Practicing the Fundamentals

At the risk of overusing baseball analogies (see “If You Build It, …?“), I’ll use another in this post to illustrate an interesting dynamic in the solar appraisal world. Picture the experienced second baseman about to field a grounder with a runner on first base. His team needs just two more outs to win the championship. In the excitement to turn the double play, he forgets all his training and fundamentals, lifting his eyes, head, and glove, as the ball skips between his legs into right field. When it comes to playing in the solar PV appraisal market, it seems many have also let their excitement distract them from some fundamentals.

FUNDAMENTAL #1:  PERSONAL PROPERTY IS NOT REAL PROPERTY

One of those fundamentals related to appraising solar PV systems, pertains to determining whether the solar PV system is real property or personal property.  Real property appraisers know there is relatively clear guidance for determining whether certain assets associated with real property can be considered a component (e.g., fixture) of the real property. Certainly, commercial real property appraisers and their clients deal with this determination quite often. In general terms, if the asset (e.g., solar equipment) is substantially fixed to the real property (e.g., residential home) and owned by the same owner (e.g., the homeowner), then the asset might be considered real property. However, some solar PV systems are not substantially attached (e.g., readily removed without damaging the real property), and further, most are owned by a third party (e.g. lessor). In such cases, the solar PV system should be considered personal property, and more specifically, machinery and equipment (e.g., as compared to other types of personal property, such as residential contents, art, antiques, gems, etc.). In fact, many lease agreements specifically classify the solar PV system as personal property.

FUNDAMENTAL #2:  PERSONAL PROPERTY SHOULD BE VALUED SEPARATELY FROM REAL PROPERTY

When the solar PV system is identified as personal property, certain appraisal reporting and/or competency rules can apply. For example, one reporting fundamental to apply in this case specifies that the value of the solar PV system should generally not be included in the value of the real property. Surprisingly, however, the more common practice seems to be to include it in the real property value (e.g., as a comp adjustment). This may be appropriate, depending on various factors (e.g., lease terms, etc.), but it is certainly not a given as generally assumed. When it is included in the real property appraisal, the real property appraiser should at a minimum identify and treat the solar PV system (e.g., or any personal property) separately in the appraisal, clearly stating the portion of the final value attributable to the solar PV system.

FUNDAMENTAL #3:  APPRAISER MUST BE COMPETENT IN APPRAISED PROPERTY

As is fundamental to any appraisal assignment, the appraiser must be competent to value the solar PV system. This is certainly true when the system is deemed to be personal property, but also applies when the system is classified as real property. In either case, the techniques, expertise, and approaches more familiar to the accredited machinery and technical specialties appraiser might be needed to properly value the solar PV system. Such competency must cover not only the equipment, but also any related contractual terms (e.g., a PPA, lease transfer terms, etc.) that may affect value. For certain assignments, accredited appraisers might need to abide by the competency rules and/or policies from many agencies and institutions (e.g., USPAP, Fannie Mae, Freddie Mac, FHA, HUD, etc.).

These and other fundamentals have been established over many years to largely protect appraisal clients. While one might be safe with a ballpark appraisal of a residential solar PV system from a non-equipment appraiser in some game situations (e.g., a small installation on a $1 million property), we appraisers must never forget to practice our fundamentals. (all puns intended)