Residential Solar Photovoltaic
Leasing Valuation Issues
Presenters:
Sandra K. Adomatis, SRA
LEED Green Associate
Adomatis Appraisal Service
Punta Gorda, Florida
Geoffrey T. Klise
Senior Technical Staff Member
Sandia National Laboratories
Albuquerque, New Mexico
Sandra K. Adomatis, SRA, LEED Green Associate
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
Adomatis@hotmail.com
Geoffrey T. Klise
Senior Technical Staff Member
Sandia 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 gklise@sandia.gov
Session 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
Definitions
• 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.
• 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 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
attributed to Lease
http://apps3.eere.e
nergy.gov/greenpo
wer/onsite/solar_fi
nancing.shtml
Lease/PPA company examples
1000 California Homeowners surveyed
All 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/rosanafrancescato/383936/mosaic-poll-finds-americans-still-lovesolar-and-they-love-own-it
California 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/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
California Study on TPO Industry
• Prepared by Navigant Consulting for the CA
Public Utilities Commission
http://www.cpuc.ca.gov/NR/rdonlyres/55A4BF20-875A-4B40-AD7C3C768104211E/0/CSIThirdPartyOwnershipImpactReportFINAL.pdf
• Purpose: Explore how the third-party industry
has impacted the solar PV market in California
Findings from Navigant Study
http://www.cpuc.ca.gov/NR/rdonlyres/55A4BF20-875A-4B40-AD7C-3C768104211E/0/CSIThirdPartyOwnershipImpactReportFINAL.pdf
Findings 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
http://www.cpuc.ca.gov/NR/rdonlyres/55A4BF20-875A-4B40-AD7C-3C768104211E/0/CSIThirdPartyOwnershipImpactReportFINAL.pdf
• 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
http://www.cpuc.ca.gov/NR/rdonlyres/55A4BF20-875A-4B40-AD7C-3C768104211E/0/CSIThirdPartyOwnershipImpactReportFINAL.pdf
Findings from Navigant Study
Page 6-25
http://www.cpuc.ca.gov/NR/rdonlyres/55A4BF20-875A-4B40-AD7C-3C768104211E/0/CSIThirdPartyOwnershipImpactReportFINAL.pdf
Recommendations by Navigant to
California Solar Initiative
Administrator
• 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
http://www.cpuc.ca.gov/NR/rdonlyres/55A4BF20-875A-4B40-AD7C-3C768104211E/0/CSIThirdPartyOwnershipImpactReportFINAL.pdf
Survey of PV
®
Value
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 Review
Survey of PV Value® users…
• 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 Review
Will be available at http://pv.sandia.gov/pvvalue
Survey of PV Value® users…
• Not many third-party ownership transfers where an independent appraiser
conducted a ‘fair market value’ analysis to price the PV system
Klise, G.T., Market Valuation Perspectives for Photovoltaic Systems, Sandia National Laboratories, In Review
Will be available at http://pv.sandia.gov/pvvalue
Is a leased Solar PV System
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
or 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?
Appraisal 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 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 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?
• 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
ownership
• 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
States and leases vary on REC & SREC
ownership
• In some states, the homeowner has legal rights to the
RECs and is not required to assign them to the thirdparty.
• 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
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
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
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 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
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 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-panelscan-cast-a-shadow-over-a-homes-value
Sample Lease Terms – 9.81 kW-DC
PV 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
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
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
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
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
What are typical lease/PPA
buyout terms?
• 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
What are typical lease/PPA
buyout terms?
• 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
Agreement
• 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
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
Sample Power Purchase
Agreement, cont.
• 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
Sample Power Purchase
Agreement, cont.
• 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
Sample Power Purchase
Agreement, cont.
• 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
Sample Power Purchase
Agreement, cont.
• 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?
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
Market Say?
• Personal property may not be included in market
value
• Fannie Mae - Ann. SEL-2010-09: Selling Guide
Updates and Additional Guidance on AppraisalRelated Policies (06/30/10)
• Treatment of Personal Property
What does Secondary Mortgage
Market Say?
• 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
Secondary Mortgage Market implies…
• Fannie Mae - Ann. SEL-2010-09: Selling Guide
Updates and Additional Guidance on AppraisalRelated 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…
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
market guidelines imply in the
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 Guidelines
K. Additional Appraisal Requirements for Special EnergyRelated Building Components
So how soon will we know more
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&genericCo
ntentID=110770&channelID=311
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
Communicating the appraisal
• Does the 20-year solar photovoltaic lease
and/or power purchase agreement encumber
the property?
• Does the lease affect the title?
AI Residential Green and Energy
Efficient Addendum
Addendum has a solar page
that asks the question…
LEASED
OWNED
Does your MLS Identify Solar PV
Ownership?
Market and appraiser
considerations
• 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
Market and appraiser
considerations
• 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.)
Possible Lender Concerns
• 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?
Appraisal Resources
Thank you for attending!
Sandra K. Adomatis, SRA
LEED Green Associate
Adomatis Appraisal Service
Adomatis@Hotmail.com
Geoffrey T. Klise
Senior Technical Staff
Member
Sandia National Laboratories
Albuquerque, New Mexico
gklise@sandia.gov