residential solar photovoltaic leasing valuation issues presenters: sandra k. adomatis, sra leed...

Residential Solar Photovoltaic Residential Solar Photovoltaic Leasing Valuation IssuesLeasing Valuation Issues

Adomatis Appraisal Service

Sandra K. Adomatis, SRA is an active real estate appraiser, instructor, course developer, and consultant to North Carolina Advanced Energy Corporation and General Electric. She is a national speaker on the topic of green valuation and often quoted in media articles regarding the valuation of green buildings. She wrote the course, “Case Studies in Residential Green Buildings,” “Description of Residential Green Buildings Made Easy,” and “Residential and Commercial Valuation of Solar,” and spearheaded the development of the “Residential Green and Energy Efficient Addendum.”

Her accomplishments include past president of the West Coast Florida Chapter Appraisal Institute, past Region X Representative and Education Liaison, demonstration report grader and she served as Vice Chair of the National Education Committee of the Appraisal Institute for three years. She is a current member of the Admissions and Designation Qualification Committee (ADQC). In August 2012, Sandra received the Dr. William N. Kinnard, Jr. Education Award from the Education Trust Foundation of the Appraisal Institute for her contributions to the education of real estate appraisers. In July 2013, Sandra received the Appraisal Institute’s President’s Award for her contributions to the Institute. Sandra can be reached at her business, Adomatis Appraisal Service, in Punta Gorda, FL at [email protected]

Sandra K. Adomatis, SRA, LEED Green Associate

https://www.adomatisappraisalservice.com/index.html

mailto:[email protected]

Senior Technical Staff MemberSandia National Laboratories

Geoffrey T. Klise, is a Senior Member of the Technical Staff at Sandia National Laboratories, in Albuquerque, New Mexico. He has been working at Sandia for the past 6 years on issues that pertain to solar photovoltaics, biofuels, and climate change. He is currently the Market Transformation team lead for Sandia Labs overseeing research that aims to reduce the soft costs of solar PV Installations. He has a Bachelor of Science from Western Washington University in Environmental and Engineering Geology, and a Master of Water Resources from the University of New Mexico.

His current research efforts include identifying and removing market barriers to solar PV adoption, with a focus on reducing the soft costs of solar to meet the SunShot goals set out by the U.S. Department of Energy. He co-developed the proof of concept spreadsheet for the PV Value® tool with Energy Sense Finance, and has worked on multiple outreach efforts both locally and nationally to promote PV market valuation concepts and the PV Value® tool to appraisers, assessors, solar PV installers, lenders, workforce training groups and solar industry professionals. He is an affiliate member of the Appraisal Institute, and has been working to assist development of the “Residential and Commercial Valuation of Solar” course offered by the Appraisal Institute. Geoff can be reached at his office in Albuquerque, NM at [email protected]

Geoffrey T. Klise

mailto:[email protected]

Session ObjectivesSession Objectives

• Identify solar photovoltaic (PV) leasing and power

purchase agreement’s(PPA) market share by state

• Identify solar PV lease and PPA terms and valuation

issues

DefinitionsDefinitions• Solar Photovoltaic (PV) – Solar panels that produce

electricity using energy from the sun

• Lessor – The party owning the solar photovoltaic

system

• Lessee – The residential property owner that enters

into a lease from a party owning the solar photovoltaic

system

• REC – Renewable energy credit

• SREC – Solar renewable energy credit

Definitions, cont.Definitions, cont.• PBIs – Production based incentives

• FMV – Fair Market Value - FMV represents a

transaction between the third-party and the

homeowner regarding the PV system and not the

property it is attached to

• PPA – Power Purchase Agreement

• TPO – Third party owned system (property owner

does not own system)

Types of Solar LeasesTypes of Solar Leases• Monthly lease payment is made for the PV system

with or without a down payment

• Up-front pre-paid lease payment is made for a portion

of, or the entire lease amount

• Power Purchase Agreement (PPA) is entered into

where the homeowner purchases the power (per kWh

generated) produced from the PV system for a

specified period with renewal options

http://apps3.eere.energy.gov/greenpower/onsite/solar_financing.shtml


Growth of Solar PV – Market Share Growth of Solar PV – Market Share attributed to Leaseattributed to Lease






