Everyone’s An Expert

I think it was about the time I was pursuing my undergraduate degree in electrical engineering at the University of Michigan (go Blue!) when I first realized just how many more people out there are smarter than I am. I always had good grades, and put the work in to get them, but there was one guy in my class that seemed to consistently be above and beyond the rest of us. I wasn’t surprised to learn later that he went on to become a very successful entrepreneur.

I also would say there are many that know more than I do about solar equipment and even solar equipment appraisals. I try to learn as much as I can from such experts. I have also discovered others, perhaps not so qualified, that seem to be compelled to address certain topics pertaining to solar appraisal, often missing the mark on various basic appraisal concepts.

One example that caught my attention was from a July 2015 article in Solar Industry Magazine outlining a solar energy plant fact sheet published by the Vermont Department of Taxes. The fact sheet, among other things, promotes the use of a discounted cash flow (DCF) model to determine the fair market value (FMV) of solar equipment for property tax purposes. Specifically, the model is said to be based on algorithms developed by Sandia National Laboratories, such as those included in the PV Value tool, which can be useful in estimating future solar equipment income streams. Like all models, however, the quality of the output depends on the quality of the inputs.

In this case, some of the inputs specified in the model are such that the result is effectively not an indication of FMV at all, but rather just a number that can be used to calculate property taxes. The authors of the article, from law firm Akin Gump, correctly identify some of the more questionable inputs:  a fixed discount rate of 13.3%, an exclusion of federal investment tax credits, a fixed estimated life of the equipment, and a “gratuitous” 30% valuation reduction!

I can appreciate the state’s interest in lowering associated taxes to encourage more solar energy investment, but please don’t call the output of that model a “valuation” result (e.g., FMV). What happens when the solar energy plant owner needs financing backed by the solar equipment or wants to sell the plant? An accredited appraiser will likely be called in to make a true assessment of FMV and may have to expend energy discrediting the self-proclaimed “FMV” derived from the property tax model. The authors of the article specifically cited a need to adjust the “inappropriately repressed” valuations from the model when determining a value for income tax purposes. Such adjustments, and all inputs to a valuation model and/or approach, should be determined by an experienced and accredited equipment appraiser.

Just remember, while there are indeed different types of FMV for equipment assets, they all should be based at least in part on the following definition from the American Society of Appraisers (or similar):

An opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.