Renewable energy (Non Domestic Valuation practice notes)
These Practice Notes were developed for the purpose of revaluing non domestic property in Northern Ireland as part of Reval2023. They were produced primarily as guidance for LPS Valuers to ensure, amongst other things, consistency of approach and practice in rating valuations.
Scope
The scope of this Practice Note is solely to ensure a consistent valuation approach for this property Class/ Sub Class/ Type for Non-Domestic Revaluation 2023 and subsequent entry in the new Valuation List which becomes effective on 1 April 2023.
The basis of valuation for new entries in the Valuation List, or Rating Revision cases after 1 April 2023, is Schedule 12 (2)(1) of the Rates (NI) Order 1977.
Description
This Practice Note refers to property classified as:
Class: Commercial Unclassified
Sub class: Electricity Generators (Non Fossil Fuels)
Type: Anaerobic, Biomass, Hydro Electric, Landfill Gas, Solar, Other
Any hereditament with an installed capacity greater than 50 KW is rateable under the Rates (Microgeneration) Order (NI) 2012.
This Practice Note does not apply to wind farms or wind turbines. These should be valued in line with the individual Practice Note for this property type.
Legislative background
Schedule 12 Part 1 Paragraph 1 of the Rates (NI) Order 1977 applies.
“Subject to the provisions of this Order, the Net Annual Value of a hereditament shall be the rent for which, one year with another, the hereditament might, in its actual state, be reasonably expected to let from year to year, the probable average annual costs of repairs, insurance and other expenses (if any) necessary to maintain the hereditament in its actual state, and all rates, taxes or public charges (if any), being paid by the tenant”.
Under the Rates (Microgeneration) Order (NI) 2012 any plant and machinery used for the generation of electricity, which has an installed capacity of 50kW or less, is not rateable. This practice note does not therefore apply to turbines with an installed capacity of 50kW or less.
If the power generated is mainly or exclusively for self-consumption then the relevant plant would be valued with the hereditament (eg. a factory with rooftop solar panels for self-consumption), provided that it is not classed as microgeneration.
Valuation approach for 2023
The receipts and expenditure (R&E) method of valuation is retained as the approach for this type of hereditament. The value of renewable energy installations is linked to their ability to generate a profit over their lifetime.
In the absence of rental evidence, or a suitable unit of comparison to permit such rental evidence to be reliably analysed, the preferred method of valuation may be either the R&E method or the Contractor’s basis. Where the nature of the occupation of the property is primarily concerned with achieving anticipated profit and the tenant’s rental bid is therefore likely to be based upon a consideration of receipts and expenditure, then in the absence of reliable rental evidence, the R&E method may be the most appropriate method of valuation to adopt.
Source: The Receipts and Expenditure Method of Valuation for Non-Domestic Rating Guidance Note produced in 1997 by the Joint Professional Institutions' Rating Valuation Forum which consists of the RICS, the IRRV, the RSA, the SAA, the VLA and the VOA.
Step 1
Gross Receipts are determined by taking into account all income reasonably to be derived from occupation of the property. A period of three years accounts, prior to the AVD should give sufficient information to establish a fair and reasonable indication of the trading position. In the case of new ventures where trading accounts do not exist, we refer to the accounts of similar ventures, or to the business plan prepared for the new occupier.
In general, receipts should include all income derived directly and indirectly from occupation of the property.
For the valuation of renewable energy generators gross receipts have been calculated commensurate with the number of Renewable Obligation Certificates (ROC’s) granted for the generation type and the date of accreditation.
If any new hereditaments, without the benefit of RO subsidies, require valuation post Reval, they will have to be considered on an individual basis by the Practice Note author. Actual costs, projected load factor, turnover etc. will be required from operator, and a new valuation model is likely to be required.
Step 2
The proper Cost of Purchases (Expenditure) made in order to produce those receipts should be deducted to determine the Gross Profit. Such costs relate only to those purchases which form part of the venture undertaken.
This includes direct costs (eg. fuel) and fixed costs (business costs that are constant no matter the output), working expenses and operating costs. Operating costs will include operational costs, maintenance, security and management. Cost of general repairs is also an allowable expense.
Step 3
Working Expenses are deducted from the Gross Profit from the Gross Profit to determine the Divisible Balance. Outgoings considered as allowable working expenses are those incurred as a result of the operation. For example, salaries, National Insurance payments, provision of services, insurance, phone bills, advertising, Head Office expenses. However, a mortgage payment, which is an expense of the business, is not an expense for a rating valuation.
Depreciation of tenant’s assets is deducted from Gross Profit. Only items which do not form part of the rateable hereditament are included within any deduction for depreciation.
Depreciation is calculated on a ‘straight line’ method over the expected life of a renewable installation (replacement cost of tenant’s assets at AVD divided by total expected life) with no residual value assumed.
Step 4
The Divisible Balance (or net profit) is the remaining sum available to be shared between the landlord, and the tenant. It comprises two main elements:
a.The Tenant’s Share – to provide a return on any tenant’s capital employed and a reward to the tenant for his venture reflecting the extent of the risk and the need for profit.
For renewables, tenant’s share is based on an asset split between the tenant’s assets (non-rateable) and the landlord’s assets (rateable). This percentage varies between different types of renewables, as the rateable and non-rateable assets will differ, as will their respective costs.
b.When the tenant’s share is deducted it leaves The Landlord’s Share – i.e. the amount available for the payment of rent and rates.
It is also necessary to calculate a sum for rates as part of the Divisible Balance. The balance is what remains available for ‘rent’ which is essentially the Net Annual Value (NAV).
The resultant NAV should be a reflection of what a hypothetical tenant would pay to rent a fully serviced and accessible site with all civil works, non-generating plant and grid connection in place. It does not include the generating plant (eg. turbine, transformers, inverters, monitoring equipment) as these are considered to be a tenant’s assets, and are non-rateable plant as set out in the Valuation for Rating (Plant and Machinery) Order (NI) 2003.
The hypothetical landlord’s position is also considered, particularly given that the landlord is assumed to have invested significant capital in the property and will therefore expect a return which is commensurate with their investment.
Rent & Lease Questionnaires
For this class of property bespoke Rent and Lease Questionnaires (RALQs) were issued by LPS.
Contacts
For advice on any aspect of this Practice Note contact LPS on 0300 200 7801.