Low Income Housing Tax Credit Projects and Energy Conservation; Utility Calculator Analysis: Policy Options - Washington State Housing Finance ...
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Low Income Housing Tax Credit Projects and
Energy Conservation; Utility Calculator
Analysis: Policy Options
Washington State Housing
Finance Commission
June 17, 2011S U B M I T T E D T O :
David Clifton
Washington State Housing Finance Commission
1000 2nd Avenue, Suite 2700
Seattle, WA 98104-1046
206-287-4407
206-254-5357 Fax
david.clifton@wshfc.org
www.wshfc.org
S U B M I T T E D B Y :
David Paul Rosen & Associates
1330 Broadway, Suite 937
Oakland, CA 94612
510-451-2552
510-451-2554 Fax
david@draconsultants.com
www.draconsultants.com
3941 Hendrix Street
Irvine, CA 92614
949-559-5650
949-559-5706 Fax
nora@draconsultants.com
www.draconsultants.com
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission iTable of Contents
Assignment Overview................................................................... 1
Executive Summary ...................................................................... 2
Key Findings ................................................................................. 4
Advantages.............................................................................. 4
Disadvantages ......................................................................... 4
Conclusion ................................................................................... 5
1 Introduction........................................................................ 6
1.1 Federal Utility Allowance Regulations................................. 6
1.2 WSHFC Utility Allowance Policy ........................................ 7
1.3 Overview of other State ECM Policies................................. 8
1.4 Economic and Policy Benefits of the ECM ........................... 8
1.5 The Functions of a Utility Calculator................................. 11
2 Case Studies ...................................................................... 12
2.1 Kentucky Housing Corporation ......................................... 12
2.2 Florida Housing Finance Corporation................................ 13
2.3 Ohio Housing Finance Agency .......................................... 14
2.4 Texas Department of Housing and Community Affairs...... 14
3 California Utility Allowance Calculator ............................ 15
3.1 CUAC Program Background and Goals............................. 15
3.2 How CUAC Works ............................................................ 15
3.3 CUAC Process, Rules and Administration.......................... 16
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission ii3.3.1 Selection Criteria for Energy Consulting Firms ............. 16
3.3.2 Monitoring Utility Tariffs............................................. 16
3.3.3 Owner Submission Requirements................................ 17
3.3.4 TCAC review .............................................................. 17
3.4 Existing Buildings Policies ................................................. 17
3.5 CUAC’s New Online Interface .......................................... 18
3.6 Cost of Developing and Administering CUAC ................... 19
4 Issues and Considerations Regarding Use of a Utility
Calculator in Washington State......................................... 20
4.1 Appeal of the ECM Option to Owners............................... 20
4.1.1 Utility Cost Structure................................................... 21
4.1.2 PHA Estimates............................................................. 23
4.1.3 Units at Maximum Rents Allowed by Regulation......... 23
4.1.4 Alternative UA Estimate Options................................. 24
4.2 Accuracy of Estimates ....................................................... 25
4.3 Underwriting and Leverage............................................... 26
4.4 Retrofit financing .............................................................. 26
4.5 Developer, Investor and Lender Incentives and Barriers to
Participation ..................................................................... 26
5 Administrative Issues......................................................... 28
5.1 Selection of Energy Consultants ........................................ 28
5.2 Costs of Developing and Administering a Utility Calculator
Program ............................................................................ 28
6 Key Findings...................................................................... 30
6.1 Advantages........................................................................ 30
6.1.1 Accurate Utility Tariffs .................................................. 31
6.1.2 Reliable Consumption Estimates ................................... 31
6.1.3 Transparency................................................................ 31
6.2 Disadvantages ................................................................... 32
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission iii6. 2.1 Front-end and Administrative Costs.............................. 32
6.2.2 Limited Benefits............................................................ 33
6.3 Conclusion ........................................................................ 33
7 Next Steps......................................................................... 34
L I S T O F T A B L E S
Table 1: Leveraging Potential of Monthly Utility Allowance
Reductions ........................................................................ 10
Table 2: PHA Electric Monthly Utility Allowances for 1 Bedroom
Units in Multifamily Buildings, Among a Sample of PHAs in
California and Washington juristidctions .......................... 22
Table 3: Estimated WSHFC LIHTC Units at Maximum Regulatory
Rents................................................................................. 24
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission ivAssignment Overview
The Washington State Housing Finance Commission (WSHFC) retained David Paul
Rosen & Associates (DRA) to provide recommendations to assist WSHFC in
advancing the following policy goals:
! Lowering energy and water consumption in affordable multifamily
rental properties consistent with State law and the goals of the
Washington Sustainable Energy Trust; and,
! Employing energy cost savings to help finance affordable multifamily
housing in the form of increased leverage or cash flow.
DRA examined methods for WSHFC to achieve these goals though the strategic use
of its Low Income Housing Tax Credit (LIHTC) utility allowance authority. In
2008, the Internal Revenue Service amended its utility allowance rules, giving state
allocating agencies new flexibility in approving project-specific utility allowances.
As a result, energy efficient (and water conserving) properties can qualify for
substantially lower utility allowances. By lowering utility allowances, LIHTC
owners are able to increase affordable rents, thereby increasing leverage, cash flow
or both.
In this report DRA reviews different approaches used by state allocating agencies to
administer utility allowance options including the California Utility Allowance
Calculator (CUAC). CUAC represents a national best practice approach to the
administration of utility allowance policy.
DRA recommends next steps regarding a utility calculator tool, based on its
advantages and disadvantages, and its appropriateness for WSHFC.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 1Executive Summary
Recent amendments to Section 1.42-10 of the Internal Revenue Code give state
allocating agencies new authority and greater flexibility over the determination of
utility allowances (UA) at individual low income housing tax credit (LIHTC)
projects. This authority equips LIHTC state allocating agencies with strategies and
tools for promoting energy efficiency, renewable energy and water conservation in
both new and existing LIHTC properties.