Lease/PPA company examplesLease/PPA company examples

1000 California Homeowners surveyed1000 California Homeowners surveyedAll else being equal, homeowners prefer owning their solar system to leasing. The margin for this was significant, at over 2 to 1: 62% said they’d rather own and 26% lease, with the rest being neutral on the matter.People think owning their system rather than leasing will make it easier to sell their house. Whether this is true may not be clear yet even to those in the industry, and is something we need to get more data on.

People feel that owning brings more freedom and greater financial benefits. – (Study from Jan. 2014)http://theenergycollective.com/rosana-francescato/383936/mosaic-poll-finds-americans-still-love-solar-and-they-love-own-it

http://theenergycollective.com/rosana-francescato/383936/mosaic-poll-finds-americans-still-love-solar-and-they-love-own-it



California SurveyCalifornia Survey

If 2:1 say they would rather own than lease – Will that affect market value or marketing time of house with leased system?

Market Perspectives on Lease/PPAMarket Perspectives on Lease/PPA

Why are they popular?

•As PV is expensive, ~$20,000 to $25,000 for average

size system (5 kW), lower barrier to entry

•Little to no money down

•Operations & Maintenance included in contract

•Structured so rate paid to Third-Party is lower than

utility bill

• Prepared by Navigant Consulting for the CA Public Utilities Commission

http://www.cpuc.ca.gov/NR/rdonlyres/55A4BF20-875A-4B40-AD7C-3C768104211E/0/CSIThirdPartyOwnershipImpactReportFINAL.pdf

• Purpose: Explore how the third-party industry has impacted the solar PV market in California

California Study on TPO IndustryCalifornia Study on TPO Industry




Findings from Navigant StudyFindings from Navigant Study



Concerns over Terms/Agreement with TPO

•More than ½ of new residential lease/PPA customers

that participated in the study had no concerns, though

•The concern most cited by new residential lease/PPA

customers had to do with what happens when home is

sold (8-10% of respondents)

Table 6-1


• Multiple options for sale of property

• Many have changed over time, as evidenced by this chart

• Transfer Agreements typically require credit check for new leaseholder

• Not all TPOs/contracts allow for purchase

From page 4-8



Page 6-25


Recommendations by Navigant to Recommendations by Navigant to California Solar Initiative California Solar Initiative

AdministratorAdministrator• There appears to be a gap for transferring TPO PV

system to new owner if the does not meet financial

criteria. Options in this case may be burdensome

• Complete a future survey on TPO PV system

customers to gauge their experiences during a home

sale or early buy-out

Pages xxi and xxiv

Klise, G.T., Market Valuation Perspectives for Photovoltaic Systems, Sandia National Laboratories, In Review

Survey of PV ValueSurvey of PV Value®® users… users…

• Generally, do owned PV systems add to or reduce the

value of real property in real estate transactions?

Purpose of question: to gauge different stakeholder

responses, ranging from appraisers, real estate

agents, lenders, homeowners, and solar industry

professionals

Klise, G.T., Market Valuation Perspectives for Photovoltaic Systems, Sandia National Laboratories, In ReviewWill be available at http://pv.sandia.gov/pvvalue


• Generally, there was less uncertainty by users and survey participants on the contributory value of an owned PV system

• Greater uncertainty when asked the same question about TPO systems

Klise, G.T., Market Valuation Perspectives for Photovoltaic Systems, Sandia National Laboratories, In ReviewWill be available at http://pv.sandia.gov/pvvalue


•Not many third-party ownership transfers where an independent appraiser conducted a ‘fair market value’ analysis to price the PV system

Is a leased Solar PV System Is a leased Solar PV System personal property?personal property?

