IRR, NPV, and Payback: How to Underwrite Solar Like Any Other Real Estate Asset

Two scenarios, two IRRs

Third-party funded, no owner investment. IRR is not a meaningful metric here, and it is not "infinite" either: an internal rate of return needs an initial negative cash flow to solve against. With no owner outlay there is nothing to discount back to. Compare the things that do exist — the cash receipts over the term, the obligations you take on (term length, escalator, roof access, assignment, end-of-term treatment), and the downside if production, enrolment or the tariff moves against the model.

Owner-funded (cash or loan). This is where IRR applies, because there is an outlay to solve against. Build it from your own numbers: installed cost, the credit the project actually qualifies for, production, the revenue net of operating costs and any service payment, and a defensible escalator. We do not publish a specimen return — the inputs vary too much between buildings for a printed figure to mean anything.

NPV

Same rule. Discount the net cash flows you can document at a rate your capital committee will defend, then test it against a lower escalator and a lower enrolment case.

Payback

Payback only exists where the owner funds the project. Compute it from the net outlay after any credit, divided by the modeled annual benefit after costs — and state the assumptions beside the answer.

The one variable that swings everything

Utility rate escalation. A higher assumed escalation lifts every return metric, which is exactly why it needs defending. Pick a rate you can support from your own utility's rate-case history, and show the result at a lower rate too.

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