The Right Utility Allowance

6 min read

Monitoring energy efficiency earns extra income

National Church Residences (NCR) is earning a half-million dollars a year in extra rental income, simply because the nonprofit changed the way it calculates the utility allowances at 25 affordable housing properties.

At many of these apartments, the cost of utilities billed to residents was less than the utility allowances provided for the residents — often because of sustainable design features like energy efficient appliances and lighting.

NCR used actual utility bills to adjust the utility allowances to reflect actual utility costs.

“It was a very beneficial task,” says Alan Mileti, utility and procurement coordinator for NCR.

Utility allowances are often set far too high – especially for affordable apartments where sustainable design features help keep utility costs low. Technology now makes it much easier to base utility allowances on actual costs. Housing officials across the country are also creating models to compute utility allowances that recognize the benefits of sustainable designs.

How it works
Utility allowances represent how much households living in government-subsidized affordable housing are likely to get charged every month for utilities – mainly electricity, but sometimes also water.

At affordable housing communities subsidized with federal low-income housing tax credits (LIHTCs), property managers subtract the allowance from the maximum
rent they can charge each household, according to the apartment’s affordability restrictions. Every extra dollar added to an apartment’s utility allowance means one less dollar in rental income, every month, for an affordable housing manager.

Internal Revenue Service rules offer managers at affordable housing communities a range of methods to set utility allowances. Most use the simple formulas used by local public housing authorities to set utility allowances for their rental subsidy programs, like Sec. 8 and Housing Choices Vouchers.

“In excess of two-thirds of owners chose the public housing authorities’ utility allowance method because it’s easy,” says James Grow, deputy director of the National Housing Law Project, based in San Francisco. “The problem is, it might not be accurate.”

An accurate utility allowance could reward property managers that have renovated apartments with energy efficient appliances and lighting. Lower utility costs create lower utility allowances, allowing managers to set slightly higher rents, though still within the limits of affordability for the property.

To make utility allowances more accurate, affordable housing managers can work with local public housing authorities to adjust the allowances based on the actual utility bills paid by residents – provided the apartment rents are paid by the tenants and not by rental subsidy programs. Property managers are careful not to shock residents with sudden changes to utility allowances that raise their rents – substantial changes can be phased in.

NCR’s Experience
NCR adjusted the utility allowances at 25 of its affordable housing communities between 2011 and 2012. The extra income adds up to $489,000 a year, ranging from less than $10,000 a year at the properties with the least increased rent to nearly $80,000 a month at its Kirby Manor property. At many apartments the actual utility bills were roughly half the utility allowance.

To make these adjustments, NCR got permission from residents to collect information on their utility bills and submitted the data in the format demanded by local housing authorities. That sometimes involved gathering boxes of paper billing statements and keying in utility data by hand.

“It was a very tedious task,” says Mileti. The managers also need to keep updating the utility cost information with the housing authority every year.

Fortunately, technology has made it a lot easier for owners and managers to gather accurate information on utility expenses for their residents. Computer systems can now automatically access the utility bills for individual apartments over the Internet.

“Gathering actual bills from dozens of tenants – you don’t have to do that any more,” says Edward Connelly, president of New Ecology, a nonprofit catalyst for sustainable development based in Boston.

For example, New Ecology’s WegoWise energy benchmarking system is now set up to work with about 400 different local utility companies. When a new community joins the system, property managers get permission from residents to access their accounts with the utility companies online. From then on, the utility information for each apartment flows automatically into WegoWise every month. New Ecology has been using the data gathered by WegoWise to help adjust utility allowances for the last two years.

Affordable housing properties developed with LIHTCs can also use models to set utility allowances that take into account the sustainable design features, like energy efficient appliances and lighting, thanks to 2008 ruling from the IRS. State housing agencies can use an “Energy Consumption Model” or “Engineering” model to calculate a utility allowance for a specific project. A public housing authority can also use an “Energy Efficiency-Based Utility Allowance” for energy-efficient buildings in its housing stock. However, these models are expensive to create and need to be maintained to reflect changing utility costs, says Grow.

Change from the top
State and federal housing officials increasingly favor setting utility allowances based on actual utility costs – including the U.S. Department of Housing and Urban Development (HUD).

“HUD wants to move towards calculating utility allowances from actuals across the board,” says Connelly.

This summer, HUD officials plan to release guidance on how managers and public housing authorities should calculate utility allowances for properties funded by HUD, including apartments that receive rental subsidies like Sec. 8 or Housing Choice Vouchers. The guidance is widely expected to mandate that these projects use utility allowances based on actual utility costs.

The guidance is likely to affect many properties developed with LIHTCs, since most of these properties now use the utility allowances created by housing authorities for HUD’s rental subsidy programs.

However, it can take time to create new systems to set accurate utility allowances. For example, state housing agencies are also considering ways that property managers can use actual utility bills to set utility allowances. “Increasingly, the state housing finance agencies are looking to have more accurate data,” says Connelly.

New Ecology has worked with about a half-dozen state agencies to create systems to calculate utility allowances based on actual costs, starting with MassHousing two years ago. “None have finished,” says Connelly. “That’s just how long it takes.”