Among the various new UA estimate options authorized under the revised
regulations, the Energy Consumption Model (ECM) is perhaps the most promising
in terms of advancing energy and water conservation in LIHTC projects. Under the
ECM option, a building owner may calculate UAs based on consumption
estimates. UA estimates can be established in advance of construction, renovation
or retrofit activity, and in so doing become a tool for underwriting future utility cost
savings arising from investments in conservation. These projected savings can be
used to leverage all or a portion of additional financing necessary to pay for the
investments. Alternatively, lower utility allowances can be used simply to stretch
public funds with additional private financing, or they can be used to improve the
financial conditions of properties through increased cash flows.
The efficacy of the ECM option as a strategy for achieving these policy objectives
depends upon the magnitude of UA reductions likely to be realized by using this
option, and the extent to which UA reductions will enable LIHTC owners to
increase rents. In this regard, the value of the ECM option hinges chiefly on four
variables:
1) Washington State utility costs and the potential economic payback
of energy efficiency investments;
2) The amounts by which Public Housing Authority (PHA) UA
schedules overstate actual tenant utility burdens;
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 23) The number of units within a project with rents at their maximum
regulatory caps or market rate limit; and,
4) The relative appeal of alternative UA calculation methods, in
particular, the Actual Usage method.
By each of these measures, the ECM option is a viable and important alternative for
LIHTC owners. The value of the ECM option is particularly high when transactional
feasibility depends upon projected utility cost savings. This is true of retrofit
financing and of many other transactions, such as preservation investments, that
lack access to gap financing. To work as a financial leveraging strategy, ECM
administrative procedures and policies must be developed to ensure that
consumption projections are accurate and that the assumptions underlying these
projections are well understood by developers and their financing partners.
Based on DRA’s limited survey of the administrative practices of state allocating
agencies with regard to the ECM and utility allowance policy in general, it appears
that, to date, no consensus has emerged on protocols or best practices with regard
to producing accurate estimates under the ECM option. Neither does there appear
a concerted effort among allocating agencies to promote conservation through the
ECM option, with the exception of the California Utility Allowance Calculator
(CUAC) program, administered by the California Energy Commission (CEC) and the
California Tax Credit Allocation Committee (TCAC). No other state employs an
ECM administrative strategy that is as sophisticated as or conceptually similar to
CUAC.
WSHFC has expressed interest in the concept of a utility calculator and the
potential value of developing a similar tool for use in Washington. This report
concludes that a utility calculator developed in tandem with appropriate
administrative rules and procedures has the potential to significantly improve the
implementation of the ECM option and thereby promote greater investment in
energy and water conservation measures.
The benefits of a utility calculator become more pronounced the more WSHFC
seeks to promote policies and initiatives that leverage investment in affordable
housing by monetizing utility cost savings. In order to undertake such financing at
scale, WSHFC will need to collect and analyze data to serve as a foundation for
forecasting conservation performance and establishing and improving underwriting
guidelines. A utility calculator designed with this functionality will allow WSHFC
to assemble data in support of large-scale programs that monetize utility cost
savings.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 3The costs of a utility calculator program require further study. As discussed herein,
CEC may be willing to share its CUAC software with WSHFC at no cost,
substantially reducing the front-end implementation costs. However, a utility
calculator program is subject to risks and uncertainties as the benefits are not
guaranteed.
The final section of this report proposes a series of “next steps,” encompassing
recommendations for further study to better understand and mitigate these risks
and reduce the uncertainties.
Key Findings
The Energy Consumption Model (ECM) method can have considerable value to
owners, WSHFC, and local housing agencies. It can be a valuable tool to finance
energy efficiency and renewable energy retrofits, reduce reliance on limited
government resources for affordable housing, and improve financial feasibility of
LIHTC transactions. It will also prove useful in “Year 15” LIHTC transactions. The
ECM model is a valuable preservation tool for properties in strong rental markets
where project rents are more likely to be at their regulatory caps.
This report found principal advantages and disadvantages of using a utility
calculator tool, similar to the CUAC, as an ECM administrative strategy.
Advantages
Principal advantages of a utility calculator include:
1. More accurate utility tariff information;
2. More reliable energy consumption estimates; and,
3. A more transparent and understandable process for computing utility
allowance estimates, underwriting and financing energy efficiency and
renewable energy retrofit costs.
Disadvantages
The principal disadvantages of a utility calculator are related to cost and that the
benefits of the ECM calculator options may not fully materialize.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 4Costs include front-end development and ongoing maintenance/administration.
Conclusion
The potential advantages of a utility calculator surpass the disadvantages.
However, these advantages, or benefits, are not guaranteed. Much of this
uncertainty can be attributed to the newness of the utility calculator model. If
WSHFC chooses to implement a utility calculator program, it should design an
approach which best meets State policy goals.
This report suggests next steps for further exploration and development of a utility
calculator model for Washington State.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 51 Introduction
1.1 Federal Utility Allowance Regulations
26 C.F.R. 1.42-10 of the Internal Revenue Code regulates procedures for
determining utility allowances (UA) on low income housing tax credit (LIHTC)
projects. Until recently, owners of LIHTC properties that were not subject to rules
for calculating UAs under rental assistance programs of the Farmers Home
Administration and HUD, were limited to two options for establishing UAs: Public
Housing Authority (PHA) UA schedules established for the Section 8 program or
local utility company estimates. In July 2008, the Internal Revenue Service (IRS)
amended Section 1.42-10 to permit three additional calculation options.
