Valuation of Wind and Solar Farms in the context of Municipal Valuations – From a South African perspective – Part 2 | Laurie Pool

In Part 1 of this article, I covered the valuation of wind and solar farms in the context of municipal valuations with case studies from Australia, New South Wales and the USA. The second part of the article looks at the valuation of wind and solar farms in the context of municipal valuations, from a South African perspective through the lenses of my experience as a valuer.

1. My South African Experience

Firstly, I want to quote from Section 46 of the MPRA which I am sure is trite knowledge to most valuers.

“46. General Basis of valuation

• Subject to any other applicable provisions of this Act, the market value of a property is the amount the property would have realised if sold on the date of valuation in the open market by a willing seller to a willing buyer. “

The rest of this section details the inclusions and exclusions.

The valuations that we have conducted for the various municipalities have been based on the following information received either from the owner or the lease holder.

1. The lease period granted by Eskom to a wind farm operator used to be 20 years with such lease being registered against the title deed. It would appear that the leases currently being negotiated are for a period of 25 years, with an option to renew for a further 25 years.
2. The area of the lease, which is usually a land surveyor diagram for the “Leased Area” and registered at the Surveyor General.
3. Rental for the right to occupy that land by the operator.
4. The municipality has either rezoned that portion as “commercial industrial” or granted a “consent use” for commercial industrial purposes. This also allows them to levy commercial tax rate tariffs on the value.

Please note that Section 42(1) of the MPRA allows the valuer “…access to any document or information in possession of the owner, tenant, occupier or agent which the valuer reasonably requires for valuing the property” and to make extracts where necessary. The lease agreements, however, usually contain a non-disclosure provision and sometimes make it difficult for a valuer to determine the periods of the lease and the rental payable, as found in certain instances. The information can then only be produced in an Appeal Board hearing. Section 44 protects that information from becoming public.

The rental is usually a percentage of audited turnover or a fixed rental or a combination of both. As this is a substantial amount, it could be argued that this gross for net income, which is fixed, adds to the market value of the property and that in the event of an owner selling the property, this income will greatly enhance the selling price.

From our interpretation of Section 46 and using the Australian and USA findings, we valued a lease agreement (for this, in our view, is a commercial operation) based on the rental income and we calculated the value by using the Discounted Cash Flow Method over the period of the lease. Certain logical assumptions were made to the inflation rate as well as the capitalisation rate. In the cases I have dealt with, the closest town’s capitalisation rate for commercial properties was used, as I was of the opinion that the risk factor relating to the discount rate was not higher than that of the town. For the inflation rate, we used the current and historic CPIs published as a guideline. This is a risky figure as there are numerous extraneous factors that can affect the CPI.

The categorisation (Section 8 of the MPRA) has also been a contentious area. Obviously, the wind farm is part of a Multiple Use property. I have argued that the total amount of the value calculated for the Wind Farm as set out above is categorised as 8(2) (b) or (c).

There have also been arguments raised that a Wind Farm is “Public Service Infrastructure (PSI)”. However, the definition for PSI clearly states that it “…means  publicly controlled infrastructure…” and although these operators supply electricity to the national grid they are privately owned and therefore fall outside the definition.

Appeal Board decisions

I have now had two instances where the wind farm operator lodged an appeal to the Appeal Board of a municipality.

• In the first instance, the value and the method of calculation of the Wind Farm were accepted by the appellants’ valuer and legal representative. The only contention was as to how the amount to be apportioned between Agriculture (8(2)(a)) and Commercial (8(2)(c)) must be calculated. The appellant argued that the value apportionment of the wind farm portion must be determined by the percentage of the area covered by the pads and roads of the total property. This resulted in a very small amount to be allocated to the commercial category. The appeal board however decided against this argument and found that the total value calculated for the Wind Farm be deemed commercial {8(2)(c).
• In the second instance, the appeal was against the calculation of the value of the wind farm, based on the discounted cash flow value of the rental as per the agreement with the owner. The appellant argued that as the turbines were regarded as plant and machinery, the income derived from that could not be used in valuing the wind farm and that the area covered by the lease must be valued at current land values.

The appeal board however found that “The revenue used in the calculation of valuation is the rental income in the hands of the landowner and not the revenue generated from the turbines.”

It further stated “The means of rental determination in this instance is analogous to the common ‘turnover clause’ in rental agreements where the revenue turnover of say, a supermarket, is used as the calculation of rental per month. The sale of supermarket items in determining the rental is merely a means to such and is revenue in the hand of the tenant (supermarket) and not the owner. The rental calculated therefrom is the revenue in the hands of the owner and which becomes a basis to determine a net income for the purposes of calculating value.”

Although there is no precedence rule to comply with Appeal Board decisions, it does however, give an indication as to how a legally qualified entity views this matter.

We are aware that this argument will continue for a long time, until such time as the courts have had their say, but suffice it to say that so far none of these operators or others have taken this matter to court for a review.