an appraiser will have the opportunity
to value the PV system as part of a property sale or re-finance.
Proper valuation techniques as applied to solar PV are necessary
to reflect the increase in market demand for solar PV systems.
Appraisers must follow the Uniform Standards of Professional
Appraisal Practices (USPAP) when valuing solar PV systems,
which means that appraisers must gain competency to 1)
accurately recognize the value proposition of a PV system, and 2)
develop the PV system’s market value as it contributes to the
property. The challenges currently faced by property owners
with installed PV are whether the PV system adds market value
to the property, and finding an appraiser with competency. Not
all markets are the same, and PV market values will vary
considerably based on many factors that include, but are not
limited to the adoption rate in the particular market, the utility
rate paid by the customer, the PV system’s condition, aesthetics,
and obsolescence. This paper will discuss how past challenges
with respect to proper PV system valuation are being addressed
in a standard fashion, along with the far-reaching benefits that
may be available to future PV adopters as valuation concepts are
ultimately recognized and adopted by valuation professionals,
real estate agents, mortgage lenders and underwriters.
Index Terms — photovoltaic systems, appraisal, market value,
fair market value, property transaction
I. INTRODUCTION
There is currently a great deal of effort being made to
increase the adoption rate of solar photovoltaic (PV) systems
across the U.S. by focusing research to provide solutions that
reduce both the hardware (balance-of-system) and soft
balance-of-system, or “soft costs” of an installed PV system.
In the area of reducing soft costs related to financing as
defined by the SunShot Vision Study [1], a strategy to achieve
cost goals includes “Expand access to a range of business
models and financing approaches.” Directly related to the
effort at reducing financing costs is the ability to access lower
cost financing, which indicates that lower cost financing is
available, however barriers must be overcome to open up
these products to those interested in financing a PV system.
The current higher capital cost for financing and inability to
access lower rates reflects the potential risk premium
perceived by some lenders of both unsecured and secured loan
products used to purchase PV systems, as well as their relative
lien position.
One area that has not received as much attention in terms of
the potential to reduce soft costs has to do with how a PV
system is valued in a residential or commercial property
transaction. Because PV systems are arguably still in the early
adopter’s phase of Roger’s Bell Curve and are not common
across the US [2], most appraisers are unsure about the market
value proposition it can provide to property owners. It is this
lack of understanding (due to market immaturity and lack of
education opportunities), and lack of both support and
understanding from lenders, underwriters and government
sponsored enterprises (GSE’s) that has led to improper
valuation techniques as applied to PV systems. It also holds
true that not every market has been educated on the benefits of
PV systems, which is borne out in how local markets respond
either positively or negatively to estimates of value.
Reconciling these challenges to support the proper valuation
of PV systems through education efforts aimed at the real
estate and valuation professionals will ultimately result in the
recognition of the fact that an increase in market acceptance of
PV systems is occurring throughout the U.S. The value
proposition enjoyed by current PV owners will over time be
better understood by future PV adopters and those in the
appraisal, real estate and lending industries. This recognition
will translate into lower perceived risk and greater access to
lower cost financing.
This paper will discuss the efforts to have PV systems
recognized in real property appraisals being led by a number
of groups that include private industry, professional
organizations and national laboratories. Examples of standard
appraisal practices will be presented, along with areas of
existing research and education efforts currently underway
that are designed to gain access to lower financing and reduce
existing financing costs through the support of the real estate
and valuation industries.
II. IMPORTANCE OF PROPER PV SYSTEM VALUATION
One of the main benefits to a homeowner that owns a PV
system is the fact that once a PV system is given value in a
property sale or re-finance, that value is essentially ‘unlocked’
allowing the owner to realize some of the initial investment in
the PV system, especially if the payback of the PV system has
not been realized. Fig. 1. The fact that some PV systems have
not been properly appraised or the market did not support the
value through comparable sales, results in situations where for
example, the property was sold with the PV system, but the
payback from the investment was never realized and an
economic loss to the original PV system purchaser may have
occurred. Figure 1 indicates that in year 6, if the value is
recognized, yet payback has not yet occurred, using an income
based discounted cash flow approach, that remaining payback
has been recovered. Standard appraisal practices in support of
transactions with knowledgeable buyers and sellers can
facilitate the unlocking of the PV system’s value and remove a
barrier that many potential adopters experience have when
selling their home before the payback is reached.
Fig. 1 Example of value unlocked from a 2.4 kW PV system with
a net cost of $7,631 and a payback (as a function of utility bill
savings) around year 14. PV system value determined using PV
Value® tool, payback (simple) calculated using SAM.