1. Agency Estimate or Actual Usage. This option allows the owner to request
a UA from the local agency (PHA) with jurisdiction over the LIHTC
building. The regulations outline two approaches for establishing an agency
estimate:
a. Agencies may establish UAs based on estimates that are derived from
relevant data, including utility rates, property type, climate
conditions, and local taxes and fees.
b. The agency may also use actual building usage data. Usage-based
UAs must be derived from 12 months of building consumption data.
Consumption data may be based on an appropriate sample of the
project’s units as determined by the local PHA.
2. HUD Utility Schedule Model. The building owner may calculate UAs using
the “HUD Utility Schedule Model,” which is based on data from the
Department of Energy’s Residential Energy Consumption Survey (RECS).
3. Energy Consumption Model (ECM). A building owner may calculate UAs
using energy, water and sewage consumption estimates. The ECM must take
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 6into account factors including unit size, building orientation, design and
materials, mechanical systems, appliances and characteristics of location
(Modeling Factors). ECM estimates must be calculated by a properly
licensed engineer or a qualified professional approved by the allocating
agency.
1.2 WSHFC Utility Allowance Policy
Appendix O of the Tax Credit Compliance Procedures Manual (CPM) describes
WSHFC’s UA policies and procedures, which incorporate in full the options
detailed in Section 1.42-10. The CPM notes that owners who use UA methods
established under Section 1.42-10 before the 2008 amendment require minimal
review, while options established by the 2008 amendment require higher levels of
review by WSHFC to assure accuracy of the estimates.
Under the Agency Estimate/Actual Usage option, the CPM provides owners with
two choices: “Owner Estimate, Similar Buildings,” and “Owner Estimate, Actual
Usage Data” (OEAU). While the CPM refers to these as “owner estimates,” the
approval of these estimates are subject to the due diligence review of WSHFC staff,
and accordingly must fulfill the IRS’ Agency Estimate standards.
WSHFC also permits owners to use the HUD Utility Schedule Model. Under this
option owners must document all model input factors, and WSHFC must approve
the UA prior to implementation.
According to the CPM, projects with less than one full year of operations after
placement in service are excluded from using the OEAU and ECM methods of
calculating UAs. However, WSHFC now grants exceptions to this policy, allowing
owners to use ECM estimates when a project is placed in service. When the ECM
is used at placement in service, owners must provide actual usage data after the
project has achieved one full year of stabilized operations. In addition, all projects
using the ECM, both new and existing, must provide actual usage data every four
years. Owners must justify material variances between ECM estimates and actual
usage data; otherwise WSHFC may require them to revise UAs to more closely
align with actual usage results.
Although not directly addressed in the CPM, WSHFC permits the use of ECM
estimates during the underwriting phase of an LIHTC development; however, it
was noted that owners typically prefer to use the more conservative PHA UAs for
underwriting purposes. This strategy allows owners to capture cash flow if UAs are
subsequently reduced using the ECM or other methods.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 71.3 Overview of other State ECM Policies
This report examines strategies for implementing the ECM, with particular attention
given to the California Utility Allowance Calculator (CUAC) program, a UA
estimation tool developed by the California Energy Commission (CEC) and the
California Tax Credit Allocation Committee (TCAC). DRA’s survey of other
allocating agencies’ ECM policies uncovered a variety of administrative strategies
and procedures, but none approach the level of sophistication or are conceptually
similar to the CUAC program.
The ECM option presents a unique challenge to LIHTC allocating agencies because
it requires them to establish new due diligence and underwriting protocols where
none previously existed. To date, no consensus has emerged on protocols or best
practices. States hold divergent views on the merits of the ECM. Ohio and
Michigan prohibit ECM-derived UAs. Actual usage options are prohibited in
California and discouraged in Kentucky, largely because they believe the option to
be more costly to the owner. Ohio and Texas staff, on the other hand, have
concluded that the ECM method is likely to cost more than the actual usage
options.
1.4 Economic and Policy Benefits of the ECM
A utility calculator such as one based on the CUAC model is essentially a tool used
to administer the ECM option. As such, an analysis of its merits must begin with an
assessment of the potential value of the ECM option to LIHTC owners. The value
of the ECM option hinges chiefly on four variables:
1) Washington State utility costs and the potential economic payback
of energy efficiency investments;
2) The extent to which PHA UA schedules overstate actual tenant
utility burden;
3) The number of units within a project with rents at their maximum
regulatory caps or market rate limit; and,
4) The extent to which alternative UA calculation methods, in
particular the Actual Usage method, represent competing and more
viable alternatives to the ECM.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 8As discussed in Section 4.1, the evidence suggests that by each of these measures
the ECM option is a viable and important alternative for LIHTC owners.
The ECM can also advance certain public goals, including:
! Increased investment in energy efficiency, renewable energy and
water conservation resulting in reduced energy consumption;
! Improved project cash flow and financial stability;
! Increased leveraging of LIHTCs and other public funds with private
loan funds;
! Increased private financing to support affordable housing
preservation through retrofits; and,
! Energy cost savings for market rate tenants (in mixed-income LIHTC
developments) and for tenants in regulated units whose rents fall
below their regulatory caps, or, alternatively “green lease”
opportunities for such tenants, in which they share utility cost savings
with their landlords.
For the most part, the goals enumerated above employ financial leverage. Table 1
illustrates the leverage potential of WSHFC’s LIHTC portfolio under monthly UA
reduction assumptions of $20, $30, $40, $50 and $60.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 9Table 1: Leveraging Potential of Monthly Utility Allowance Reductions ($)
Monthly Utility
Allowance
Reduction 20 30 40 50 60
Additional Monthly
Debt Service
Payment1 17 25 33 42 50
2
Loan Per Unit 2,505 3,758 5,010 6,263 7,515
Annual Leverage
w/ 1,400 Units at
Maximum Rents2,3 3,507,177 5,260,765 7,014,353 8,767,941 10,521,530
Pre-2002 Portfolio
Leverage w/ 9,000
Units at Maximum
Rents2,4 22,546,135 33,819,203 45,092,270 56,365,338 67,638,406
Source: WSHFC data files; DRA.
