The Cost of Value: PV and Property Tax Policy

The Cost of Value: PV and Property Tax Policy

Untangling Property Tax Policy and PV About the SunShot Solar Outreach Partnership The SunShot Solar Outreach Partnership (SolarOPs) is a U.S. Department of Energy (DOE) program designed to increase the use and integration of solar energy in communities across the US. 2 Topic Area Outline Solar 101 State practices Issues

Project characteristics PV industry context State assessment/valuation laws Property tax implications for owners Problems encountered in valuation and policy Unanswered questions Solar Industry 101 Real Property Type: Residential, Commercial, Agricultural, Exempt System Configuration: Behind the meter (on-site use), in front of the meter (wholesale sale) System Ownership Configuration: Owned by real property owner, owned by a third party

(leased or PPA) Real Property Ownership: Owned by project owner, roof/land lease Net Metering Net metering allows customers to export power to the grid during times of excess generation, and receive credits that can be applied to later electricity usage Net Metering: Market Share More than

93% of distributed PV Installations are net-metered Source: IREC ( http://www.irecusa.org/wp-content/uploads/IRECSolarMarketTrends-2012-web.pdf Net Metering: State Policies www.dsireusa.org / August 2012. DC 43 states, + Washington DC

& 4 territories,have adopted a net metering policy. Note: Numbers indicate individual system capacity limit in kilowatts. Some limits vary by customer type, technology and/or application. Other limits might also apply. This map generally does not address statutory changes until administrative rules have been adopted to implement such changes. Renewable Portfolio Standard Retail Electricity Sales Renewa ble Energy Any electricity source Renewable Portfolio Standard

Retail Electricity Sales Solar carveout Renewa ble Energy Any electricity source Renewable Portfolio Standard e $Fossil Fuel Two revenue streams e $- $REC Solar Energy System

Utility Renewable Portfolio Standard www.dsireusa.org / March 2013. 29 states,+ Washington Washington DC DC and and 2 2 territories,have territories,have Renewable Renewable Portfolio Portfolio

Standards Standards (8 (8 states states and and 2 2 territories territories have have renewable renewable portfolio portfolio goals). goals). Third Party Ownership: PPA

Power Purchase Agreement $ $ Customer e e Incentiv $es- $ - Developer Assessment Basics Property taxes are a significant source of local government revenue Real property and personal property

Three methods Sales comparison/market Cost Income Which one for solar? PV Valuation Issues Comparable Sales Limited/no data available Typically ball-parked at 20 times the value of annual energy savings LBL study in CA put it at 14 -22 times the value of energy savings, but Hard to isolate the impact of PV from other factors Directly applies only to a limited and unique market

Bottom line: At this point it is very challenging to reliably estimate PV Valuation Issues Cost Cost basis (Incentives? Adjustments?) Transferrable vs. non-transferrable to buyer What is the right depreciation schedule? Found ranges from 5 50 years Abnormal obsolescence? Front-loads property tax burdens Market vs. depreciated original How reliable is market data? Bottom Line: Perceived reasonableness

varies Market vs. Depreciated Original PV Valuation Issues Income Complicated (unless a standardized tool is used) May require information that is hard to obtain or impossible to forecast Electricity prices SREC values Capitalization rate May depart from traditional valuation of some properties Do power or SREC sales constitute a true

income motivation, regardless of Current Practices: 15 States State Exemption or Equivalent Other Policy/Properties Other Methods/Notes Arizona Behind the meter systems are exempt (TPO unclear) Valued at 20% depreciated cost (30-yr

SL, 10% floor); 20% assessment rate Assessment rate for utility and industrial property varies from year to year California Value excluded for locally assessed properties Utility or very large scale projects are centrally assessed (no exclusion) Exclusion lost at change in PV property ownership; sale leasback and flip do not trigger Colorado

Residential behind the meter 2 MW-AC or less locally assessed at Larger than 2 MW-AC uses income systems exempt, including third- value of $1,171/kW and 20-yr economic approach equalized to cost approach with standard values party owned up to 100 kW life; 29% assessment rate Residential typically real property; nonNo set depreciation schedule, but residential typically personal property (cost and/ commonly 25 - 30 years; FL PSC schedule is or income) 30 years Florida No statewide policy Hawaii

All counties have local exemptions for behind the meter systems, 25% exports permitted County practices vary; some counties offer additional exemptions for wholesale Cost approach typically used where exemption does not exist Illinois Law unclear, but all behind the meter systems appear to be exempt Special assessment may apply to wholesale;

personal vs. real property likely important No business personal property tax; 33.3% assessment ratio Maryland All behind the meter systems are exempt Wholesale gets 50% exemption; valued at depreciated cost (30-yr SL, 25% floor) Local property tax credits exist in several counties (typically limited to residential) Massachusetts 20-yr exemption for behind the meter

systems located on taxable property Non-exempt systems likely cost approach; no standard depreciation. For wholesale, some components may be assessed as real property Current Practices: 15 States State Exemption or Equivalent Other Policy/Properties Nevada

