This article is a valuer’s perspective on the valuation of wind and solar farms in the context of Municipal Valuations. Perhaps it will elicit debate on the subject, as there have been a few different approaches. There hasn’t been any Court decision on this matter that I am aware of, therefore, it would be apt that we, as valuers, in the meantime, try and get some sort of clarity amongst ourselves in the industry.
It could be argued that since the notarial lease agreements for both wind and solar farms are quite similar, then the same arguments that are to be proposed should hold good in both instances.
Renewable energy projects are set to explode in the next few years and if experience with Municipalities is anything to go by, they would want the maximum revenue that they can get, especially in the rural areas where their income stream has come under severe strain. Here you have to make it clear to the Municipalities that the turbines themselves are regarded as plant and machinery and can therefore not be valued as such. It sometimes takes some convincing as most of the wind farm operators tend to boast about the amount of money to be invested in the Municipality.
I have had the opportunity to value a few wind and solar farms for municipal rates purposes since 2011. At the time there were no precedents to work from so I undertook some secondary research to investigate what happens in other countries with similar property tax assessment rates as South Africa in an effort to try and assess a possible approach to take.
The USA and Australia for example, are two countries with similar economic structures as ours. These countries have had wind farms for a number of years and their property taxes are levied by local authorities.
In the case of Australia, we found two references to the valuation of wind farms:
- Government of South Australia – State Valuation Office – Wind Farm Workshop – 29/11/2011p
- They consider “Wind Turbine Structures” to be plant and machinery
- As “most Wind Farm operators pay what is considered a land rent for the pad site, this reflects the right to occupy the site to exclusion of all others. The commercial value of the pad is primarily reflected in the Site Value of the property and ultimately contributes to the Capital Value of the property”
- The income that is generated does not affect the productive arable land that the owner can still utilise (around the pads) and is a relatively risk-free form of income on sometimes less productive land.
- Wind Turbines are seen as secondary tenancy to the main use as a farming enterprise.
- Lease Agreements are usually for an initial 25 years with options to renew for two further periods of 25 years. (In RSA leases vary between 20 and 25 years which is registered against the title deed).
- New South Wales Valuer General’s Policy – June 2019: Valuation of land used as a wind farm.
This policy states that where there are comparable sales it is obviously preferable to analyse and use these sales. One of the issues to consider when using comparable sales is to consider the value of existing lease agreements in the sale price.
“Where a wind farm site is leased, and direct sales evidence is not available you can value the land by capitalising the net rental return. The actual rental paid to the owner may be the best evidence of the value of the leased area.
Capitalisation of the net rental reflects the value of the owner’s right to receive the rental income from the land.”
Capitalisation rates could be determined by analysing sales of comparable investment properties.
From the above, it seems clear that in Australia, at least in these two states, the capitalisation of net rental is the preferred method of valuation where there are no comparable sales.
In the USA there were two studies that I found.
- “Wind Farm Valuation for Real Estate Tax Assessment” – prepared for the Assessors Association of Pennsylvania by Camins Associates – April 2006.
It was a two month investigation including discussions with local authorities and other assessment practitioners. (As Valuers are known as in the USA)
The conclusion of this paper reads as follows:
“Land value would be determined by one of two approaches: the income approach based on the capitalized value of the rent (direct or yield capitalization), if rental information is available, or the sales comparison approach if rental information is not available.”
- “Wind Farm valuation Issues for Ad Valorum Taxation Purposes” – Article written by P Barton DeLacey, principle at DeLacey Consulting, Chicago and published in the Summer 2014 issue of Insights magazine (p 85).
The article examines three valuation approaches, i.e. The Income Approach, The Sales Comparison Approach (of similar Wind Farms) and The Cost Approach.
The writer however does not come to a final conclusion although the depreciated cost approach seems to be favoured as in the USA there are tax incentives for wind farms and he takes this into account as well the Net Capacity Factor of a specific wind farm.
From these cases, we should be able to draw similarities and differences which are applicable in part 2 of the article which looks at the valuation of wind and solar farms in the context of municipal valuations from a South African perspective.