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Residential Solar Photovoltaic Leasing Valuation Issues


Fannie/Freddie/VA/FHA guidelines are being revised; however, the issue of solar leases and power purchase agreements are still being researched. – PowerPoint PPT presentation

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Title: Residential Solar Photovoltaic Leasing Valuation Issues

(No Transcript)
Residential Solar Photovoltaic Leasing Valuation
Presenters Sandra K. Adomatis, SRA LEED Green
Associate Adomatis Appraisal Service Punta Gorda,
Florida Geoffrey T. Klise Senior Technical
Staff Member Sandia National Laboratories Albuquer
que, New Mexico
  • 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 Institutes Presidents
    Award for her contributions to the Institute.
    Sandra can be reached at her business, Adomatis
    Appraisal Service, in Punta Gorda, FL at

Sandra K. Adomatis, SRA, LEED Green Associate
  • 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

Geoffrey T. Klise
Session Objectives
  • Identify solar photovoltaic (PV) leasing and
    power purchase agreements(PPA) market share by
  • Identify solar PV lease and PPA terms and
    valuation issues

  • Solar Photovoltaic (PV) Solar panels that
    produce electricity using energy from the sun
  • Lessor The party owning the solar photovoltaic
  • 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

Growth of Solar PV Market Share attributed to
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
theyd 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)
California Survey
If 21 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
  • 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//
  • Purpose Explore how the third-party industry has
    impacted the solar PV market in California

Findings from Navigant Study
  • http//

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//

  • Multiple options for sale of property
  • Many have changed over time, as evidenced by this
  • Transfer Agreements typically require credit
    check for new leaseholder
  • Not all TPOs/contracts allow for purchase

From page 4-8
  • http//

Findings from Navigant Study
Page 6-25
  • http//

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
  • 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//

Survey of PV Value users
  • Generally, do owned PV systems add to or reduce
    the value of real property in real estate
  • 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//

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//

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

Questions revealing real property or personal
  • Does the solar PV system require a building
  • Is it attached to the structure?
  • Would the structure be damaged if it were
  • Is the solar PV system ownership in the name of
    the property owner?
  • Is it located on the homeowners 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

Whats 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

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 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

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

Whats 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.

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
  • 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

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

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
  • 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

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

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

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
  • Fannie Mae - Ann. SEL-2010-09 Selling Guide
    Updates and Additional Guidance on
    Appraisal-Related 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
    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
  • 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

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

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//

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 has a solar page that asks the
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
  • 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?

Thank you for attending!
Sandra K. Adomatis, SRA LEED Green
Associate Adomatis Appraisal Service Adomatis_at_Hotm Geoffrey T. Klise Senior Technical
Staff Member Sandia National Laboratories Albuquer
que, New Mexico