It is also important for appraisers to understand ownership
of the PV system, as that will determine if value can be
developed and what other components of value may have to
be considered.
PV systems in states with fixed contract renewable energy
credits or certificates (REC), and production based incentives
can add value based on the guaranteed income stream. Other
states that have these RECs that can be sold or traded in REC
markets have varying prices, making it difficult for an
appraiser to consider value beyond what the REC is worth at
the time the appraisal is completed. A proper understanding of
these differences will ensure value is developed correctly.
III. HOW PV SYSTEMS ARE APPRAISED
This section will discuss concepts around appraising PV
systems, provide examples of early practices, and show
standard practices are currently being implemented.
Appraisers use variations of three approaches: cost, income
and sales comparison [3] to develop the potential market
value. Most importantly, they must demonstrate “competency”
before accepting an assignment otherwise they must acquire
competency during the assignment or “withdraw from the
assignment” [4]. However, if the appraiser’s client is selling
the loan on the secondary mortgage market that falls under the
Government Sponsored Enterprises (GSEs) such as Fannie
Mae or Freddie Mac, the appraiser must have competency
prior to accepting the assignment [5]. These guidelines
indicate the appraiser must have knowledge of the PV
systems, understand how PV systems work and have sufficient
appraisal methodology knowledge to complete the
assignment.
In the early 1980s, appraisers published papers that
suggested using combinations of a cost and income approach
to estimate the value of a PV system, recognizing back then
there were not enough comparable properties with solar to use
a paired sales approach [6] [7]. Those observations still hold
true today; comparable properties with PV are still far and few
between making it difficult for an appraiser to weigh the
market for PV systems on comparable properties alone.
A. Comparable Sales
A typical comparable sales analysis traditionally utilized by
an appraiser compares the subject property to other similar
properties nearby, and within a specific timeframe. As solar is
a new feature, an appraiser relying on comparable sales may
not find a PV system and erroneously conclude that since no
existing homes sold with PV nearby within a certain time-
frame, there is no market demand or support for value. Some
underwriters are insisting on no value placed on a PV system
if the appraiser cannot find a sale of a similar property that has
a PV system. As appraisers are required to also consider cost
and income approaches [3], a comparable sales only approach
may not be appropriate in most U.S. markets.
A comparable sales analysis that reveals homes sold with
solar PV could be conducted. Understanding the
characteristics of the PV system is necessary to make
adjustments to comparable sales based on the differing size of
the PV system. It is highly unlikely that each comparable will
have the same size PV system; and therefore, the value of the
produced energy would have to be determined to make a
proper adjustment. This is also important considering whether
the PV system is working optimally, or if it is being shaded
and output is reduced. Evaluating the condition of the
comparable PV systems would alleviate these concerns,
however, data may be difficult to obtain.
A large study in California completed by Lawrence
Berkeley National Laboratory compared sales of homes with
PV and without to determine what premium, if any, existed on
homes sold with PV systems. Their results indicated that
depending on whether the home was new construction, or
existing, the price per watt premium varied between $2.30 -
$2.60/watt, and $3.90 and $6.40/watt, respectively for homes
with PV systems, as compared to comparable homes without
PV [8]. Energy savings was not analyzed in this study, though
estimates in California were used to develop a ratio. It is worth
mentioning that the premium identified in this study could
also include other features or condition of the homes, which
were not completely disentangled from the value of the PV
system. In addition, there was no information that stated what
method appraisers used to develop value. As this study
presented premiums in California for a limited sample size,
this data shows evidence of market reaction to PV systems,
however, relying exclusively on these premiums is not an
acceptable basis for the value of the PV system without other
appraisal techniques. An appraiser should understand the PV
system’s condition, existing market demand and other factors
necessary to develop the PV system’s contributory value to
the property.
B. Cost
The Cost approach is a way of developing value though an
understanding of what it would cost to replace the item. The
age-life method is one way that residential appraisers can use
a cost approach. The challenge when using this approach for
an appraiser, which currently limits its effectiveness, is the
presence of many different types of rebates and tax credits,
some of which can only be used one time by the property
owner.
This method is shown in Table 3 in the comparison of
different appraisal techniques for a residential property. As the
PV modules have a 25-year useful warranty life, the age of the
system is divided by the useful life (physical age/life method)
to return a depreciation percentage. This amount is then
multiplied by the cost of a system purchased today less
incentives except tax related incentives to apply the
depreciation amount, which is then subtracted from the cost to
get the final depreciated value. However, this method only
addresses the physical depreciation and requires the appraiser
to consider obsolescence that exists in markets where cost
exceeds what the market is willing to pay. This results in a
superadequacy. The physical age/life method does not include
the obsolescence; therefore, the appraiser must measure the
obsolescence and also subtract it from the cost. Due to each
individual’s different tax rate, the use of tax credits in a
depreciated cost framework is not recommended for
developing a market value for the PV system [9].