• The contract language in many leases state that the solar PV system as installed is considered personal property and not real property. However, a solar PV system requires a building permit, is attached to the real estate, and ownership remains with solar leasing company

Versus

• The solar PV system owned by homeowner is attached, requires a building permit in most states, is considered part of the real estate because it is held in the same ownership as real estate

Questions revealing real property Questions revealing real property or personal propertyor personal property

• Does the solar PV system require a building permit?

• Is it attached to the structure?

• Would the structure be damaged if it were removed?

• Is the solar PV system ownership in the name of the

property owner?

• Is it located on the homeowner’s property?

Continuity of Ownership?Continuity of Ownership?

Appraisal ConcernsAppraisal Concerns• How does the residential appraiser with certainty

determine if system is leased or owned?

• Is the lease agreement recorded? If so, where? Can

title company identify properties with solar leases?

Extraordinary assumption?

• Is the lender/AMC aware of the Solar PV Lease

Agreement prior to ordering report? What are their

appraisal assignment conditions regarding the lease?

Appraisal ConcernsAppraisal Concerns

• Does the MLS correctly identify the Solar PV System on

sales as leased or owned? How can an appraiser

verify with certainty?

• If the system is leased and considered personal

property, it should not be considered in the market

value of the real estate. If value is assigned, Standard

Rule 7 and Standard Rule 1-4 (g) applies

Appraisal ConcernsAppraisal Concerns• Secondary mortgage market guidelines do not SPECIFICALLY address solar power leases or

PPAs – this issue is reportedly being researched

• Fannie Mae

• Freddie Mac

• FHA

• VA

What’s in it for leasing company?What’s in it for leasing company?

• Federal Tax Credit of 30% Year 1

• Accelerated Depreciation – 5 Years

• Incentives and/or rebates

• In some cases the RECs or SRECs

• Monthly lease income

• Profit

States and leases vary on REC & SREC States and leases vary on REC & SREC ownershipownership

• If allowed by state law, the third-party is eligible to have assigned to them, any rebates or renewable energy credits (RECs) that are typically available to the owner of the PV system

• Some agreements allow for a reduction in the monthly or pre-paid payment through the assignment of any rebates or RECs to the third-party

• In some states, the homeowner has legal rights to the RECs and is not required to assign them to the third-party.

• For example, one third-party lease agreement that was reviewed states that for systems in Massachusetts, New Jersey, New York and Pennsylvania, RECs will remain with the homeowner

States and leases vary on REC & SREC States and leases vary on REC & SREC ownershipownership

Income from RECs and SRECs Income from RECs and SRECs

Did you know that income from RECs and SRECs may be taxable?

What’s in a lease position for the What’s in a lease position for the residential property owner?residential property owner?

• Lease or PPA payments may be less than the

amount of current electricity costs

• Usually less upfront costs to install and no high

interest loan

• Leases or PPAs offer onsite monitoring and

maintenance of the system

What’s in a lease position for the What’s in a lease position for the residential property owner?residential property owner?

• Leases or PPAs offer guaranteed energy

production

• Leases or PPAs do not require a loan but

do require adequate credit rating

Lease TermsLease Terms

• Lease language is not standard (as evidenced in

Navigant survey results shown above)

• Lease terms may affect the marketability or

mortgage process - An unknown because of

insufficient existing guidelines

• Lease agreement should be provided to lender in

its entirety

Who is responsible for providing Who is responsible for providing lease?lease?

• New secondary mortgage market guidelines

should address the person responsible for

obtaining the full copy of the solar PV lease

• MLS could be helpful in providing the lease in its

entirety as an attachment to the listing – No

surprises for the buyer!

Home Buyer Surprised at ClosingHome Buyer Surprised at Closing

• California homeowner had solar leased system. Upon selling the house, buyer realized at closing that the remaining term on the lease was 15-16 years and decided they wanted credit from the seller for the long term remaining on the lease.

