Energy
Efficiency-Based Utility Allowance Schedule
One policy that many PHAs are adopting
in California, EEBUA, corrects a
long-standing, split-incentive problem by bringing utility allowances
more in line with utility costs for projects that are energy efficient:
new construction projects that are 15% above the energy code, and rehab
projects with a 20% improvement over existing conditions. The rationale
for this schedule is that developers who build energy efficient
affordable housing (or owners who improve the efficiency of existing
properties), to reduce utility costs to the tenants, should be allowed
to reap some (not all) of the economic benefit of their investments.
When there is only one utility allowance schedule applied to all
properties, efficient or not, owners and developers have no incentive to
invest in improvements. A lower utility allowance, resulting in slightly
higher rents, allows the owner to receive a portion of the money that
the utility company would otherwise have collected - without increasing
the tenants' total housing burden (rent plus utilities). Further, the
model that is used to calculate the lowered (energy efficiency-based)
utility allowance ensures that the tenant saves as well. EEBUA thus provides a long-term mechanism
to provide a pay-back for investments in energy efficiency. To ensure
proper use of the EEBUA, housing
authorities rely on a home energy rater (HERS) to verify that a project
meets the policy's energy efficiency requirements. This program strives
to foster good relationships between HERS raters, property owners, and
housing authorities.
Establishing Rent
and Utilities for Affordable Housing Projects
Housing authorities cap housing burden
of tenants at 30% of income. The housing burden is rent plus utilities.
The utility allowance is based on average billing information or an
engineering analysis. Total rent is the housing burden less utilities: Housing
Burden - Utilities = Rent.
Standard Utility Allowances (SUA) overestimate utility costs for
efficient projects, and artificially decreases rents.
THE
IMPACT OF AN EEBUA
(Figure 1)
|
|
|
With
a Standard
Utility Allowance
|
 |
| Total Housing Burden |
$500/mo |
| Utility Allowance |
$100/mo |
| Developer Rent |
$400/mo |
| Tenant Utility Cost |
$100/mo |
|
|
With
an EEBUA
|
|
| Total Housing Burden |
$500/mo |
| Utility Allowance |
$90/mo |
| Developer Rent |
$410/mo |
Tenant Utility Costs
|
$88/mo
|
|
|
| Owner's
rent increases $10/mo and tenant's net utility costs decrease
$2/mo without changing total calculated housing burden. |
Figure 1 above shows the concept and
impact of an Energy Efficiency-Based Utility Allowance on (1) housing
costs to the tenant, (2) rent to the developer, and (3) utility costs.
Note that the total housing burden (rent and actual utility costs) is no
higher with the energy efficient unit. In the chart, the SUA (and the
actual utility costs for the inefficient unit) was $100; the section
within the dotted lines represents the reduction in utility COSTS that
the tenant pays. The blue area between the dotted line and the EEBUA "slice" represents the
reduction in utility allowance from the SUA to the EEBUA, and is what the developer gets in
increased rent. The $2 difference between these (the "mini-slice
within the larger EEBUA slice) is
savings for the tenant.
An Example of the
Impact of an Energy Efficiency-Based Utility Allowance on Increased Cash
Flow for the Owner-Developer
The following is an example to
illustrate the impact that an Energy
Efficiency-Based Utility Allowance schedule would have on a
hypothetical new construction project. We use a project with 40
two-bedroom units and 12 three-bedroom units. Some of the assumptions (e.g,
rents, allowable housing burdens for tenants, "other" laundry
income associated with the property, etc.) were drawn from a
hypothetical 53-unit apartment complex in Southern California. All but
one of the units was designed to be affordable to low and very
low-income families (41%-47% of median area income). The other one is
the manager's apartment. Table 1 from the EEBUA
Case Study shows what the rents and income figures would have been
had an Energy Efficiency-Based Utility
Allowance schedule been in place and utilized for this
project. Table 1 also shows the difference between the rental incomes
using the two schedules. Notice that the developer receives an
additional $8,688 in rents per year without increasing the tenants'
total housing burden.
Table 2 shows the fifteen year annual
net income for our hypothetical project, both with the Standard Utility
Allowance schedule and with the Energy
Efficiency-Based Utility Allowance schedule. The top half of
the table shows the income and expense estimates from the actual
application for the project proposed to the local PHA. The bottom half
shows what the income and expenses would have been with an EEBUA, given the following assumptions:
- $5000 additional first costs (52
units X $96/unit) for efficiency upgrades
- Rents from the Table 1 above
- Repayment (to the lender) of the
additional $5000 over the life of the 15-year mortgage
- No additional "Other"
income or additional operating expense (e.g., the laundry facilities
are assumed to be unchanged)
Note that in both sections of the
table, years 8-12 are present in the calculations but collapsed (not
shown) in the presentation since they add little additional information.
The most notable lesson of the table is that even with a larger debt
service payment (more than enough to cover the additional cost of
measures even WITHOUT a utility program incentive), the residual cash is
significantly larger. The cumulative residual cash by the 7th year is
about $59,034 larger and $141,019 after 15 years. The developer is able
to make more return on his/her investment while the tenants' total
housing burden is slightly decreased. Meanwhile, tenants also enjoy
increased comfort.
An essential element of this policy is
reliable third party verification of efficiency improvement before the
PHA grants the lower utility allowance. In the long run, this means new
markets for HERS raters, a market-based incentive for developers to
recoup investments in energy efficiency, more comfortable and affordable
housing for low-income tenants, and energy savings for a large portion
of the state's housing stock that is often neglected.
Click
here for a list of Housing Authorities that have adopted EEBUA's.
All AHEEA
services are free to affordable housing entities served by SCE and
interested in improving energy efficiency through design, policy,
knowledge, and resources. To take advantage of these services, please
contact Julieann Summerford at 619-917-5690 or summerford@h-m-g.com