The appraiser must always consider cost of the PV System
as of the effective date of value and not the cost paid by the
purchaser when it was new. Therefore, with the cost of PV
systems decreasing, the cost may eventually not have the
problem of a superadequacy to consider. Also, if the PV
system is not working “optimally” due to shading or other
issues, this approach may result in a value estimate that is too
high unless the appraiser can adjust the physical depreciation
to account for the physical deficiency.
C. Income Approach - Gross Rent Multiplier
A Gross Rent Multiplier (GRM) is essentially a simplistic
income capitalization approach to translate the value of a
monthly energy savings from energy efficient features into a
contributory value, or adjustment to value [10], based on the
appraisal technique of dividing the sales price of a building by
the monthly rent, which is then multiplied by the monthly
energy savings. The GRM is property specific and is discussed
as an appropriate technique to develop value for energy
efficient features. Having rental data nearby is necessary,
though a proxy method could be developed for that market.
Efforts were made to tie a study about energy efficiency in
the 1990s [11] to the value of PV systems. This metric has
been used by installers and touted as evidence that every
dollar of energy saved by using a PV system translates to an
increase in property value of $20, though this was disputed
[12] based on the premise that applying this ratio to PV
systems (which generate electricity) from a study where PV
systems were not analyzed does not provide enough support to
suggest a 20:1 premium for houses with PV systems. This
type of study is good for finding evidence of value in a certain
market at a certain time period; however, studies do not
necessarily apply to all markets, and would not satisfy USPAP
requirements if relied on solely to develop value.
Can a Gross Rent Multiplier (GRM) be applied to solar PV?
It is possible; however, the appraiser must not rely solely on
this method. This method is one tool from the appraiser’s
toolbox that must be used along with other methods and
reconciled to mirror the reactions of buyers and sellers in the
market.
D. Income Approach – Discounted Cash Flow
Currently, based on the challenges presented with the other
approaches and the unique ‘income’ producing features of a
PV system, an income approach using a discounted cash flow
(DCF) to develop the present value of the energy produced is
a recommended technique.
The benefit of this approach is that it considers the details of
the PV system, and validates whether it is working correctly
and delivering electricity as designed. For a residential
appraiser, this approach can take more time and effort to
perform, however if the data is available, an estimate of value
can be made quickly. The key here is that an appraiser needs
knowledge of how a DCF works, how to set one up properly
and how to provide support for each input. One minor error in
the DCF can result in a larger error in value.
The PV Value® tool (www.pvvalue.com) developed in
2012 as a proof-of-concept that can help appraisers use the
DCF approach as it has the necessary inputs for an appraiser
to develop a value for the PV system [13] [14]. Due to the
challenges with the other approaches, the tool is being widely
used across the U.S., with over 2500 downloads in the past 18
months, and early evidence that appraisers are successfully
utilizing it in appraisals. Current collaboration with LBNL
will involve validating the methodology using existing sales
data in multiple U.S. markets.
With this greater level of accuracy in translating energy
produced to a market value, what are the typical parameters
needed by an appraiser to develop the value? An appraiser
needs the following:
• zip code
• system size
• degradation rate
• derate
• tilt
• azimuth
• discount rate
• utility rate & utility escalation rate
• estimate of O&M expenses, and
• system age.
Many of the parameters in PV Value® including the utility
rate, utility escalation rate and O&M expenses are pre-
determined, however the appraiser can overwrite that data
with more accurate estimates that may be necessary for the
market that is being considered. The discount rate is
determined using a risk-free rate tied to the Fannie Mae daily
Net Yield rates for 15-and 30-year mortgages. These were
chosen for residential appraisals as these rates are most
reflective of the always fluctuating cost to borrow money at
the time the appraisal is conducted. The basis point spread on
top of that risk free rate can be changed by the appraiser if
needed, to reflect other market conditions that speak to issues
around obsolescence, PV system condition, roof repair,
shading, and markets that are supportive, or not supportive of
PV. The resulting Appraisal Range of Value Estimate
provides the appraiser with a general range to use along with
other methods to reconcile to a value contribution for the solar
PV system.