1
Debt service payment amount is based on a 1.2 debt coverate ratio.
2
All loan/leverage calculations based on interest rate of 7% and 30 year amortization period.
3
!Assumes that 3500 new LIHTC units are approved annually, and that the rents on 1,400, or
40 percent, of these units are at their regulatory caps.
4
Pre-2002 projects are selected to estimate near-term preservation and retrofit opportunities.
According to WSHFC data files, there are 28,060 pre-2002 units in its LIHTC portfolio. Based
on the AMI distribution of units approved over this time period, 9,000, or 32 percent, of unit
rents are estimated at their regulatory caps.
This analysis looks at leverage on a per unit basis, in the context of WSHFC annual
LIHTC unit production and with regard to WSHFC older, pre-2002 LIHTC
portfolio. It may be unrealistic to expect average utility allowance reductions to
exceed $30 on an annual or portfolio-wide basis. Thus, the larger leverage figures
should be viewed cautiously. However, at a project level, $60 reductions may be
attainable in certain cases.
The leverage potential of UA savings is an important and largely untapped
affordable housing investment resource.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 101.5 The Functions of a Utility Calculator
The benefits of a utility calculator similar to CUAC as a tool for administering the
ECM are more difficult to quantify and assess. Potential utility calculator benefits
include:
! More reliable and transparent ECM calculations;
! Reduced owner compliance cost; and,
! Reduced WSHFC administrative costs.
Given that both the ECM option and CUAC are new, as are the various other
methods for implementing the ECM option, it is not possible at this point to make
definitive conclusions about the relative advantages and disadvantages of CUAC.
Nevertheless, the benefits of a utility calculator, while speculative, are potentially
significant. A utility calculator administered in conjunction with thoughtfully
designed and well-documented policies and procedures is likely to inspire greater
confidence in ECM estimates among developers, lenders, LIHTC investors and
tenants. This in turn should lead to more investment in energy efficiency,
renewable energy and water conservation.
DRA’s analysis evaluates merits of using a utility calculator tool similar to CUAC to
administer the ECM option. DRA’s analysis includes a review of alternative ECM
implementation procedures. We detail the CUAC software model itself, and the
administrative and compliance procedures that TCAC and CEC developed in
support of CUAC.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 112 Case Studies
As noted above, DRA’s review of state allocating agency ECM policies and
procedures did not uncover a clear consensus on best practices. In many
instances, allocating agency written documentation regarding ECM policy mirrors
the IRS’ regulatory language and, as such, perpetuates its ambiguities.
In addition to TCAC/CEC, DRA interviewed four state allocating agencies: the
Kentucky Housing Corporation (KHC), the Florida Housing Finance Corporation
(FHFC), the Ohio Housing Finance Agency (OHFA) and the Texas Department of
Housing and Community Affairs (TDHCA). In addition, DRA had email exchanges
with the Minnesota Housing Finance Agency (MHFA). MHFA reported that it has
yet to process an ECM request and that most owners continue to use PHA
schedules. Accordingly, we did not interview MHFA. The National Council of
State Housing Agencies referred DRA to: KHC, OHFA, TDHCA and MHFA.
2.1 Kentucky Housing Corporation
The KHC interview was conducted with Michael Dant, Asset Analyst.
Kentucky approved 28 ECM and 10 Actual Usage requests over the past year.
Nearly all requests were from existing stabilized projects. KHC’s ECM procedures
for existing projects require owners to use an approved engineering firm to conduct
an analysis using a nationally recognized model and to simultaneously present
actual consumption data on the project. KHC uses the actual data to verify the
reliability of the ECM outputs. Generally, if ECM estimates are within 10 percent
of the actual consumption amounts, KHC will approve the ECM energy
consumption estimates. If the variance is more than 10 percent and the engineer
believes that the ECM is more representative of a typical year, a detailed
explanation must be provided for the variance. Once every 10 years owners must
re-verify their ECM estimates with actual consumption information. Mr. Dant
noted that a principal advantage of the ECM option over the agency estimate
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 12option is that actual consumption is verified only once every 10 years under KHC’s
ECM policy, as opposed to every year under its Actual Usage rules.
Relatively few projects have applied for ECM UA approval during the underwriting
phase. Those that do so must provide actual consumption data from a similar
property. They must then re-verify the model with actual consumption data from
the completed project after it has maintained stabilized occupancy over
12 consecutive months.
In collecting actual consumption data on properties, KHC requires owners to
supply information on 40-50 percent of the units for projects of 10 units or less and
25% of the units for projects with 10 or more units. Sampling percentages must be
applied to each bedroom type.
KHC staff review and approve UA submissions. The review process includes a
comparison of model estimates with actual usage data; verification that
consumption data were based on appropriate unit sampling; confirmation that
required tenant notification procedures were followed; and verification that the
correct utility tariffs were used for the allowance calculations. Among the most
common problems uncovered in this review process involve the use of incorrect
tariffs, which was attributed to the complexity of utility tariffs.
According to Mr. Dant, once ECM estimates have been approved, compliance
issues are not materially different than compliance issues encountered under other
UA options. For example, even if a re-verification analysis shows actual usage to
be more than 10% over estimates and as a result of this KHC increases UAs, this
would not be considered noncompliance.
2.2 Florida Housing Finance Corporation
The FHFC interview was conducted with Robin Grantham, Compliance Monitoring
Administrator, and Matt Jugeheimer.
