New rules to the utility allowance

Following in the footsteps of other residential energy efficiency programs, multifamily housing is becoming the subject of new energy performance rules and regulations. The new mandates require higher levels of usage disclosures and prescribe energy benchmarking policies.

The goal of this expanded oversight is to encourage greater transparency in energy performance information. Regulators believe that providing energy data to residents will help drive improvements in multifamily housing energy efficiency and lower utility bills for both tenants and owners.

Today, very little utility consumption data is available for the 25 percent of the U.S. population that dwell in rental properties. The adoption of the new guidelines is making that data more accessible to policymakers, utility companies and lenders of capital. As a result, the sharing of consumption data is producing new regulations, utility savings incentives and financial products.

One of the overarching impediments to improving the energy performance of multifamily communities is the industry’s fragmentation of ownership and consumers. Properties range from low-income subsidized public housing to luxury residences in high-barrier markets, all with varied sources of public and private financing.

“Gathering utility usage data is much more difficult for market-rate property owners than it is for owners of low-income housing properties”, says Dave Borsos, VP of Capital Markets for the National Multi Housing Council (NMHC).

Whether it’s for public housing, housing vouchers or low-income housing tax credit (LIHTC) project-based affordable, having some form of governmental support in any one of those instances, the residents of those communities, because of the support they are receiving, can have a requirement placed on them to report their utility consumption.

“In direct comparison, if you are a market-based property that doesn’t have some form of governmental, state or local support, there is no obligation for residents to allow owners to look at or view utility consumption,” said Borsos.

In federally subsidized affordable housing, monthly rental costs for residents are based on a payment standard that is set as a percentage of a tenant’s adjusted monthly income, depending on the program through which the subsidy is provided. A tenant’s total rental payment includes the costs of shelter and a reasonable amount for tenant-paid utilities, known as a utility allowance.

There are two traditional methodologies used by housing authorities to calculate consumption and set utility allowances for residents. The first is engineering based and entails the hiring of qualified professionals analyze technical information such as weather data and the types of appliances used at the property. Alternatively, billing data and previous consumption statistics of the community’s residents can be used to formulate the allowance.

Over the past year, both the IRS and the U.S. Department of Housing and Urban Development (HUD) have released new rules for calculating the utility allowance for affordable housing programs. Historically, HUD’s methodology for calculating expenditures were based on an engineering model. The agency’s new guidelines standardize the required utility allowance calculation to the usage of the actual utility-billing and consumption data from the previous year.

“HUD’s ruling (released last July) speaks directly to how the utility allowance is calculated, while the IRS’s just released final rules for sub-metering talk about the allowance from a LIHTC perspective. They don’t say, ‘This is how you figure it out,’ just that, ‘if you have residents who are paying utilities directly, then it doesn’t go into the calculation for the maximum rent you can charge.’ There’s a slight difference in the two,” said Borsos.

There also are differences in the possible benefits to the owner that may be derived from each new rule.

Owners may choose which methodology they want to use if their property’s contract anniversary date falls within 180 days of notice. But for properties falling outside the 180-day window, owners are required to use the new billing data methodology and establish a baseline utility allowance for each bedroom size once every third year, using specific sampling requirements outlined by HUD. Over the following two years, they may adjust the allowances using the utility allowance factor of each utility.

HUD specifies that the utility allowances should be compared to the paid utilities over the previous twelve months. If an allowance decrease exceeds fifteen percent and is more than $10, the decrease must be phased in over multiple years. Owners may require tenants to sign release forms to share utility data.

NMHC supports an accurate methodology that makes sense and is readily determinable by owners and not difficult to interpret, said Borsos.

“So the program HUD rolled out last year takes a step in the right direction in that it helps provide a more accurate way of determining the energy consumption in certain buildings, but, while HUD’s new national standard provides clarity on the requirements, complying with them could become burdensome for many owners and operators.

“And my fear would be that if there is a rule or regulation that makes things more difficult, people are going to shy away from it,” said Borsos, adding that while it’s hard to argue with more accuracy, what comes with that is a more complex methodology.