What are the biggest challenges for appraisers when using
this tool? Appraisers and underwriters first need to understand
how a discounted cash flow analysis works. Currently, with
the exception of a few residential appraisers and underwriters
that understand how to value accessory dwelling units and
apartments, most all residential appraisers and underwriters
rely exclusively on the sales comparison approach. USPAP
guidelines do not say that the sales comparison approach is to
be exclusively used for residential properties, therefore the use
of an income approach to develop the contributory market
value to the property is valid. USPAP states all applicable
methods should be used. An appraiser should explain when
reconciling their report, whey he/she did not use an income or
cost approach according to USPAP.
Underwriters often reject the use of the income approach for
the solar PV; however, the appraiser should be the one making
the decision on which approach(s) are applicable and not the
underwriter. The use of this tool (DCF) will help standardize
the appraisal process, especially for residential properties if
the market data reveals it mirrors the reaction of buyers and
sellers. Improvements to the other approaches can be made
over time as the PV industry matures with more PV systems
installed, subsidies and tax credits decrease and education
efforts aimed at the appraisal and real estate industry resulting
in a greater understanding of PV system benefits.
IV. HOW DOES THIS APPLY TO THIRD-PARTY OWNED PV?
Many homeowners believe a PV system adds value to their
property, and as shown above, it does for customer owned
systems. However, does this hold true for third party owned
systems? Much of the answer lies in the difference between
residential and commercial underwriting and the ability to
recover collateral if the PV system is removed from the
property.
For commercial systems, the PV system can be located on
the rooftop, with the building owner charging rent for the use
of the space by the third party PV system owner. This rent can
be capitalized and a value developed by an appraiser. The
Appraisal Institute course materials for valuing PV systems
have many more case studies that discuss how an appraiser
can develop value for PV systems on commercial rooftops,
considering different ownership structures and PPA
agreements [9].
For a residential property with a third-party owned PV
system, the customer is not “renting” their rooftop to the third
party owner to generate income, they are renting the
equipment or entering into a power purchase agreement to
reduce their electricity bill and pay for the use of the PV
system to attain that savings. When a PV system is included in
a valuation estimate, the underwriter will carefully analyze the
additional value developed by the appraiser. In some cases,
the underwriter may exclude the value even if the appraiser
attributes value to the system. For third-party owned PV
systems, the PV system will most likely be listed as an asset
on the Lessors balance sheet and can be removed subject to
the terms of the lease or PPA agreement as it is not owned by
the homeowner.
If an appraiser develops a value based on the energy
produced by the third party owned system, this could also
create a problem in a foreclosure if the PV system were
removed between the time of valuation and time of
foreclosure. Once removed, that collateral evaporates with no
remedy for the lender, and no future energy production for a
potential home purchaser.
A. Fair Market Value
What is fair market value (FMV), and how does it differ
from the market value of a PV system? Related to PV systems,
this is a new opportunity for appraisers that is different from
the way an appraiser considers market value, as a fair market
value appraisal for solar PV may be done to satisfy the tax
rules and regulations when property is transferred between
owners; in the case of PV systems, when a third party owned
PV system is purchased by to the homeowner or is removed
and re-sold by the third party.
FMV can be determined by the appraiser, with an
understanding that this is a transaction between a willing
buyer and seller. When a lease is broken either due to early
buyout clauses, home sale (if home buyer does not want to
assume the PV system lease terms), end of lease term or early
termination, there are opportunities for an appraiser to help
develop that fair market value. The result may be the same or
different from the market value. An appraiser may consider
the cost of a new PV system in their analysis, or the remaining
useful lifetime of the existing system using a tool such as PV
Value®. It is important to note that in many current lease
contracts, the value ultimately paid by the customer in these
transactions is the higher of the value in the buyout or early
termination table within the lease terms, or the fair market
value determined by an independent appraiser.
Ultimately, as more lease transactions enter these potential
ownership transfers and appraisers are brought in to determine
fair market value, a better understanding how this value is
developed can be analyzed and conveyed to help standardize
the process by which appraisers conduct FMV determinations.
V. EXAMPLE RESIDENTIAL APPRAISAL
In this section, an example of an appraisal is presented
along with a treatment of value developed using comparable
sales, cost and income approaches. This is intended to
illustrate how an appraiser should consider the three
approaches when developing value. For the sake of discussion,
there are multiple assumptions here that will vary depending
on the market, as this does not represent an actual appraisal of
a home with a PV system, the available listing data, and the
varying knowledge of buyers and sellers in different markets.
