Wind Farms & Turbines (Non Domestic Valuation practice notes)

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^st April 2023.

The basis of valuation for new entries in the Valuation List, and Rating Revision cases after 1^st 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:                 Wind Farm
                           Wind Turbine

Wind farm and Wind Turbines were previously two separate Practice Notes. They are now to be merged as one for Reval2023.

Any hereditament with an installed capacity greater than 50 Kilowatts (kW) is rateable (per the Rates (Microgeneration) Order (NI) 2012).

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”.

Any hereditament where the installed capacity does not exceed 50 kW (classed as microgeneration) is not covered by this Practice Note.  Under the Rates (Microgeneration) Order (NI) 2012 any plant and machinery that has microgeneration capacity is currently not taken into account in a valuation for rating purposes.

The valuation excludes items classed as “excepted plant and machinery” as outlined in the Valuation for Rating (Plant and Machinery) Order (NI) 2003. This includes wind turbines, solar panels, water turbines etc. which are treated as non-rateable plant, provided that the power is used mainly or exclusively for sale to a third party. 

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) if it is not classed as microgeneration.

Valuation approach for 2023

The Receipts and Expenditure (R&E) method of valuation is the recommended approach used 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.

Where utilising the R&E method, the approach is generally as follows: -

Step 1

Gross Receipts are determined by considering 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, 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.

For revaluation purposes all factors are considered as at the AVD.  At AVD there were no wind farms in the valuation list which were not accredited under the RO scheme. 

If any new turbines, without the benefit of RO subsidies, require valuation post Reval, they will 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 business rates, 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 to determine the Divisible Balance.  Outgoings considered as allowable working expenses are those incurred because 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:

1. 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.

2. When the tenant’s share is deducted it leaves The Landlord’s Share – i.e., the amount available for the payment of rent.

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.

The landlord’s position should also be 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.

A full analysis of information received from ratepayer questionnaires has been carried out and a shorthand valuation table has been attached at Appendix 1.

Rent & Lease Questionnaire

For this class of property targeted 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.

Appendix 1 Table of Values - Wind Turbines