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April 16, 2020

Water and Energy Efficiency: Connecting the Owner and the Tenant Through Utility Allowance Modeling

By: Eddie Wilcut, Water and Energy Efficiency Practice Leader

Have you ever rented an apartment that advertised all bills paid?  If so, how concerned were you with the amount of energy and water that you used?

Have you ever rented a home or apartment where you were responsible for the energy and water bills?  Were you willing to spend your own money to make upgrades to someone else’s property just to save on energy or water bills?

Finally, have you ever rented out a home or condominium? How concerned were you with utility bills paid by your tenant?

Chances are good that the answers to each of the previous questions are pretty similar and illustrate the disconnect between tenants and landlords when it comes to utilities.

In the low-income housing tax credit (LIHTC) or affordable housing world, property managers and owners are all too familiar with published utility allowances. These allowances are estimates of what a tenant pays each month for utilities including electricity, natural gas, water and sewer.  These allowances are subtracted from published maximum rent limits to determine the net rent that can be charged to tenants at a given property.

Most affordable housing properties use a utility allowance developed and published by their local housing authority, which is an average estimate based on existing housing stock in the area.  As these estimates consider all local housing stock, they may be considerably higher than the actual energy use, especially when it comes to new properties or those that have undertaken significant upgrades.

As discussed in a previous blog, federal laws do provide the opportunity for owners and managers of affordable housing to establish their own custom allowances based on the features that are specific to their property.  This is typically accomplished through the development of an energy consumption model or ECM.  By modeling energy and water consumption based on characteristics that are unique to a given property, it is possible to achieve a lower utility allowance that can result in an increase in net rent.  For example, a property with an established max rent of $800 for a given unit type and a published utility allowance of $150 will achieve a net rent of $650 per unit. While the same property with a custom utility allowance of $100 will achieve a net rent of $700 per unit. If this is applied to a property consisting of 200 units, the difference is $120,000 in net operating income.

Now, there are some out there who may feel that lowering utility allowances and increasing rents is to the detriment of the individual tenant. After all, they do end up paying more rent…right? Well, let’s take a moment to explore that. 

In most cases, especially with newer properties, the published utility allowance is significantly higher than a tenant actually pays for utilities during any given month. While, in older and less efficient properties, tenants may actually be paying more than the published utility allowances. At the end of the day, a utility allowance can determine how much rent will be charged.  However, in no way does it ensure that the tenants will not be charged more for their energy and water use by the local utility.  In fact, many published utility allowances are only updated every five years and generally do not keep up with the pace of local increases in utility rates.  For every year that the same published utility allowance remains in place, it becomes more and more likely that the tenant will end up paying more for utilities than the published allowance.

Conversely, under a custom utility allowance, a review of the energy model must be conducted every year.  This annual review includes updating the utility rates in the model to reflect changes made by the local utility.  As such, any increase in the custom utility allowance will result in a dollar for dollar change in the net rent charge. 

Long term, this is a more fair and equitable system that not only protects the interests of the tenant, but encourages the owner or manager to continue to invest in upgrades that provide additional benefit to both the property and the tenant.

Eddie Wilcut, Plummer’s Water and Energy Efficiency Practice Leader, has 6 years of experience conducting energy consumption modeling for Low Income Housing Tax Credit (LIHTC) properties and HUD regulated properties. Eddie also has 22 years of experience in Program Development, Project Management, Program Management, Contract Administration, Scheduling, Facility Assessment, Programming, Cost Estimating, Energy and Water Conservation and Sustainability. To date, the Plummer team has successfully provided energy consumption models for more than 200 properties across 28 states.

The Plummer team includes a group of highly skilled project managers, engineers and energy modelers. The significant expertise, experience and knowledge base of the team acquired by successfully conducting utility allowance modeling for a large number of properties across the United States will help them quickly determine the best and most cost-effective platform and methods required to achieve the best and most reliable results. A proven and collaborative process involving the modeling team and the developer will result in identification of the most important elements that will lead to decision making that will ultimately provide the greatest and most cost-effective results for both the tenants and the owner.

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