Energy-Efficient Improvements Cut Costs, Boost Revenues
Tax credit sites have been hit hard by the financial crisis. In the past few years, rents in many areas have been held down to levels that have made it difficult for owners and managers to adequately operate their sites, much less generate additional revenue.
Unfortunately, it's not a situation that will improve as the economy gets stronger. Across the country, the cost of utilities is on the rise and will continue to eat away at tax credit site rental receipts.
IRS Amends Utility Allowance Regulations
Last summer, help came from the IRS, which changed its rules regarding utility allowance methodology. The final regulation, which amends Section 1.42-10 of the Code, provides owners with five methods of determining the utility allowance at an affordable housing site, says tax credit expert Andrew Seelye.
“A method will have to be selected each year,” he says. “Different methods can be selected for different utilities. Owners should check their state agency's rules for specific details.” The methodologies are:
Existing PHA utility allowance schedule. This option was in place before the 2008 rule change.
Utility provider estimate. This must be a written local estimate from a utility provider representing utility costs for units of similar size and construction in the same geographic area in which the building is located.
Agency estimate. (Some states have allowed this method since 2007.) Owners submit data showing actual use over the past 12 months. State agencies use the data to make an estimation of the utility allowance.
HUD utility schedule model. Owners may use the HUD model to enter unit data and current utility rate information to estimate the utility allowance.
Energy consumption model. Owners may hire a licensed engineer or qualified professional who will enter specific data into energy consumption modeling software and estimate the utility allowance.
“Within the framework of these methods are several market options available to owners and managers who want to reduce operating costs through energy management or would like professional compliance help to establish new, more accurate and lower utility allowances at a LIHTC property,” Seelye explains.
Allowing owners to choose the method of utility allowance determination for each site is a good change, he adds, “because, without this option, it was difficult to determine a fair utility allowance amount; often the owner had to pay for some of the utility costs incurred by the resident (who was the utility customer).”
Conservative Approach to Improvements Can Provide Solid ROI
There are steps that site owners and managers can take to help manage rising utility costs. As we reported in the June 2009 issue of the Insider, HUD's Office of Public and Indian Housing (PIH) was recently presented with an Energy Star Special Recognition Award for promoting the use of energy-efficient appliances in public housing units, and for encouraging public housing authorities nationwide to follow green building standards. PIH developed an Energy Improvements Checklist that outlines the following nine improvements that site owners and managers can make that can provide a solid return on investment (ROI). (This list is not meant to be comprehensive; you can download the full checklist from http://www.hud.gov.)
Lighting fixtures and controls. Energy Star-qualified light fixtures use about 75 percent less energy than standard incandescent bulbs, generate 75 percent less heat, and last up to 10 times longer. Lighting controls should be carefully selected to ensure optimum performance and maximize payback. Use sensors where lighting is likely to be operated for at least 15 minutes at a time, such as public spaces. Use vacancy sensors to ensure that lighting is not activated when not needed.
Appliances. Energy Star-qualified refrigerators, clothes washers, and dishwashers use up to 40 percent less energy and water than the conventional models sold in 2001.
Programmable thermostat. Households with dedicated heating and cooling systems can save about $180 a year by properly setting programmable thermostats.
Water efficiency. WaterSense-labeled high-efficiency toilets, faucets, and showerheads use fewer gallons of water per minute. Site managers should also inspect the water distribution system for leaks and conduct repairs.
Ductwork improvements. Ensure that all duct joints are sealed and all ductwork is insulated and properly located (this will require a qualified contractor).
Envelope improvements. Ensure that buildings are well insulated and that air leaks are sealed.
HVAC maintenance. Ensure that maintenance regularly cleans or replaces filters for air distribution systems, and checks that grills and registers are open and not obstructed, and that airflow is correct. Consider a regular maintenance contract with an HVAC service company.
Ventilation upgrades. Install airflow regulators on central ventilation stacks. Replace all fans with high-efficiency and/or variable frequency drives.
Install energy management controls. Install timer controls with properly set year-round clocks for boilers providing central heating. Install outdoor reset controls set for automatic shutdown at 55°F in warm weather and at 45°F at night.
Replacement cooling equipment. Replace with right-sized Energy Star-qualified AC or heat pump.
Replacement heating equipment. Replace with Energy Star-qualified gas furnace, heat pump, boiler, or oil furnace.
More Extreme Retrofitting Reaps Higher Rewards
“Most people acknowledge that utility costs are only going to increase,” says Seelye. “The best option available to the LIHTC industry—especially where rents are capped—is to make improvements that significantly reduce the demand for water and energy at the site. This reduces the cost of the utilities to the resident (lower demand) and increases the income at the site (lower operating expenses and possibly increased rental receipts). While this type of project is financially more complex and some improvements can be expensive, the rule of thumb is that the improvements should pay for themselves with savings in operating expenses or increased revenue from raising rents.”
What type of savings can owners expect by making more substantial improvements to their sites? A recent study illustrates the cost savings that owners can expect by making conservative improvements compared with more aggressive retrofitting. In “Bringing Home the Benefits of Energy Efficiency to Low-Income Households,” Enterprise Community Partners found that, for about $2,500 per unit, existing multifamily buildings could gain energy savings of 25 percent to 40 percent by making boiler upgrades, insulating ceilings, caulking, sealing, and installing storm windows. They estimated the payback period to be five to 10 years. However, buildings that underwent a substantial rehabilitation—such as installing high-efficiency equipment and systems, double-pane windows, and new insulation—reported energy savings of 40 percent to 50 percent. Costs averaged up to $50,000 per unit—although much of the cost would be incurred anyway as part of rehabilitation—and the payback period could be eight to 10 years.
How to Get Started
If you are considering a utility allowance reduction project, Seelye recommends asking yourself the following questions:
How would a substantially lower utility allowance help my site?
Which improvements should I make?
And how will I manage the improvements so that I can be sure that I'll get the highest level of improvement for the lowest cost?
The first step is to determine which improvements can be paid for quickly with the savings (or increased rent income). Seelye's firm uses most of the established procedures from the federal model, modified to suit LIHTC portfolios, to select developments where increased rents and reduced costs will be most helpful. To establish a baseline, energy auditors and engineers are hired to take specific measurements at the units and input modeling data that will be more accurate than a basic modeling estimate. Owners can choose to continue to use software to support annual utility estimates or install sensors to gather previously uncollected consumption data. The technology exists to make the collection of actual utility consumption data, where meters aren't already installed, simple and affordable so that ongoing management of energy and water can be optimized.
“If owners or managers have a site that needs a substantial utility allowance reduction, improvements can be made to greatly reduce water and energy usage on the property. Once the work is completed and new consumption measurements are taken, the data will support the new, substantially lower utility allowance.
“The goal is lower operating costs, increased rental receipts, access to very accurate consumption data, and the power and flexibility to support annual selection of the best utility allowance determination method each year,” he says.