FHFC has approved seven ECM proposals to date, all of which were on existing
projects. This year a few new projects have applied. FHFC’s principal method for
assuring quality control is through the approval of engineering firms, selected by
FHFC though an RFQ process. FHFC does not verify that correct utility rates were
used.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 132.3 Ohio Housing Finance Agency
The OHFA interview was conducted with Brian Carnahan, Director, Office of
Program Compliance and Betsy Krieger.
OHFA prohibits the use of the ECM option, but allows owners to use the Agency
Estimate (AE) Actual Usage options. Until May 2011, however, the AE option
could only be used on existing properties. OHFA reports that very few owners
have chosen to use the AE option. Most continue to use PHA schedules, even
though prior to the new regulations owners frequently complained the PHA UA
estimates were too high. Low participation may in part be a reflection of lower
natural gas prices and perceived administrative costs associated with actual usage
data collection.
OHFA’s AE policy requires owners to update usage and utility rate data annually.
The unit sample size must be 40 percent of each unit type. If the project has fewer
than 20 units, usage data must be provided on all units. For projects with 20 or
more units, there are no specific procedures in place to prevent owners from
“cherry-picking” their 40 percent by including units with the lowest levels of
energy consumption. Owners may obtain utility records from utility companies or
directly from tenants. OHFA has posted a form on their web site called Permission
to Obtain Utility Records, which when signed by a tenant, authorizes the utility
company to release the tenant’s utility records. It was noted that some utilities are
more cooperative than others in supplying tenant records.
2.4 Texas Department of Housing and Community Affairs
The TDHCA interview was conducted with Patricia Murphy, Chief of Compliance
and Asset Oversight.
TDHCA allows all UA calculation methods, but reports that, to date, it has
received only one ECM request. It has processed a large number of actual usage
requests. Actual usage data must be supplied by the utility providers, and it must
be provided on all units for which data is available, but at a minimum five of each
unit type or 20 percent of each unit type, whichever is greater.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 143 California Utility Allowance Calculator
DRA conducted interviews with three individuals regarding the California Utility
Allowance Calculator (CUAC): Adrian Ownby, Energy Commission Specialist at
CEC; Ammer Singh, Compliance Program Manager at TCAC; and, Nehemiah
Stone, Principal at Benningfield Group, an energy consulting firm. Mr. Ownby
oversees the development and administration of CUAC. Mr. Stone consults on the
development and administration of CUAC. He also provides CUAC training for
energy consulting firms and TCAC staff.
3.1 CUAC Program Background and Goals
The CEC developed CUAC with the assistance of TCAC to allow energy
consultants to provide more accurate project-specific estimates of tenant-paid
utility expenditures, taking into account a building’s energy and water utilization
features, the presence, if any, of solar PV systems, and applicable utility tariffs.
Owners that elect the ECM UA estimate option must use CUAC. TCAC, which first
introduced CUAC in its 2009 funding cycle, has approved approximately
30 CUAC ECM estimates to date. TCAC does not offer an agency estimate option
for calculating UAs, and CUAC was not designed to support this option.
The current version of CUAC (and the ECM option) may only be used for new
construction and substantial rehabilitation projects, as the CUAC program contains
as-built verification requirements. The CEC and TCAC plan to introduce guidelines
for the use of CUAC on existing projects later this year.
3.2 How CUAC Works
CUAC does not estimate energy consumption attributable to heating, cooling and
water heating. Energy consultants must use third party software models approved
by the CEC to develop these estimates. The energy consumption estimates (i.e. the
“outputs”) generated by these third party models become CUAC inputs. CUAC
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 15does calculate energy use related to appliances, lighting and miscellaneous uses
(factoring in the use of Energy Star appliances and energy efficient lighting). It also
calculates water consumption based on a usage assumption of 65 gallons per
person per day, and on the additional assumption that the number of unit
occupants will be 1 person plus 1.5 times the number of bedrooms. Energy
consultants may override the CUAC default water consumption estimate provided
they have reliable data substantiating that tenants will use different amounts, and
that they submit documentation to TCAC justifying their estimates.
A key feature of CUAC is its tariff database which links consumption estimates,
provided by energy consultants or through the CUAC model as described above,
with local electric and natural gas tariffs. CUAC also provides a single propane
rate, which is based on average statewide propane rates and adjusted on an annual
basis. CEC has determined that, given the many water utilities in California, it is
not practical to monitor water rates. Therefore, energy contractors must enter
water rates into CUAC.
3.3 CUAC Process, Rules and Administration
3.3.1 Selection Criteria for Energy Consulting Firms
TCAC requires that the signing consultant be California Association of Building
Energy Consultants Certified Energy Plans Examiner (CEPE) qualified and either
Home Energy Rating System (HERS) rater or a California licensed mechanical
engineer or electrical engineer.
3.3.2 Monitoring Utility Tariffs
CEC updates tariff rates quarterly. Annual weighted average rates are used for
natural gas because of the volatility of natural gas prices. Electric rates are based
on current tariffs levels. CEC estimates that the tariff update process takes about 40
hours a quarter. Various factors contribute to complexity and time needed to
accurately update tariffs. These include tiered pricing, local usage taxes and fees,
and reduced rates available to low income tenants under California’s CARE
program. The current version of CUAC is not equipped to handle local user utility
taxes, which vary widely by jurisdiction and are assessed at both city and county
levels. The new web-based version of CUAC has been designed to fix this
shortcoming by using League of California Cities data.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 16California does not have a central repository for utility rates. Current utility rate
data must be collected by CEC staff by monitoring individual utility company
websites. One disadvantage of this method is that utility companies do not always
update rates on their web site concurrently with rate changes.
