Solar Panels on Buildings Need a Shift in Valuations

If solar power wasn’t on the agenda for more CRE owners, operators, and developers before the pandemic, it should be now. The Inflation Reduction Act, passed in 2022 as an attempt to slow the growth of inflation, has provided many billions in potential tax credits for smarter energy use and generation, with solar a big part.

And there are many ways to using solar, including having panels installed directly for the owner, renting space out to third parties, providing power to tenants, using it only for internal purposes and cutting utility bills, or selling power back to the grid. Installation costs of PV dropped by 90% between 2010 and 2020, as JLL notes. Life expectations of the systems have also grown to a range of 25 to 40 years. Then there are the ESG benefits at a time when the chances of having to report on greenhouse gas emissions either directly or through tenants is a distinct probability for CRE firms.

According to JLL, “three quarters of landlords (75%) currently have between 5% and 25% of their portfolio equipped with solar panels. With all industries under pressure to decarbonize, the affordability and accessibility of PV offers many benefits to commercial real estate. As a result, PV is expected to have the highest share of future power generating capacity, overtaking natural gas in 2026 and coal in 2027.”

But the potential benefits are complicated. Not all buildings have the exterior space to place the size of array that might be needed for a given use. Rooftop geometry and orientation will affect how much power can practically be generated. All this and more fall into the question of how to construction valuations for a building.

“Although PV solar panels can introduce complexity to valuation, this does not have to be a barrier to widespread adoption amongst commercial and real estate landlords,” said Emre Karagozlu, director of renewable energy valuation at JLL, in prepared comments. “The Discounted Cash Flow (DCF) approach allows greater detail to be inputted into the valuation, creating the opportunity for a more detailed appraisal that more accurately captures the benefits of installing PV panels.”

The more accurate and encompassing the valuation, the better for financing, pricing for sales, financial planning, and also taxes, whether applying for specialized tax credits or determining whether cost segregation might be applicable and, if so, what the depreciation valuations might be.