• Seller reports he and agent kicked in $10,000 in credits at the closing table for buyer credit to accept the leased system.

http://www.wbur.org/npr/330769382/leased-solar-panels-can-cast-a-shadow-over-a-homes-value

Sample Lease Terms – 9.81 kW-DC Sample Lease Terms – 9.81 kW-DC PV SystemPV System

• 20-Year Term – Started 1/2013 (30-page lease)

• Payment total over 20-Year Period - $14,012.80

• One time payment of $17,167.50 assigned to

leasing company for Solar Incentive (reduces

solar payment)

• Leasing Company receives the 30% Federal Tax

Credit and depreciation

Sample Lease Terms – 9.81 kW-DC Sample Lease Terms – 9.81 kW-DC System, cont.System, cont.

• Total monthly lease payments and solar incentive

– $31,180 or $3.18 per Watt ($31,180 / 9810

Watts)

• Early Buy-Out (EBO) period – Sept. 2019 (6+

years after commencement of lease) – $10,000 rd

• End of term buy-out – $8,650 based on schedule

in lease

What happens when I sell my What happens when I sell my house?house?

• Seller purchases system and unexpired

warranties

– Price for system may be equal to the remaining amount

of lease payments

• Require buyer to assume all of your obligations

under the lease

– Buyer must have a specific FICO Score to assume

lease

What happens when I sell my What happens when I sell my house?house?

• If you sell your home and do not purchase the

system or assign the lease consistent with lease

terms, then you may be in default.

What are typical lease/PPA What are typical lease/PPA buyout terms?buyout terms?

• Buyout amount set in lease buyout table

• Buyout amount may be based on total of

remaining lease payments or FMV appraisal by

professional appraiser you choose that is

acceptable to leasing company, whichever value is

higher


• Buyout may not be required for all transactions;

depends on contract terms and when buyout occurs

• Some leases/PPAs do not allow buyout until after

year 6. Terms vary and should be carefully

reviewed

• Some, but not all leases/PPAs offer buyout at end of

term


• Some leases allow leasing company the option of

leaving system in place at end of term rather than

remove and repair roof

Sample Power Purchase Sample Power Purchase AgreementAgreement

• Solar PV Company leases rooftop from residential

homeowner for $1 per year

• Residential homeowner (Host) signs contract to

purchase 100% of the power generated by the solar

PV system on their roof for 20-year term at a set price

Sample Power Purchase Sample Power Purchase Agreement, cont.Agreement, cont.

• Host pays all documented taxes, fees, or charges

assessed or charged to Solar PV Company by any

Governmental Authority and pay all taxes owed

resulting from rebates the Solar PV Company

received for the installation or production

• Ownership of the system remains with the Solar PV

Company and Host agrees it is not a fixture or part of

the real estate

• Solar PV Company has rights to RECS or SRECs


•Solar PV Company has rights to RECS or SRECs

•Solar PV Company has right to mortgage, pledge,

grant security interests or otherwise encumber the

System in connection with installation or operation


•Host agrees not to directly or indirectly cause,

create, incur, assume or suffer to exist mortgage,

pledge, lien, charge, security interest

•Host is required to provide internet connection


•Host may assign lease to another if assignee meets

Solar PV Company credit criteria

•Host makes payments in two installments – Upon

signing agreement & prior to installation

•Buyout schedule included in the contract with year

20 requiring Host to pay $105 for 7.76 kW system


What does USPAP require?What does USPAP require?Standard 7-4 (Personal Property)

In developing a personal property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results

(d) When developing an opinion of the value of a lease, leased, or encumbered property, an appraiser must analyze the effect on value, if any, of the terms and conditions of the lease(s) or encumbrances

What does Secondary Mortgage What does Secondary Mortgage Market Say?Market Say?

• Personal property may not be included in market value

• Fannie Mae - Ann. SEL-2010-09: Selling Guide Updates and Additional Guidance on Appraisal-Related Policies (06/30/10)

• Treatment of Personal Property

• Lenders are reminded that personal property,

including (but not limited to) furniture, vehicles,

boats, floating boat docks, and art work, may not be

included as additional security for any mortgage on

a one-unit property unless otherwise specified by

Fannie Mae

What does Secondary Mortgage What does Secondary Mortgage Market Say?Market Say?