3.3.3 Owner Submission Requirements
TCAC allows three types of CUAC estimates, each produced at different points in
the life of a project. A stage 1, or draft, estimate may be produced at the time of
the initial LIHTC application. TCAC can, at the request of the owner, use this draft
UA to underwrite the project. The stage 2 estimate is mandatory and, must be
submitted by the energy consultant to TCAC for review and approval at the
placement in service. The stage 2 submission represents the project “as built,” as
opposed to “as proposed” and, as such, is treated as the “locked-in-place” version
of CUAC. Finally, an energy consultant must produce an annual CUAC estimate
throughout the compliance period. This simply requires the energy consultant to
rerun the calculator to update utility allowances to reflect current utility rates.
3.3.4 TCAC review
TCAC staff review the stage 2 submission to verify that proper back-up
documentation has been provided to substantiate the underlying assumptions (the
inputs) of the energy consultant’s energy consumption model, and to confirm that
the outputs of the consultant’s model match the energy consumption estimates
entered into CUAC.
The TCAC review has been designed to be brief, taking on average about two
hours.
If specific technical questions arise that TCAC staff are not qualified to address,
questions are forwarded to CEC or an outside consultant retained by CUAC. TCAC
staff attended a half-day training session that provided instruction on these review
procedures.
3.4 Existing Buildings Policies
As noted, TCAC does not currently allow owners to use CUAC on existing
buildings. CEC and TCAC plan to introduce a new version of CUAC this summer.
In their view, existing buildings present quality control challenges because energy
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 17efficiency measures can be difficult to verify if architectural and construction
records are not available or if energy efficiency improvements were not verified
during construction. CEC is currently drafting procedures for existing buildings to
address these quality control risks.
For existing buildings that are not undergoing an energy retrofit, these new
procedures will require energy consultants to verify building energy features
through approved sampling procedures. Where certain elements cannot be
verified, the guidelines will require energy consultants to make conservative
default assumptions based on the vintage of the building. Procedures for buildings
undergoing energy retrofits are expected to be similar to current procedures for
new construction/substantial rehabilitation projects.
3.5 CUAC’s New Online Interface
The current version of CUAC runs locally on PCs, using Microsoft Access. Users
must download utility tariff data files. Since CEC updates these data files quarterly,
users must frequently download these files to assure UA estimates reflect current
utility rates. CEC plans to introduce a new online web-based version of CUAC
(CUAC v.2) this summer in which users will input building and consumption data
through a web interface. The utility rate database will be housed on CEC’s server,
assuring that estimates will always reflect the most current rates.
CUAC v.2 will also be more accurate by having tier break points for up to five tiers
in the database and by allowing more flexibility for creating special situation rates
and tariffs. These result in more complexity at the front end, but, according to
CEC, not appreciably more work to maintain the database as baseline and tier
break points do not change frequently.
CUAC v.2 will continue to have energy analysts input the water rates. However,
data entry options will become more flexible by allowing for tiered water rates.
CUAC v.2 will include two types of accounts, each providing a different level of
user access. General users will have open access accounts through which they
will be able to produce draft utility allowance estimates. General users might
include developers or architects who want to produce draft calculations to test
hypothetical assumptions. Only users with “Active” restricted access will be able
to produce final/official utility allowance estimates. Active account holders must
be authorized by CEC, and must at a minimum be a CEPE, who is also either a
HERS rater or a licensed California mechanical or electrical engineer. CEC
designed the dual account system to promote interest and transparency among
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 18non-energy consultants while at the same time allowing more control over who
produces the final estimate. CEC noted, for example, that through the online
version of CUAC they will be able to suspend or decertify Active users for cause.
3.6 Cost of Developing and Administering CUAC
CEC estimates that the third party costs of developing the new web-based version
of CUAC will be approximately $150,000. Both Mr. Ownby and Mr. Stone
indicated that the CUAC v.2 software could be easily adapted for use in other
states. Moreover, CEC owns the software, and according to CEC staff, there are no
licensing restrictions that would prevent CEC from sharing the software with other
jurisdictions. This could substantially lower the front-end cost of implementing a
similar program in Washington. Principal administrative costs include one full-
time staff person at CEC and an outside energy consultant available (but to date
rarely used) to assist TCAC staff with technical issues they are unqualified to
address.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 194 Issues and Considerations Regarding Use of a
Utility Calculator in Washington State
A utility calculator is a tool for implementing and administering the ECM UA
option. WSHFC should consider developing a utility calculator if it wants to
promote the ECM option for public policy reasons, and if owners will want to use
this option for transactional reasons. Thus, evaluating a utility calculator as a tool
is in part an assessment of the specific merits of the ECM option, and in part an
evaluation of the potential efficacy of a utility calculator compared to other
methods of implementing and administering the ECM option.
4.1 Appeal of the ECM Option to Owners
Section 1.4 notes that for owners, the economic value of the ECM hinges on four
principal variables:
1. Washington State utility costs and the potential economic payback of
energy efficiency investments;
2. The amounts which PHA UA schedules overstate actual tenant utility
burdens;
3. The number of units within a project with rents at their maximum regulatory
levels and with respect to which owners could increase rents if utility
allowances fall; and,
4. The relative appeal of alternative UA calculation methods; in particular, the
Actual Usage method.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 204.1.1 Utility Cost Structure
Utility cost structure is an important factor in weighing the benefits of energy
efficiency investments and using the ECM option. It is also highly relevant to
WSHFC’s decision about whether or not to invest in a utility calculator. In this
regard, it is instructive to compare Washington and California utility costs. The
comparison is important because if tenant utility burdens are significantly higher in
California, then it is reasonable to argue that California has more compelling
economic reasons to invest in a utility calculator tool.