For this example, a house with PV is listed on the market. It
has a 6 kW, 5-year old PV system, no shading and performs as
designed, according to the homeowner. The local MLS system
that this home is entered into just recently adopted fields that
match the Appraisal Institute’s Green Addendum [15] with PV
fields that also match the inputs in the PV Value® tool. The
appraiser that accepts the assignment has taken courses on
valuing PV systems and has appraised property with PV
systems prior to this assignment, and therefore, meets the
definition of having competency according to USPAP and
GSE rules. Details on the price paid for the example PV
system and today’s price are shown in Table 1.
TABLE 1
SUBJECT PROPERTY PV SYSTEM CHARACTERISTICS
Size
Age
Price paid
$/Watt
Gross
cost
Net cost
6 kW
5 yr
$7.00
$42,000
$40,000
a
If purchased 6 months ago
b
6 kW
6 mo.
$4.25
$25,500
$16,450
c
If purchased now – current estimated costs
b
6 kW
0 yr
$4.00
$24,000
$15,400
c
a - Installed before 2009, cap on federal tax credit was $2,000.
b - From appraiser survey of local installers.
c - The utility offers a $2,000 rebate. Current federal tax credit is
$30% with no cap.
A. Information Discovery
The appraiser starts searching for comparable properties to
value just the property without the PV system, and found that
one property that has sold within the past 6 months had a PV
system; however, none of the other houses had a PV system.
The comparable property is listed in Table 2. Since the more
detailed data that is now available in this local MLS
(following AI Form 820.04) was not implemented and
available when the comparable property sold, there were no
information fields that captured the PV system characteristics.
Fortunately, the appraiser knew where to potentially find
information on PV systems, and discovered that a permit was
pulled 3 years ago to install a 4.5 kW PV system on that
comparable property, with a listing of the installing company.
Research revealed there were no rebates offered when it was
installed but there is one currently offered and that the
investment tax credit of 30% was applied with no cap. During
the drive-by of Comp 1, the appraiser also noticed shading on
the PV system during the mid-day, realizing that will reduce
the PV system production.
TABLE 2
COMPARABLE PROPERTIES
1
Subject
Comp 2
Sold Price
N/A
$204,000
Date Sold
N/A
5 mo. ago
PV System
6 kW
none
Age of PV
System
5 yrs.
N/A
Current
Installed Cost
(date of sale)
$4.00/Watt
(eff. date of
value)
N/A
Gross Total
$24,000
N/A
Rebates
Available
Today
$2,000
N/A
Parking
2-Car Gar.
1-Car Gar.
+$3,000
Gross Living
Area
1,600 sq. ft
1,625 sq. ft
Adjusted
Home Sales
Prices
$207,000
Value of PV
System
Comp 1 ($220,000) less Comp 2 $207,000 =
$13,000 value for 4.5 kW system, or $2,888
per kW ($2.89/Watt)
Shading
None
N/A
Adjustment
for PV System
6 kW x
$2,888 =
$17,300 rd
Value of Home
with PV
$224,300
1 – For educational purposes only, not actual data
Going beyond the radius of comparable properties, the
appraiser found a PV system located 2 miles away using an
aerial image search, which is available in many mapping
programs available on the internet. After determining that
address, the appraiser checked to see if the permit was pulled
and found that the same company installed this system. This
home had not sold; however, the appraiser wanted to know if
any other PV systems were nearby to help understand the
market. The appraiser then contacted the installer and found
out that the 4.5 kW PV system, located close to the property
for sale was purchased by the homeowner, and the one 2 miles
away was a newer 6 kW PV system, but owned by a third-
party. From that information, the appraiser was able to
understand there is some demand for PV systems in this area
with different ownership options.
B. Analyzing Comparable Sales
The two comparable sales provide good support for a value
of the subject property. Comp 1 deserves most consideration
because it has a PV system; however, it is a smaller system
with some shading that will negatively affect the energy
production. Pairing Comp 1 to Comp 2, a similar house
without a solar PV system, provides good support for the
$2,888 adjustment per kW. The only other adjustment is for
the garage size difference. The adjustment is based on market
extraction. After adjustments are applied, the two sales closely
support a value conclusion at $224,400 for the value of the
home. Using the $2,888/kW the value of the PV system is
$17,328.
C. Analyzing the Cost Approach
The appraiser has enough information to apply the physical
age-life method in the cost approach. Table 1 shows the cost
to install that same system today, the effective date of the
appraised value. The appraiser finds out that the PV panels
have a 25-year warranty and the inverter has a 10-year
warranty. Assuming the useful lifetime of 25 years, the
appraiser develops potential contributory values, showing the
depreciation of the PV system and the gross and net costs
(Table 3). Comp 1 and Comp 2 are not used in this analysis.