All behind the meter systems are exempt Valued at depreciated cost (1.5% annually for 50 years); 10+ MW get 55% abatement for 20 years New Jersey All behind the meter systems are exempt No business personal property tax; wholesale facilities most likely personal property Typically locally assessed; abatements seeking personal property classification denied Pending legislation would apply $7,000/MW standard rate for

wholesale facilities New Mexico Residential systems not treated as physical improvement, therefore exempt All other PV assessed centrally using depreciated cost (20-yr SL, 20% floor); 33.3% assessment rate Residential exemption lasts only until change is home ownership New York Residential behind the meter exempt; local option 15-yr exemption for other facilities or PILOT

If opted-out, no personal property tax, but one ORPTS opinion called wind farm real property No apparent ownership or on-site use requirements for 15-yr local option North Carolina at depreciated cost (18-yr SL with Residential behind the meter exempt Valued inflation added, 25% floor); 80% of as non-business personal property appraised value exempt Ohio

All systems 250 kW-AC or less exempt Pennsylvania No statewide policy so local variation possible Other Methods/Notes Utility-owned centrally assessed using composite; 80% exemption applied to cost method PILOT of $7,000 - $9,000/MW for non- Additional requirements for PILOT if facility is 5 MW or larger exempt systems placed in service by 2013 For residential, no comparable sales. Non-residential may be commercial equipment (exempt)

Wholesale likely income capitalization, unless considered commercial equipment Financial Implications: Examples OH (PILOT at $7,000/MW): $6 7/MWh (slightly backloaded due to production declines) Reduction of ~90% compared to former system (as utility property) Examples CO ($1,173/kW value, 20-yr life, 29% assessment rate,

varied mill rates): Avg. MW rate = $11,000 $22,000 /MW (front-loaded in theory) Avg. MWh rate = $7 17/MWh (front-loaded in theory) Increases in threshold capital cost have a significant influence 5% increase increases valuations by 65% over 20 years 16% increase increases valuations by 600% over 20 years Examples MI (Depreciated Market Cost) 147 kW facility in Kalamazoo valued at

$7.3M per MW Owner contends cost was 50% of that Property tax owned in Year 1: $120/MWh, more than the retail value of electricity Examples NC (Depreciated Original Cost; 80% abatement, 18-year trended schedule) At $5.33/W taxes owed = $4-5/MWh Policy Issues

Classification as real or personal property Whether the property classification is explicitly stated or implied by state law or regulation The potential for injury to the PV property or to the underlying real property upon removal of the equipment The physical character of the facility, including the degree to which various components are attached to each other or the underlying real property Real vs. Personal Cont Classification of real or personal property The details of other indicators of the

permanence of the facility, such as any associated contracts or leasing arrangements The degree to which a system functions as an integrated whole rather than a collection of independent pieces of machinery and equipment, including whether it is uniquely adapted for a specific site or use Policy Issues Clarity of terms and treatment What is a conventional system with respect to PV? Treatment of grid-supply vs. behind the meter systems Lack of differentiation

Ambiguous language (e.g., third-party owned systems) Attention to market variations Policy Issues System vs. Value Added Ultimately mean different things Most visible where system is owned by a third-party Systems on Exempt Property Exclusive use and default to taxation Income producing? Different ownership scenarios Systems on Specially Assessed Farmland

Standard Practices Ignore or exempt behind the meter systems or those put to personal use If exemption does not apply, use the replacement cost method for behind the meter systems (usually business personal property) Use income and/or cost in combination for grid supply systems Exempt grid supply/commercial systems in favor of a negotiated or standard PILOT Policy Considerations Careful attention to market context and how changes affect property taxes

Simplicity vs. accuracy and ease of implementation Fairly implementing changes (e.g., timing) Clear determinations of real vs. personal property classification Policy Considerations Cont Collection of information to support comparable sales analysis and relative burden Use of simplified or standard incomebased tools (e.g., PV Value). Guidance and data for the use of cost approaches Impacts on local revenue and projects

Questions for Further Discussion Can we define PV as real or personal property? What is the best valuation method for different circumstances? Is one-size fits all a good approach? What does equality mean in terms of property taxes on traditional generation and PV (or other renewables)? Is there value in having a good solar site (e.g., a roof, vacant land) Justin Barnes Chad Laurent Keyes, Fox and Wiedman, LLP

Meister Consultants Group, Inc. [email protected] [email protected] (617) 209-1986

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