DRA’s comparison of tenant utility costs in California and Washington suggest
tenants in the two states experience similar utility burdens. While there are
significant differences in utility tariff structures between Washington and California,
there is no strong evidence to suggest that this translates into material differences in
monthly household utility costs. For example, in 2009 the average residential
retail price for electricity (cents per kilowatt-hour) was 13.81 in California and
7.54 in Washington, yet average monthly electric bills in the two states were nearly
identical: $81.10 in California (where average monthly residential consumption
was 587 kwh) and $81.79 in Washington (where average monthly residential
consumption was 1,086 kwh). In addition, Washington State’s natural gas tariffs are
substantially higher than California’s, which in 2009 were $13.95 and $9.43 per
thousand cubic feet respectively.
Finally, in a limited sample review of PHA utility allowance schedules, DRA found
that low income rental households in the two states share relatively similar utility
burdens. This can be seen in Table 2 which compares electric and water utility
allowances published by a small sample of PHAs in both states.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 21Table 2: PHA Electric Monthly Utility Allowances ($) for 1 Bedroom Units in Multifamily
Buildings, Among a Sample of PHAs in California and Washington jurisdictions
Utility Category PHA Monthly Utility Allowance ($)
Oakland Sacramento Spokane Pierce County Seattle
CA CA WA WA WA
Electric Cooking 5 12 5 5 3
Electric Heating 12 12 18 23 23
Electric Hot
Water 12 15 17 8 6
Standard Electric 20 24 19 17 9
AC 0 8 0 0 1
Electric Service
Charge 0 7 0 0 3
Water/Sewer 57 49 81 44 59
Total 106 127 140 97 104
Sources: Oakland Housing Authority (2010), Sacramento Housing and Redevelopment
Agency (2010), Spokane Housing Authority (2011), Pierce County Housing Authority (2010),
Seattle Housing Authority (2009); DRA.
The variance between the two states may be less than expected because of climate,
and because tiered pricing in California may shift a disproportionate share of the
state’s overall utility cost burden to single-family homeowners.
DRA was not able to find comparative water/sewer tariff and household
expenditure data. However, as shown in Table 2, using PHA utility allowance
schedules as a proxy measure for residential water/sewer expenditures, it is clear
that major population centers in both states experience comparable residential
water/sewer cost burdens. More importantly, water represents the highest cost
utility allowance category. According to WSHFC, increasing water rates throughout
the state of Washington are driving many LIHTC owners to individually meter
water, through both retrofits of existing projects and in the design of new
properties. Thus, while individually metered water systems may be relatively
uncommon now, they will likely become increasingly common in the future.1
1
Individual metering of water may present unique and challenging fairness issues regarding leaks. What
happens when tenants pay for water, but landlords are responsible for fixing leaks?
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 22The discussion above suggests that Washington and California are likely to
experience similar reductions in UAs by using ECM option, and that California is
not uniquely positioned by virtue of its utility rate structure to benefit from the ECM
option or a utility calculator.
4.1.2 PHA Estimates
According to data from WSHFC, there were significant UA reductions on all
14 LIHTC projects that received UA adjustments under the Actual Usage or ECM
methods, with median reductions at the project level for studios, 1br, 2br, 3br and
4br apartments of 25 percent ($13 per month), 28 percent ($15 per month),
32 percent ($25 per month), 37 percent ($31 per month) and 42 percent ($59 per
month) respectively. Overall, utility allowance reductions ranged from $2 to $62
per month.
The UA reductions of the magnitude shown above are large enough in absolute
dollar terms to earn the attention of owners. Of course, these above 14 projects
are a self-selected group, with something to gain by switching to one of the new
UA calculation methods. Determining whether this group is representative of
WSHFC’s LIHTC portfolio would require additional research.
4.1.3 Units at Maximum Rents Allowed by Regulation
WSHFC does not collect data on the number of LIHTC units with rents at the
maximum levels allowed by regulation. However, it is possible to estimate this
number by looking at the AMI set-aside distribution among the units comprising
WSHFC’s LIHTC portfolio. This analysis appears in Table 3.
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 23Table 3: Estimated WSHFC LIHTC Units at Maximum Regulatory Rents
Area Median Income Set-Aside (%)
WSHFC LIHTC Portfolio 30% 35% 40% 45% 50% 60% Total
1
Total Units 4,673 937 3,662 1,648 12,005 30,614 53,629
1
Portfolio Distribution 9% 2% 7% 3% 22% 57% 100%
2
Estimated Annual Distribution 311 61 239 108 783 1,998 3,500
Estimated % of Units at 100% 100% 100% 90% 60% 15%
Regulatory Caps
Estimated Units Approved 311 61 239 97 470 300 1,478
Annually at Regulatory Caps
Source: WSHFC data files; DRA.
1
Distribution by AMI of units subject to LIHTC regulatory agreement and awarded credits between
1987 and 2009.
2
Estmated annual AMI distribution based on the assumption of 3,500 new LIHTC units annually,
based on the historic Portfolio Distribution.
3
Estimate of units at their regulatory caps at each AMI set-aside.
Table 3 assumes that WSHFC approves on average approximately 3,500 new
LIHTC units per year, and that new units are distributed by AMI set-aside in
accordance with the Portfolio Distribution. DRA’s estimate of the percentage of
units at their regulatory caps is based on the assumption that rent increases on the
lower AMI units are constrained by regulation rather than market. Rent increases
at the higher AMI set-asides are limited by market conditions, leading to rents that
are typically lower than their regulatory caps. Based on the assumptions in Table
3, the number of LIHTC units approved each year at their regulatory caps will be
approximately 1,478, or 42 percent of total units. While approximations, these
figures clearly suggest that rents could increase on a significant portion of the units
in WSHFC LIHTC portfolio if UAs decline.