TABLE 3
AGE-LIFE DEPRECIATION – 6 KW PV SYSTEM
Useful Life
25 yrs
Age
5 yrs
Physical Depreciation %
20%
6 kW Gross Installed Cost today
$24,000
6 kW Net Installed Cost today
$15,400
Gross Cost Today - Depreciation Amount
$4080
Net Cost Today - Depreciation Amount
$3080
Final Gross Depreciated Value
$19,200
a
Final Net Depreciated Value
$12,320
a – value does not include obsolescence due to superadequacy.
As discussed above, when looking at the net value, the tax
situation is very different between owners and years; in the
year it was purchased, there was a federal tax credit, however
it was capped at $2,000 and for this system the tax credit was
only able to reduce the price paid by $2,000, from $42,000 to
$40,000, with a resulting net depreciated value of $12,320. A
new system now costs less than it did 5 years ago, and the
amount of tax credit available today is greater. However, that
tax credit is not available to seller if the entire system had to
be replaced. The gross depreciated value would be more
applicable here with an amount showing less than the cost of
purchasing a new system, however there is more to this
approach than just depreciation.
A challenge with using this approach exclusively is that it
does not consider potential obsolescence that may exist due to
superadequacy. In other words, the market is not willing to
pay full gross cost. For instance, a swimming pool on a brand
new house costs $35,000 and one year later the owners sold
the house. Upon the sale of this one-year old house it sold for
only $10,000 more than the same house without a pool. The
difference between the $35,000 one year ago and $10,000 on
resale is due mainly to obsolescence due to a superadequacy.
Only a small amount of the $15,000 in loss is attributed to the
physical depreciation. (Physical age/life method provides
physical depreciation and does not consider obsolescence.)
To get a better understanding of how this cost approach
value may fit with the other methods, it should be compared to
the value developed using an income approach, which
considers the geographic variability of energy produced and
price paid for the energy.
D. Analyzing the Income Approach – Discounted Cash Flow
The appraiser was able to gather the necessary information
from the homeowner to populate the solar PV section in AI
Form 820.04 and from there, was able to utilize the PV
Value® tool to develop an income approach to value. The
appraiser did not have access to utility savings information
before or after the PV system was installed or information
about rents paid in the vicinity of the subject property and
determined the gross rent multiplier method would not be
appropriate. The information about the PV system is presented
below in Table 4 along with the results of the DCF analysis
using PV Value®.
TABLE 4
DISCOUNTED CASH FLOW – 6 KW PV SYSTEM
System Size
6 kW
System Age
5 yrs
Remaining Energy
20 yrs
Derate
0.77
Degradation Rate
20%
Array Type
fixed
Array Tilt
latitude
Array Azimuth
180
30-year fixed 60 day Conv.
3.51
Avg. Discount rate (50-200 bp spread)
4.76
Utility Rate
11.50 c/kWh
Utility Escalation Rate
1 %
O&M Expenses
55 c/Watt
Annual PV Production –
start year 6
9975 kWh
Avg. appraisal range of value estimate
$13,800
The result here indicates that based on all of these unique
characteristics that are a function of the location of the PV
system and energy it produces, the value estimate is $13,800.
If this system were shaded, then the derate value could be
changed, as shading is included in the PVWatts® derate
definition. This approach gives the knowledgeable appraiser a
number of options to develop value in light of many aspects
that reduce the optimal energy output from the PV system.
If the appraiser had more detailed information about the PV
system on Comp 1, PV Value® could be utilized to better
understand the income value for that PV system, and make
adjustments accordingly. This information could be made
available from the installer, if the appraiser was able to
determine the installation company from the filed permit, or it
may eventually be in the MLS system, as the example here
stated that the MLS in this location just started adding fields
that can help capture the inputs for developing value using a
discounted cash flow analysis.
E. Reconciliation
At this stage, the appraiser will consider all approaches used
to estimate value. The strengths and weaknesses of each
approach are carefully weighed to form an opinion of the
value of the PV system. The appraiser considers data available
to support each of the steps and reliability of the data sources.
Whether the market will support any of these estimates is a
large part of what value the appraiser will determine. An
underwriter may choose to remove the value from the
equation but cannot force an appraiser to remove value
without accepting a value subject to a hypothetical condition
that the PV system has no value when in fact the appraiser
determined that it does.
In reconciling the sales comparison approach, Table 5 gives
an idea of the values the appraiser will consider when
developing the value. The two comparable sales provide good
support for a value of the subject property. Using the
$2,888/kW from Table 3, the value of the PV system is
$17,328. Currently, in most markets comparable properties
that have sold with PV systems may be non-existent, and
relying exclusively on this approach may not accurately reflect
market demand for the income producing benefits of a PV
system.