Secondary Mortgage Market implies…Secondary Mortgage Market implies…•Fannie Mae - Ann. SEL-2010-09: Selling Guide Updates and Additional Guidance on Appraisal-Related Policies (06/30/10)

•Personal property is permitted as part of the security for a loan on a two- to four-unit property to the extent it is pledged by the 1-4 Family Rider (Form 3170). Whether an item is real or personal property is generally determined by the law of the jurisdiction where the property is located. A professional appraiser who has the knowledge, experience, and geographical competence to complete the appraisal assignment must also possess the expertise to identify personal property items in the appraisal

Secondary Mortgage Market implies…Secondary Mortgage Market implies…

HUD - FHA Guide – Appendix D: Valuation Protocol (4150.2): says

Sales Concessions Down Payment Assistance -

•Market the appropriate box indicating whether or not there is any financial assistance….

•If yes, the appraiser is to report the total dollar amount and describe the items to be paid. If the sale involves personal property (e.g. above ground pool, lawn mower, furniture, etc.) it should be identified and excluded from the valuation

What will the secondary mortgage What will the secondary mortgage market guidelines imply in the market guidelines imply in the

near future?near future?

•Fannie/Freddie/VA/FHA guidelines are being revised; however, the issue of solar leases and power purchase agreements are still being researched. Revised guidelines most likely will not address these issues

FHA Draft GuidelinesFHA Draft GuidelinesK. Additional Appraisal Requirements for Special Energy-K. Additional Appraisal Requirements for Special Energy-Related Building ComponentsRelated Building Components

So how soon will we know more So how soon will we know more about leased systems and value?about leased systems and value?

As homeowners typically stay in their homes for roughly 12 years,* it will take time to understand how buyers and sellers react to leases and power purchase agreements. Uncertainties discussed today will only be reduced with underwriter guidance that will help define what is allowable for the different ownership options presented in this webinar

*http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=110770&channelID=311

Communicating the appraisal Communicating the appraisal

• Always verify the ownership of the solar photovoltaic system and document the steps taken to verify ownership. (Scope of Work)

• If the system is leased, clearly identify the leased position in the appraisal report and suggest lender seek legal review of the lease to assure no clauses that would affect their mortgage position

• Does the 20-year solar photovoltaic lease

and/or power purchase agreement encumber

the property?

• Does the lease affect the title?

Communicating the appraisal Communicating the appraisal

AI Residential Green and Energy AI Residential Green and Energy Efficient AddendumEfficient Addendum

Addendum has a solar page that asks the question…

LEASED

OWNED

Does your MLS Identify Solar PV Does your MLS Identify Solar PV Ownership?Ownership?

Market and appraiser Market and appraiser considerationsconsiderations

• Appraisers must be competent in type of property to meet USPAP

• Fannie Mae, Freddie Mac, and FHA require competency prior to appraiser accepting assignment

• Leases are typically for a 20-year term and should be recorded or a database made public to allow the public and real estate professionals to accurately verify ownership

• MLSs need to have a searchable field identifying solar PV leased versus solar PV owned systems

• Sales contracts should clearly identify the solar PV lease and how the lease will be handled in the transfer. (Could present a concession.)

Market and appraiser Market and appraiser considerationsconsiderations

• If the value for a leased solar PV system is used to calculate the total LTV for a mortgage, what happens if the lessee is in breach of contract with the lessor, would this automatically place the mortgage in default?

Possible Lender ConcernsPossible Lender Concerns

Appraisal ResourcesAppraisal Resources

Thank you for attending!Thank you for attending!

Sandra K. Adomatis, SRALEED Green AssociateAdomatis Appraisal [email protected]

Geoffrey T. Klise Senior Technical Staff MemberSandia National LaboratoriesAlbuquerque, New [email protected]

residential solar photovoltaic leasing valuation issues presenters: sandra k. adomatis, sra leed...

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