Depending on where you live, and what areas you’ve worked in, you may have years of experience addressing the perceived market impact of a residential solar photovoltaic system. But as the technology becomes more affordable, and its use is more broadly employed in new markets throughout the country, it’s become increasingly more important to understand the nuances associated with addressing this type of property amenity in the context of an appraisal.
When analyzing the impact a solar system has on a property’s value and marketability, you must first identify if the system should be considered in the appraisal at all. As illustrated by Fannie Mae in their “Appraising properties with solar panels” letter dated August 5th, 2020, the ownership of a property’s solar system, or its debt financing structures if not owned outright, will play a pivotal roll in determining whether or not the system’s contributory value should be analyzed.
For example, if the subject property’s solar system is owned outright as the result of a cash purchase, or if the loan used to finance the system was not collateralized by the solar panels, the contributory value of the system can be contemplated when developing your report findings, as the system itself would be rightfully considered as Real Property.
If the subject’s solar system has been financed as a Fixture to Real Estate, and the physical panels can not be repossessed as a result of defaulting on the financing terms, the system’s contributory value to the subject can be considered during the report development process in the same manner it would be if the panels were owned outright.
What if the solar system in question was financed, and the system’s hardware was the collateral used to secure the financing? In this case, the system’s contributory value can not be considered as part of the property’s appraised value since the system would be considered Personal Property used to collateralize another debt.
If the system is actively leased, or covered by a Power Purchase Agreement, its contributory value may not be included in the appraised value of the subject property, as again the system would be considered personal property, and not permanent fixture of the subject property.
Once you have successfully identified the solar panels as Real Property, and the ownership structure of the system allows for the appraiser to consider its contributory value in the subject’s appraised value, the appraiser will need to identify the system’s contributory value through analysis. Per Fannie Mae:
Appraisers must compare energy-efficient features of the subject property to those of comparable properties in the Sales Comparison Approach adjustment grid. Appraisers may augment the Sales Comparison Approach in evaluating any impact (either positive or negative) to the value of energy efficiency improvements with either the income or cost approach; however, appraisers cannot adjust the value of the property
- on a mechanical dollar-for-dollar basis based on equipment and installation cost, or the discounted present value of expected cost savings of the equipment over the useful life of the equipment; or
- solely based on the cost or income approach. The appraiser must also analyze the market reaction to the energy efficient feature.
With this guidance in mind, the appraiser will always have to research and analyze the way in which the market recognizes this type of property amenity from a paired sales perspective, since the Enterprise prohibits the sole use of the Cost or Income approaches to ascertain contributory values. This doesn’t mean that every solar system will add contributory value from the market’s perspective, but it does mean you’ll need to qualify if there is/isn’t contributory value by way of comparable sales analysis.