The cost approach was only applied to the subject property
and done to show the limitations of this approach due to the
need to better understand obsolescence due to superadequacy,
which for PV systems is essentially due to the gross price not
being paid due to the presence of incentives. Currently in most
all markets in the U.S., these incentives are still important in
attracting new market participants.
If the appraiser determines this market supports PV systems
based on willingness from the buyer in this transaction, or
other studies available in the subject area, the appraiser may
reconcile more closely to the Income Approach indication. It
is important to note however that the current installed cost sets
the upper limit of value. It is usually less reliable for PV
systems because of its uniqueness in the market leaving the
depreciation estimate less reliable. Also, the partial shading in
the comparable property example makes it difficult to
understand the percentage reduction in energy production. For
this example, in a supportive market with a knowledgeable
and willing buyer and seller that understand the income
benefits provided by a PV system, the income approach makes
more sense and has more support for the conclusion.
TABLE 5
RECONCILIATION
Sales Comparison
$17,328
Cost Approach
a
$19,200
Income DCF
$13,800
a – physical depreciation only, could be much less if
obsolescence due to super adequacy is included
VI. STANDARD DOCUMENTATION
Based on the example appraisal presented above, the
potential lack of documentation available to an appraiser can
be a challenge. An area that is currently lacking any standard
approach is the concept of how a PV system’s characteristics
are documented, what is being collected, by whom, and where
can the data reside in a way that can streamline the home sales
process.
This process is more commonplace for commercial PV
systems that undergo a commissioning process as there is a
benchmark for comparison to meet conditions in a
performance guarantee, or if the system has to be repaired
[16]. Many states and municipalities collect PV system data as
part of incentive program applications, though as incentive
programs start phasing out, the only places to find data will
include the PV system installers as well as local building
permit databases. Trying to track down this data could prove
time consuming and a hindrance for an appraiser developing
an accurate value estimate.
This problem could be remedied if PV system data is
readily available, either at the property or from when the
house is listed in the local multiple listing service (MLS).
If the data is available at the property, there could be a way
to provide permanent documentation similar to what NEC 690
or the IAPMO Uniform Solar Energy Code requires for
disconnect labeling. For example, the Public Service
Company of New Mexico requires a weatherproof and easily
accessible location for a one-line diagram and site map.
Currently, PV systems in the U.S. are not required to have this
data easily accessible, though if the homeowner no longer can
find the PV system paperwork, having it permanently located
near the PV system interconnection point would help an
appraiser determine the PV system characteristics.
Using the MLS, a real estate agent can capture PV system
data during a home sale as the fields (if available in the MLS)
will be available for the listing agent to fill out with
information provided by the homeowner. Having the MLS
fields populated has the added benefit of giving appraisers
additional data points for determining where PV may exist,
especially when conducting a comparable sales analysis.
There are multiple challenges with setting up an MLS to
capture this information, though there is work that is focusing
on this effort to include solar as well as energy efficient
features [17].
Another effort being made to collect PV system data either
before or during an appraisal is to fill out the AI Residential
Green & Energy Efficiency Addendum, which helps support
the valuation of features that are not included on the Uniform
Residential Appraisal Report (URAR) Form 1004 required by
Fannie Mae. The Appraisal Institute created AI Form 820.04
to capture the necessary information to develop an estimate of
value for solar PV systems [15]. Home builders and real estate
agents can also fill out this form and give to assist the
appraiser. A database application that can capture the
information filled out on this form and make it available to
appraisers and real estate agents would be one way to make
PV system information more readily available to help
facilitate real estate transactions with PV systems.
VII. LINK BETWEEN PV MARKET VALUE AND FINANCING
If there are lower cost financing products available to
purchase a home, why are low rates not available to
prospective purchasers of PV systems? Consider for example
the long-term trend in mortgage interest rates (30-yr fixed) has
shown a decrease in the past 10 years from around 8% to just
below 4% [18]. Also, home equity is starting to “reappear” in
many homes [19] as home prices nationally appear to be
increasing [20]. Borrowing against the home’s equity provides
access to these lower rates, though even these home equity
rates are not as low as a standard conforming first mortgage.