“There’s a sampling protocol, but the reality is, it’s a bit unfavorable to smaller property owners. If you think about it from an affordability perspective, half the properties in the U.S have less than 50 units. The sampling protocol that HUD articulates from are a percentage of total units, so if you have 20 or less, you have to get data for every unit, and if it’s 20 to 30 units you’re still getting 85 or 90 percent, so your sampling protocol, if you can’t get to every unit/one to do this, you are still at a very high number.

“When you get to the top bracket of above 359 units, it’s only in the 30s. In other words, the number you need to sample off of doesn’t increase very much even though the number of units increases a lot, so it’s a bit of a disadvantage for smaller properties in terms of how many of the existing units you need to get in order to help determine the sampling for determining the allowance,” said Borsos.

Luckily, HUD included funding stipulations to help offset the additional time and expense associated with the new process.

Studies suggest that reducing energy costs in the multifamily sector can help preserve rental housing affordability, which is a growing issue for millions of Americans.

A 2012 report, jointly commissioned by Deutsche Bank Americas Foundation and Living Cities, found that energy efficient retrofits conducted on more than 21,000 affordable housing units in New York City generated energy reductions that lowered fuel costs by an average of $240 per unit annually and electric costs by $50 per unit annually.

So, while the objective of HUD, which spends $6 billion annually on utility costs, is to reduce utility spending and property operating costs, and the new guidance is a step in that direction, Borsos thinks there is an important aspect that has been overlooked in the agency’s new utility allowance guidance.

“Does it promote energy efficiency any more than the other methodology? I don’t think anyone has the answer to that question, because what it doesn’t say is, now that we have a more accurate usage, let’s do the following things to promote energy efficient retrofits to existing buildings, and that would be the important second half of the equation,” said Borsos, adding that the ultimate challenge is how much influence an owner actually has over residents, even in subsidized housing, other than educating them about personal consumption.

“Obviously their personal consumption may mean higher utility costs for them, but ultimately they may not care,” he said.

He cites the new FHA multifamily financing program implemented on April 1 as an example. FHA affords a 25-basis-point reduction in Mortgage Insurance Premium rates to owners who obtain some form of energy certification and then register with Energy Star to utilize its Portfolio Manager benchmarking tool.

“What NMHC said was that it’s one thing for an owner to retrofit—put in low-flow toilets and LED lights and Low-E glass and do all the things one needs to do to get any one of the energy efficient certifications. But even if each unit is sub-metered, making every unit individually responsible for its energy consumption, the owner is still reliant on the resident as to how much energy the property uses, because the way to keep a relative score in Energy Star is to have whole building data. So I can go get a certification on a building up front and, let’s say I installed all these great things to make me compliant, while I can control the usage in the common areas, I have no control over what the residents consume, and if my whole building data says I am not performing where I need to be, I may not continue to qualify for this FHA reduced rate,” he said.

Meanwhile, under the IRS’s final rule, released March 16, tenants with sub-metered utilities based on actual consumption will receive a utility allowance in the same way that tenants who receive bills directly from local utility companies do.

The property owner may impose an administrative fee for sub-metering, but must include in the gross rent any charge that exceeds the greater of $5 or the specific dollar amount allowed by state or local law. In future guidance, the IRS also may choose to impose its own cap on administrative charges.

“This one is still a bit new, so it remains to be seen what the impacts to owners are as to the final rule on this methodology,” said Borsos.

One possible benefit is that the new IRS ruling could potentially move LIHTC owners in the direction of sub-metering.

“When you think about LIHTC, which has an Area Median Income (AMI) restriction placed on who can actually live in a LIHTC financed property and has to be certified on an ongoing basis, if your wage side of that, meaning what you can charge for rent, doesn’t change because wages haven’t changed, but your operational costs have increased and the electricity bill was included in that, you would have an incentive to try and exclude that piece from the determination of what you could charge for rent,” said Borsos.

A good way to exclude those costs is to set up individual meters for every unit on the property, he said.