Speakers Offer Advice on Selecting From Utility Allowance Options
By Caitlin Jones & A. J. Johnson
8 min read
Tax Credit Advisor, January 2009: Speakers on a recent national Webinar offered advice to developers, owners, and property managers on how best to take advantage of the new options available for computing utility allowances for low-income housing tax credit (LIHTC) units. These options can reward owners of newer and more energy efficient buildings by generating a smaller utility allowance amount.
The new options are available under an IRS final rule published 7/29/08 that amended the LIHTC utility allowance regulations. Webinar speaker and compliance expert Scott Michael Dunn said the changes made by the new rule will apply to most owners for the first time in 2009.
The recent Webinar was sponsored by the National Association of Home Builders (NAHB). In addition to Dunn, of the firm Compliance Solutions, other speakers were: economist Paul Emrath, NAHB Assistant Staff Vice President of Housing Policy Research; and Craig Drumheller, Senior Energy Engineer, NAHB Research Center.
Under the new rule, the gross rent for an LIHTC unit must include the amount of a utility allowance for any tenant-paid utility service other than telephone, cable TV, and Internet service.
Basic Steps Continued
The final rule continues the following basic steps for determining how to establish the utility allowance for rent-restricted units in a low-income building:
- RHS-Assisted Buildings. The USDA Rural Housing Service (RHS) utility allowance must be used for all rent-restricted units in a building that receives assistance from RHS.
- Buildings with RHS-Assisted Tenants. The RHS utility allowance must also be used for all rent-restricted units in a building if any tenant receives rental assistance payments from RHS. This includes any units occupied by tenants receiving rental assistance from the U.S. Department of Housing and Urban Development (HUD).
- HUD-Regulated Buildings. The HUD utility allowance must be used for all rent-restricted units in a building if the building’s rents and utility allowances are reviewed annually by HUD, and neither the building nor any tenant receives RHS housing assistance.
- Other Buildings. If none of the above apply, the applicable local public housing authority (PHA) utility allowance schedule for the HUD Section 8 Existing Housing Program generally must be used for all rent-restricted units in the building. Use of the PHA allowance is mandatory for units occupied by tenants received HUD vouchers. However, other than for these units, the final rule offers four optional methods that may be used to establish utility allowances for rent-restricted units in such buildings, instead of the PHA utility allowance.
The first option, continued from before, is a utility company estimate. Under this, any interested party (e.g., building owner, tenant, housing agency) may obtain from the local utility company a written estimate of the cost of the particular utility service for a unit of similar size and construction in the same geographic area.
Three New Options
The final rule provides three new, additional options that may be used to compute utility allowances for units in buildings not required to use the HUD, RHS, or PHA utility allowance schedules. Different options may be used for different utilities, and owners may switch options from year to year.
Emrath advised owners and developers to be aware of and understand “the basic options that you have so you can pick the one that’s right for you and [that] works in your particular situation.”
Under the first, an owner may obtain a utility cost estimate for the utility service for each unit in the building from the state or local housing credit agency or housing finance agency (HFA) with jurisdiction over the building. This “agency estimate” may be obtained at any time during the building’s extended use period, and must provide in writing the agency’s estimate of the per-unit cost of utilities for units of similar size and construction in the same geographic area as the building. In computing the estimate, the agency must consider various factors, including local utility rates, property type, climate and degree-day variables by region in the state, taxes and fees on utility charges, building materials, and mechanical systems.
“This HFA estimate, particularly if it uses actual consumption data, is a good option for existing properties that are very energy efficient,” said Emrath.
He noted the rule permits HFAs to use actual consumption data for the owner’s building to prepare this estimate. Emrath indicated that it’s the agency’s call as to what portion of the total units of that particular type (i.e. size) in the building it will require consumption data for (e.g., 20%) in order to develop the utility allowance estimate for all LIHTC units of that size in the building.
Emrath noted this option doesn’t apply to new properties since they won’t have actual consumption data yet. However, he said one thing that might be considered by a developer of a new project who has an existing project of similar construction in the same area, is to ask the HFA about the possibility of using the current utility allowance from the existing project until actual consumption data is available for the new property.
HUD Utility Schedule Model
Under the second new option, an owner can calculate the utility estimate using HUD’s online Utility Schedule Model (at http://www.huduser.org/datasets/ lihtc.html). This HUD model provides energy consumption data by structure for heating, air conditioning, cooking, water heating, etc., and incorporates building location and climate.
Emrath called this “a potentially good option for new properties.” He described the steps involved in using the model, which is a spreadsheet that a user downloads from the HUD Web site onto their computer, and into which one enters appropriate location-specific data from the heating degree database, and billing rates for the specific utility from the utility company into a “tariff worksheet,” to generate a utility allowance estimate.
Emrath noted that this method requires obtaining current billing rates from the utility company, as does the energy consumption model (below). “So one of the keys here is to develop relationships with the utility company and try to know the right person to contact over there,” he said.
Emrath said the HUD model produces different utility allowances for properties of different ages. It assumes a larger amount of heating and cooling usage for older properties and less for new properties.
Energy Consumption Model
Emrath noted the HUD utility model is a good option to use for newer buildings of average energy usage.
For a new property that is very energy efficient, however, he suggested a better option is the energy consumption model.
Under this, an owner may retain a properly licensed engineer, or an independent “qualified professional” approved by the HFA, to calculate utility estimates using an energy and water and sewage consumption and analysis model. At a minimum, this model must take into account the unit size, building orientation, location characteristics, design and materials, mechanical systems, and appliances.
The speakers advised first checking with the HFA to find out which kinds of professional engineers are acceptable and what their definition is of a qualified professional.
Drumheller said professional engineers are licensed to practice in the state, though they come in different types (e.g., civil, mechanical, etc.).
But he added the definition of a qualified professional is “more up in the air,” with the HFA making the final determination. Drumheller said examples of professional designations he believes would be qualified to develop a utility estimate using the energy consumption model include: someone who is a “HERS” rater (Home Energy Rating System) certified by the Residential Energy Service Network (certifying body for DOE Energy Star program); a Certified Energy Manager as designated by the Association of Energy Engineers; and someone who is a LEED-accredited professional (Leadership in Energy and Environmental Design).
He advised LIHTC owners or developers before hiring an individual to first do their own due diligence to assess whether they believe the person is competent to develop an estimate under this model. Drumheller recommended asking for references, about any certifications they have, whether they have experience with multifamily housing, and their experience in using simulation software.
Drumheller said the IRS final rule spells out requirements for simulation software that must be used by an engineer or professional to compute a utility allowance under the energy consumption model. He said a wide variety of software is available, and cited as reputable products the following: REM/Rate or REM/Design (the former most popular for ENERGY STAR program); Energy Gauge; and TREAT. Drumheller said the last handles multifamily housing better than the others, produces weather-adjusted estimates, and uniquely can produce “what-if” estimates to determine energy savings using different possible grades (i.e. degree of energy efficiency) of windows, walls, insulation etc. In this way one can determine the cost-benefit relationship for each improvement and the likely payback period.
Drumheller said the HFA determines which specific simulation software is acceptable.
Separately, the speakers warned that the IRS final rule, as written, makes it difficult in an LIHTC project to employ a utility sub-metering system or a ratio utility billing system (RUBS). Emrath noted NAHB and other organizations have written to the IRS seeking a remedial change.
(For background on final rule and submetering issue, see Tax Credit Advisor, September 2008, p. 1.)