Part of the challenge is that the price paid for PV systems is
still high, with the national average at $5.04/Watt [21]
equating to approximately $25,200 before incentives or tax
credits for a 5 kW PV system. These additional loan amounts
with modified paybacks that range from a few years to 15
years can be financed through secondary secured and
unsecured loan products with interest rates much higher than
the current conforming loan rates. If home prices continue to
increase and PV system prices decrease, the homeowner will
be better positioned to use the equity in their home to finance
solar with lower rates, and current secondary mortgage and
loan products may respond with lower rates to remain
competitive with home equity refinancing.
The discussion about interest rates available for financing
begs the question about the role of appraisers in helping
homeowner’s access lower interest rates typically available for
first mortgages. Consider a loan product that allows for the
inclusion of a PV system value into the loan to value ratio for
the borrower based on the understanding the PV system will
reduce electricity costs as a function of the market value of the
energy produced.
The SAVE Act [22] has outlined this process for energy
efficiency, however for solar if an as-installed value could be
developed before the solar is installed with current appraisal
approaches, new conventional 1
st
mortgage loan products
could then be developed with lower rates that allow for the
installation of a PV system after the home is purchased or
refinanced. For example, strict risk-based rules would most
likely need to be implemented to protect the interest of both
the lender and borrower such as: 1) escrowing of funds with
bonded escrow agent, 2) approval of bonded and licensed
contractor to install the system, 3) funds should be subject to
normal program LTV guidelines, 4) additional loan payment <
90% of estimated monthly savings from PV energy generation
(proof of positive economic benefit), or percent acceptable to
GSE’s, 5) roof less than 5 years old, or determination that
remaining useful roof life > (reasonable %) useful life of PV
system, and 6) no mortgage funds allowed to monetize
incentives (rebates or tax credits, etc.).
The product discussed above is an example of how access to
lower rates could be achieved specifically for PV systems, and
further dialogue between the GSE’s and the Appraisal industry
would need to take place. In addition, costs would most likely
need to decline further from current levels and value for PV
systems would need to be recognized before these products
could be created and offered to consumers. It is anticipated,
according to lending industry sources, that a minimum of US
$400M per quarter would be required to develop a new
product which based on current average national loan size of
~$230k would translate into ~1,800 new loans per quarter in
demand from interested consumers who want to own and
finance a PV system with the purchase of refinance of their
home. As underwriters begin to accept valuations of PV
systems developed by appraisers then products like this would
be feasible.
VIII. CONCLUSIONS
This paper presents a case for why it is important that
standard appraisal techniques be utilized and accepted for
developing value for PV systems. One of the most pressing
challenges is train appraisers to first understand how PV
systems operate, and concurrently, educate them on certain
techniques that are appropriate for certain markets depending
on how well PV is understood and desired in that community.
This is currently being done with the Appraisal Institute
offering a comprehensive course that covers both residential
and commercial PV system appraisal techniques; though it
will take some time to educate all appraisers on the benefits
and value provided by PV systems.
There are many areas that could help appraisers gather the
necessary data, and as the example appraisal shows, there is
not one central database that appraisers can use that has both
past and current cost information for PV systems in that
market, or has site-specific information on the installation
properties of existing PV systems. As PV systems age,
documentation may be even more difficult to obtain and it is
important that PV systems are captured in real estate multiple
listing databases, or other databases that could be developed
for the benefit of appraisers to help them more efficiently
gather information they need to develop an opinion of value.
As this paper focused primarily on residential topics related to
appraising PV systems, many of these areas of concern and
study also apply to commercial PV systems. The techniques
utilized by commercial appraisers make it technically easier to
value PV systems, as the use of the income and cost
approaches are better understood and readily accepted by
lenders in the realm of income producing properties. To value
PV systems with a recognition of the income producing
aspects that make these systems desirable in many markets in
the U.S., residential appraisers will learn to use these
approaches and develop accurate estimates of value that will
help facilitate real estate transactions with PV systems.
Ultimately, as PV systems increase in popularity and
become more commonplace in most markets in the U.S.,
appraisers will be ready to help facilitate homes sales with PV
systems as they have data more readily available to employ
the proper methods of valuation taught in appraiser education
courses. Supporting the value of a PV system will be more
accurate due to the abundance of market data and that will
result in acceptance by underwriters. Partnerships with the real
estate, appraisal, lending and underwriting industries are just
now beginning to develop, which will help speed up this
process and essentially give appraisers the professional and
technical support needed to develop values for PV systems.
ACKNOWLEDGEMENT
Sandia National Laboratories is a multi-program laboratory
managed and operated by Sandia Corporation, a wholly
owned subsidiary of Lockheed Martin Corporation, for the
U.S. Department of Energy’s National Nuclear Security
Administration under contract DE-AC04-94AL85000.
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