Utility Allowances Online: Indiana Housing Agency Moves to Develop Innovative Calculator

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Indiana’s state housing finance agency is taking action to develop an online calculator for generating more accurate utility allowances for rental units in more energy- and water-efficient multifamily housing projects.

To date, only one other state housing agency – California – is believed to have created a utility allowance calculator for low-income housing tax credit (LIHTC) projects. However, California’s calculator is generally limited to new construction projects.

Indiana’s calculator will be able to generate utility allowances under all of the agency’s programs (including the LIHTC and HOME programs) for new construction or rehabilitation projects or existing properties, according to Matt Rayburn, chief real estate development officer at the Indiana Housing and Community Development Authority (IHCDA).

“What we’re trying to do is develop a tool that can be used for our property owners and managers to generate project-specific utility allowances for them,” says Rayburn.

“We want this to be a calculator tool that’s robust enough that it can handle a vast variety of project types,” he said. “So that includes both new construction and rehabilitation as well as different design, whether scattered-site single-family homes for rent or a high-rise apartment complex. And we also want it to be usable by projects across their lifespan. So a project that’s just being developed and is still under construction can use it to generate utility allowances as well as a project in Year 15 of its life cycle.”

Rayburn said developers could use the calculator to generate an estimated utility allowance when preparing an application to IHCDA for 9% housing tax credits for a proposed project. “Based on the design, the building materials they’re going to use, and the location they’re building at, this could generate a predicted utility allowance that they could use when they create their pro forma and that our staff could use when we’re doing our underwriting on applications.”

The Indiana agency will be selecting a vendor from those responding to an RFP by February 14 to develop the calculator. The calculator will be integrated with an existing online database system accessible through a portal on IHCDA’s Web site. The agency’s partners (e.g., developers, owners, managers) now use the database system (called Authority DMS) to report tenant events, construction progress, and for other purposes.

Rayburn said the aim is to have a vendor selected, the calculator developed, and a pilot stage up and running by the end of 2014, with full rollout by no later than mid-2015. He anticipated that developers, owners, and others using the calculator will be charged a fee but that it won’t be onerous.

 

IRS Rules on Utility Allowances

Under the LIHTC program, the monthly rent charged for a tax credit apartment equals the gross rent amount minus an allowance(s) for tenant-paid utilities (e.g., electric, gas). IRS rules prescribe the specific utility allowance that must be used. Apartments not required to use the utility allowances of the U.S. Department of Housing and Urban Development (HUD) or USDA Rural Housing Service may use the public housing authority (PHA) utility allowance. However, for these units, the IRS rules permit state housing finance agencies to approve a different allowance determined under several alternative methods, such as an estimate prepared by a licensed engineer or qualified professional using an energy consumption model. These methods generally produce a utility allowance smaller than the PHA utility allowance for more energy- and water-efficient buildings, and thereby increase the amount of net rent to the owner.        Rayburn said Indiana’s online calculator will generate a project-specific utility allowance based on information and data about the property that is keyed into the system by the user, such as the specific building materials used, the particular climate zone, local taxes and utility rates, and whether energy-efficient appliances are being installed.

IHCDA staff will verify the accuracy of information input by users by checking the original design or completed project before providing final notification of approval of the generated utility allowance.

Rayburn said IHCDA already permits developers, owners, and managers to use any of the alternative methods to determine utility allowances but has found that many have been reluctant to do so for cost or other reasons. He said the aim is to make Indiana’s utility allowance calculator “user friendly.

According to Rayburn, other state housing finance agencies that have purchased Indiana’s database system will be able to use the new utility allowance calculator once it is fully functional. A number of other state agencies have purchased Indiana’s database system, including many Midwest agencies, he said.