4.1.4 Alternative UA Estimate Options
The Actual Usage and ECM options represent competing approaches to reducing
utility allowances on energy efficient properties, but in many circumstances actual
usage options are not realistic. This is most clearly true of new projects and of
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 24existing projects that want to finance energy retrofits with projected energy cost
savings.
Another important consideration for owners is that the Actual Usage and ECM
options have different costs.
The ECM option requires a front end expenditure of approximately $5,000 to
$7,000. In addition, under WSHFC policy the owner must provide actual usage
data on a portion of the project’s units after it has achieved twelve months of
stabilized occupancy (if it is a new project). Thereafter, it must provide similar
actual usage data every four years.
Under the Actual Usage option, owners are required to supply actual usage data
annually on all units, but they incur little or no front-end costs. The cost of
securing actual usage data can vary, depending on whether the owners can secure
usage data from the local utility or if they must obtain utility bills from tenants. We
understand that utility companies are frequently uncooperative, forcing many
owners to obtain utility information directly from tenants. This would likely
increase the annual cost to owners of providing actual usage data. Our discussions
with state allocating agency officials suggest that both owners and state agency
staff are divided in their beliefs about which approach is most cost-effective, and
that state policies and procedures are an important factor in determining which
approach is more costly.
Based upon the four variables identified at the beginning of Section 4.1, the ECM
option should have considerable value to many LIHTC owners. This conclusion,
however, should be accepted with one caveat: the scope of this study did not
allow DRA to fully investigate the extent to which Washington State PHAs
overestimate tenant utility burden.
4.2 Accuracy of Estimates
Since WSHFC requires usage data on 100 percent of the units under its actual
usage option, this approach would appear to yield more accurate estimates
compared to ECM. However, this practice has a notable shortcoming in that it
subjects utility allowance estimates to variations in tenant utility usage behavior as
opposed to using an objective standard that is based on the consumption habits of
a reasonably conservative/conscientious tenant. Given WSHFC’s policy of
requiring users of the ECM method to “reality test” their estimates every four years,
the ECM option would appear to yield comparable levels of accuracy while
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 25mitigating much of the risk associated with tenant behavior; Kentucky requires
owners to collect actual usage data every ten years.
4.3 Underwriting and Leverage
The ECM is a mechanism that should allow developers to incorporate energy
efficiency and renewable energy improvements into the assumptions of their
development pro formas. Where utilities are paid by the tenants, this assumption
will be reflected as higher rents on those units where rents are capped at their
regulatory limits, but that are otherwise below market. This creates the potential
for increased private financing and reduced dependency on scarce public
subsidies. According to WSHFC and other state housing officials, developers are
reluctant to use ECM UA estimates in their development pro formas. Allocating
agencies do not appear to require or encourage underwriting based on ECM
estimates. Developers will not always have access to soft debt, or they may
encounter feasibility issues even with maximum LIHTC allocations. As discussed
in Section 4.5, under such circumstances developers have a strong incentive to use
ECM estimates in their development pro formas.
4.4 Retrofit financing
Financing for EERE retrofits on existing properties presents possibly the most useful
application of the ECM method, as a key feature of most retrofit financing strategies
is their reliance on the monetization of projected utility cost savings to finance
retrofit costs.
4.5 Developer, Investor and Lender Incentives and Barriers to
Participation
Developers will on occasion, often out of necessity, want to use ECM estimates in
their development pro formas. Developers might, for instance, use ECM estimates
to erase funding gaps or to demonstrate higher debt coverage potential.
Understandably, there appears to be a strong preference among developers, and to
some extent among state agency staff, to use more conservative PHA utility
allowances for underwriting purposes, and to switch to the ECM or actual usage
methods after financing has closed. In such instances, the project’s owners, both
general and limited partners, are likely to be the principal if not sole beneficiaries
of the increased cash flow arising from utility allowance reductions. The
magnitude of this cash flow boost can be large or small, depending on the specifics
of a project. In most instances the potential for increased cash flow on any given
LIHTC Utility Calculator Policy Analysis June 17, 2011
Washington State Housing Finance Commission 26project can be anticipated up front and may, depending on this upside potential, warrant special underwriting attention. For example, projects that have high UAs and a large portion of unit rents at their regulatory limits may experience a substantial boost in cash flow. Many developers, lenders (private and public), and investors believe that it is risky to underwrite ECM estimates, as use of the ECM at this stage gives rise to cash flow and compliance risks. However, compliance risk may be more a matter of perception than reality. State allocating agencies must approve ECM estimates before an owner can implement them. An ECM estimate approved during the underwriting phase is provisional in places like Washington State, where UAs are subject to adjustment pending the review of actual usage data. If actual usage data show the provisional estimates to be materially inaccurate, these facts alone would not, according to officials we spoke with, constitute noncompliance. In this respect, compliance risk does not appear to be significantly greater under the ECM option. However, there is the risk that state compliance officials will require owners to increase project UAs going forward based on the results of a post-stabilization actual usage analysis. Such an occurrence could significantly reduce project cash flow. In two of the states we spoke with, California and Florida, even this risk would appear to be relatively small because neither of these states require ECM users to collect actual usage data at any point in their compliance period. In these states the risk of flawed estimates falls more directly on the tenants, where they also assume more of the burden of proving that the estimates are flawed. Importantly, California’s procedures appear to be far more robust in the area of agency-level review of ECM estimates, and CUAC is an essential component of this review. Where the underestimation of UAs is a concern, equity holdbacks or reserves could be used to mitigate this risk. For example, short term reserves could be released to pay developer fee or pay down gap financing if, after the review of actual usage data, WSHFC approves UAs as originally estimated under the ECM. These reserves could be sized based on the discounted present value of the difference between the PHA UA estimate and the ECM estimates. LIHTC Utility Calculator Policy Analysis June 17, 2011 Washington State Housing Finance Commission 27
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