I do understand your points, I just don’t agree with them based on my experience. I’m not sure how many green projects you’ve worked on but I’m assuming none [correct me of I'm wrong]. If/when you do work on one you may see what I’m talking about. Then again, you may not.

Either way, I appreciate your comments and discussion. If you have more questions or would like to talk, feel free to call me directly. Outside of that, I’ll consider this thread closed for now. Thx..jim

Commonly accepted method by whom? I’ve worked in real estate for 18 years and I can tell you that the two sets of buyers can be different animals. I would not say that borrowing a cap rate from rental properties is ridiculous. It may be the best place to get a cap rate. What I am saying is that it is unreliable. So unreliable that it’s more of a guess than a calculation of estimated contributory value.

If you are using a cap rate from a multi-family property and applying it to a green multi-family property, then it makes more sense. But not if you are going to try use it on single-family dwellings.

However, the cap rate is problematic in other ways. We’re talking about savings from a depreciating component, not income. There is a difference. Will that energy efficient item that saves $1,200/year still bring $17,143 in value when it needs to replaced in a two years? Have you factored in maintenance? Will someone pay $17,143 more for a home when they could buy another home without this item and install it for $5,000?

In appraisal, the best way to really determine the contribution to value from such items is to compare the sales of similar homes with and without such items. In this comparison, you account for the other differnces between the properties and the net difference is the contributory value of that item. This is called paired sales analysis. And even this can be viewed as guess that is within the framework of supporting data since it is predicated on applying ESTIMATED adjustments to the sales to account for their differences other than green items.

There are lies, damned lies and then there are statistics. By default, you and sellers of energy effiicient items have a conflict of interest. What better way to entice potential customers than to quantify their profit? But, if anyone is playing with cap rates from dissimilar properties they may be selling a bill of goods or, need to take some appraisal courses.

You really can’t “compute” or “measure” the contribution to overall value to real estate of such energy effiicient items. You can only estimate. This is what I would tell clients to be fair, if I were in your shoes.

They aren’t created by shaking a magic 8 ball. The magic 8 ball is used to calculate college hoop brackets…

Basically, take 10 years of cash flows at $1,200 per year. Cash flow “zero” (before the 1st payment of $1,200) is

So, your cash flow schedule would appear as follows:

CF0 =
CF1 = $1,200
CF2 = $1,200
.
.
.
CF10 = $1,200
Reversion = 0 (for this argument)

Assuming 0% interest (discount rate), the NPV of the series of cash flows is $7,000. NPV at 2% = $5,779. NPV at 4% = $4,733.

I think the ideal way to go about this would be to estimate the life expectancy of the PV cells and use that number as the total number of cash flows. It’s safe to assume the reversion (instrinsic value) at the end of their physical life woud likely be close to zero. So a 20-year life expectancy would give you one cash flow of and 19 cash flows at $1,200. Choose a reasonable rate and you can calculate the NPV of the investment.

For example, assume 10 annual cash flows at $1,200 per period with a $5,000 initial capital outlaw, 2% “safe rate” (alternative investment rate of return), minimal reversion due to life expectancy: NPV = $5,779. Assuming 20 annual cash flows: NPV = $14,621.

Thanks..Jim
.-= Jim Simcoe´s last blog ..Conscious Capitalism speech =-.