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Who Needs Solar Appraisals Anyway?

Even if you’re convinced your solar equipment should by appraised by an accredited equipment appraiser, you might still wonder, who needs a solar appraisal anyway?

Stakeholders associated with commercial equipment procurement and financing might already know that answer, but many residential solar system users might not. Specifically, in commercial equipment financing, appraisals performed by accredited equipment appraisers are commonplace. As an example, during my tenure at GE Capital managing a portfolio of equipment that we financed (e.g., leased) and received to inventory (e.g., returned from lease, purchased for trade), the value of that equipment was appraised often for various purposes.

COMMERCIAL INSTALLATIONS

For example, at GE Capital or any commercial equipment-backed lender, a current value and various forward looking values had to be determined before a lease could even be proposed or originated or renewed. Even when offering finance leases (e.g., loans), value trends are desired to identify any collateral gaps that may occur over the term of the lease or loan. Such leased assets would further be appraised periodically (e.g., quarterly) using then current market conditions and inputs in a process often referred to as a mark-to-market process.

Appraised values might also be required at certain events associated with a financing product, such as an early buyout (EBO) event or an end of lease (EOL) event. If the equipment is returned at the end of lease, various valuations are needed from time to time for remarketing purposes. The lender (e.g., lessor) might participate in all the foregoing valuation events, while the borrower (e.g., lessee) might only care about the value associated with some purchase event (e.g., EBO and EOL events, inventory purchase event).

RESIDENTIAL INSTALLATIONS

Fundamentally, the leased solar equipment on the roof of a residential home will have appraisal requirements similar to that of the commercial installation. Like the commercial equipment-backed lender, the residential equipment-backed lender (e.g., installer, developer, lessor, etc.) still assumes the risk of return on the invested capital pertaining to the equipment and installation, and therefore has an interest in knowing an estimate of the value of the equipment over time should a negative credit event occur.

Residential homeowners with financed solar equipment, however, might have more occasions to have their equipment appraised than the commercial borrower. For example, the EBO and EOL purchase prices established in a residential solar lease agreement are not necessarily based on an estimated fair market value (FMV) for the event date. Rather, such prices from the lender might be established based on a formula that determines the price based on some target return for the lender. The homeowner desiring to purchase the solar equipment at one of these events therefore should have the solar equipment appraised to determine the then current FMV of the equipment.

In addition to EBO, EOL, or other lease purchase events, homeowners with financed solar equipment more often transfer ownership of the underlying property associated with the equipment (e.g., sell their home). Whether selling or purchasing such a residential property with financed solar equipment, an appraisal of that equipment by an accredited equipment appraiser is prudent. Even when the lease is merely transferred to the new owner, the value of the solar equipment is still vital to the overall value of the property, which can impact the purchase price. As an example, while the value of a solar installation is often viewed as insignificant as compared to the value of the underlying property, a relatively small investment in a solar equipment appraisal can have significant returns as pertaining to the overall value and purchase price of the home.

ASK SOLOVAR

Solovar is here to help the commercial or residential lender or borrower with any of the foregoing appraisal scenarios and more. Check out our portfolio of services, all provided by accredited senior equipment appraisers, and structured and priced to fit your particular need.

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.