Strategies for Going “˜Green’ in LIHTC Development

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Two major trends are prevalent today in low-income housing tax credit (LIHTC) production – preservation and “green” development. This article will focus on “green” or “sustainable” development and how it can benefit tax credit developers and project residents.

“Green” building refers to a set of building design and construction practices that reduce a building’s environmental impacts by improving energy efficiency and indoor air quality, reducing water use and consumption, making use of sustainable building materials, and siting buildings to take advantage of sunlight and other natural amenities. Successful green development minimizes use of resources, reduces harmful environmental effects, and creates a healthier living environment for residents.

The goals of green building have universal appeal. But the realities can make it difficult to construct apartments – particularly affordable ones – in a green fashion. Challenges include higher initial capital costs, capacity challenges, perceived risk, and contracting constraints. Still, for LIHTC projects, green building practices shouldn’t create excessive additional upfront costs for developers or undue cost burdens for low-income residents.

The U.S. Green Building Council’s LEED program (Leadership in Energy and Environmental Design) is the primary green building certification standard program in place today for commercial real estate buildings. The Green Communities Initiative, a separate green building standard administered by Enterprise Community Partners, Inc., is strictly for affordable rental and for-sale housing projects.

Commitment to Green

Public policies at the state and local level are increasingly promoting green building, and the real estate industry, including the LIHTC submarket, is following their lead.

According to the American Institute of Architects, the number of cities with green building programs has increased by 418% since 2003. Today, some 36 state housing credit agencies (HCAs) have green policies as part of their LIHTC application process. Leading HCAs that give extra points to green development proposals under their qualified allocation plans (QAPs) include California, Oregon, New Jersey, and Washington State.

Most state agencies make green development a priority. In most cases, HCAs give preference and/or award points in their QAP for energy efficiency, water conservation, and use of green building design and materials.

Success Stories

Green tax credit development is still in its infancy. But there have been enough successful green projects already completed to demonstrate the feasibility of green building in the tax credit area.

One of the earliest is Denny Park, a 50-unit tax credit project in Seattle, WA, completed in January 2006. It was constructed of durable 50-year sustainable materials, has low maintenance landscaping, and has apartments with east-west exposures. The project is located near essential amenities and public transportation – additional markers of “sustainable” development.

A more recent and advanced example is Sustainable Fellwood, a mixed-use development in Savannah, GA. Scheduled to start construction this fall with occupancy in 2009, it will consist of tax credit, public housing, and market-rate apartments and single-family homes for seniors and families, plus retail, commercial space, organic community gardens, and substantial green space. The project has been accepted into the U.S. Green Building Council’s LEED for Neighborhood Development Pilot Program, and is part of Southface Energy Institute’s EarthCraft Communities on the Coast.

Pros and Cons

Challenges to successful development of green affordable housing include: (1) a perception that this kind of development is very expensive and the technology unproven; (2) the need to deal with multiple funding sources, many of whom may not be receptive to new ideas and technology; (3) a variety of players, not all of whom will be interested in green development; (4) regulatory burdens (e.g., per-unit cost caps) still imposed by some funding sources without regard to long-term green benefits; (5) a lack of extensive documented success in all regions of the country; (6) contracting constraints (i.e. “low-bid” contractors may not include green elements); (7) limited skills and capacity by team members; and (8) restrictive local ordinances.

Some of these challenges may be overcome by creating a good development team. Others, such as the somewhat higher initial capital cost for green construction, will require additional subsidies and sources of financing. While green development may cost only 1% to 2.5% more than conventional development, the narrow margins of LIHTC development can make even this small premium a potential deal killer. Unlike conventional properties, LIHTC projects are constrained from charging higher rents to offset this extra cost.

Nevertheless, in LIHTC development the benefits of green development will usually far outweigh the negatives.

Development of green affordable housing presents an opportunity to reduce the type of costs that most adversely impact low-income residents, such as utility and transportation costs, and for a long period.

Retrofitting (acquisition/rehabilitation) of existing properties holds great promise when combined with tax credits and green methods. Replacement of appliances, light fixtures, and doors with more energy-efficient versions, passive solar heating, weatherization improvements, better insulation, rooftop gardens, low-flow water devices (e.g. toilets, showers), and landscaping with native or drought-resistant plants are steps that support the preservation of existing properties in an environmentally friendly yet cost-effective way.

Strategies for Success

A good starting point for developers thinking of planning a new green tax credit project is to analyze the state’s QAP for any preferences or points provided for green building, and to review the details of successful green LIHTC projects that have already been completed. Information gleaned from this research should help identify the combination of specific factors and traits that can lead to a favorable outcome.

Next are techniques and approaches, outlined below, that appear to provide the best opportunity for success:

  • Development budget. This should use “life cycle costing” instead of traditional cost methods to determine long-term project feasibility. Life cycle costing considers both initial construction costs and long-term operational and maintenance costs, thereby reflecting both the added upfront costs and the long-term economic benefits of green building. Developers should use architects experienced with green development and design as part of this process.
  • Project location. Proximity of the project to public transit, combined with lower utility and operating costs, can help offset the higher upfront costs for green development.
  • Development considerations. A key LIHTC consideration is whether green development is economically viable in terms of upfront costs, especially when there aren’t any government incentives. This requires careful analysis of the proposed deal, balancing affordability with sustainability.

Proven Approach

A proven approach to successful green development includes to:

  • Minimize additional costs through integrated design. This “whole building” or “total systems” approach is a must. All members of the development team must be involved in the design process from the outset to assure full realization of project goals, priorities, and constraints.
  • Work with the general contractor on cost estimates throughout the design process.
  • Identify partnership opportunities with local government, utilities, state agencies, and nonprofits.
  • Utilize technical support from utilities and state and/or federal programs.
  • Apply to utility and state pro-grams for rebates on energy and water components.
  • Include unfunded green items in the final bid documents as specification alternatives.
  • Approach local governments and foundations to fund green elements.

Proven design elements include: compact fluorescent lighting; Energy Star appliances; low-flow fixtures and dual flush toilets; environmentally preferable products; local sources for materials; recycling of construction materials and minimization of site waste; tenant education programs; chilled water air conditioning; rainwater harvesting; and rooftop gardens.

There is no single formula for success in green development; each deal must be analyzed based on its own circumstances. However, a review of completed successful projects reveals the following common traits, which developers should consider:

  • Avoid environmentally sensitive sites, such as wetlands and prime farmlands.
  • Where possible, pursue infill development.
  • Develop near public transit and community resources. This increases resident accessibility, reduces transportation costs, and promotes public health by encouraging walkable communities.
  • Develop sites compactly. This uses less land and makes public transportation more feasible.
  • Minimize site impact during construction, by protecting and reusing topsoil.
  • Use permeable materials, such as grid pavers, and employ surface water management techniques to minimize erosion.
  • Improve water efficiency by installing high-efficiency toilets, showers, and faucets.

Coordination between agencies (federal, state, local) will be critical to any long-term, industry-wide success in making green development more feasible from a cost standpoint. In the short-term, deal-by-deal success is possible through close cooperation between the development industry and state HCAs, and a full understanding by developers of the elements required for successful green development.

A. J. Johnson is president of A. J. Johnson Consulting Services, Inc., a Williamsburg, VA-based full service real estate consulting firm specializing in due diligence and asset management issues, with an emphasis on low-income housing tax credit properties. He may be reached at 757-259-9920, [email protected].