Custom Utility Allowances Open the Door for Affordable Housing Providers Nationwide

As demand for affordable housing continues to rise, developers and managers nationwide are turning to custom utility allowance models (UAMs) and strategic conservation as an innovative solution to address economic challenges. Low Income Housing Tax Credit (LIHTC) properties face mounting economic and regulatory challenges, and even with tax credits as incentives, many developers and managers struggle to keep their planned or existing properties financially viable. Developers of affordable housing operate within tight budgets. Implementing energy-efficient features can be costly upfront, and recouping these costs through income-restricted rents is challenging. The maximum allowable rent that can be charged for any given area is based on a percentage of the Area Median Income (AMI).  

Additionally, the maximum allowable rent must account for the local published utility allowance, which must be subtracted from the gross maximum rent when calculating the actual net rent that can be charged and collected by the property owner.  Utility allowances are intended to reflect average utility costs, based on the local housing stock, and not actual bills or costs paid by any individual household.

The good news is that the Internal Revenue Service (IRS) allows other alternatives for calculating utility allowances.  Where alternative utility allowance adjustments are pursued, they should reflect savings from energy efficiency improvements in a manner that is both fair to tenants and financially beneficial for owners.

As such, customized utility allowance models are gaining traction as fair, successful and environmentally friendly options to improve properties’ bottom line, pay for upgrades and build additional housing for those who need it.

Custom Utility Allowance Models

Approximately 95%or more of new and existing low-income housing developments leave significant money on the table by using authority-based allowances. Custom utility allowances are tailored to the specific characteristics of each property to reflect specific property modeled utility costs vs. estimated local housing authority allowances.

Plummer’s Water and Energy Efficiency Services (WEES) practice is one of few in the nation that creates custom utility allowances by using detailed energy and water consumption modeling and applying local utility rates to estimate tenant utility costs (also known as utility allowance modeling). The WEES team uses this modeling to show the estimated tenant utility use at the property which tends to be less than the local average especially when owners and developers invest in water and energy efficient design, fixtures, appliances, and HVAC systems.

Owners/managers can subtract a smaller utility allowance from their maximum rent, increasing their property’s net income and property value. Providers routinely save more than the cost of their custom model in less than two months. Property owners/manager can use this strategy to fund repairs, maintenance and upgrades that improve their tenants’ quality of living. Ultimately, these providers can afford to develop more properties and serve additional low-income renters. Tenants may pay a little more in rent but save an equal amount on utilities, enjoying modern amenities and, in many cases, reducing utility costs.

Multifamily property developers, owners or managers who use a custom utility allowance—especially for new properties built in 2023 or 2024 can capitalize on the water and energy efficiency that they built into their property to increase its net operating income. It’s a win-win solution that helps properties compete in well-established housing markets.

Plummer is confident in its models, even guaranteeing their success—if the model doesn’t benefit the property, it’s free of charge. This guarantee has a good history and is supported by utility allowance reductions. The WEES team works closely with local governments in 30states to ensure their models comply with national and state requirements. As a result, 100% of the 1000+ property custom allowances they have submitted nationally since have been approved.

For example, in Jacksonville, Florida, a LIHTC property with 150 units saw significant benefits from a custom water and energy consumption model developed by Plummer. The custom model reduced the monthly utility allowance from $282 to $182 per unit per month, translating to an annual savings of $180,000 and a payback period of just two months​​​​.

Strategic Conservation Planning

Customizing utility allowances also incentivizes water and energy conservation. Affordable housing owners and managers need to invest in water and energy efficiency and encourage responsible usage. Upgrades, that result in greater efficiency, also lower tenant utility bills and result in lower utility allowances. This allows the owner to cover the cost of upgrades, while making the property more environmentally friendly at the same time. In turn, residents benefit from property improvements, and more efficient fixtures and appliances.

Conclusion

By adopting the custom utility allowance model, affordable housing providers can make their properties more profitable and sustainable. The result is a win-win for owners/managers and tenants alike, providing a framework for continued investment in water and energy efficiency upgrades to benefit both for years to come. Plummer seeks to ensure that low-income tenants are not only financially protected, but also gain net benefits from lower utility bills by assisting developers and owners in expanding water and energy efficiency improvements to affordable housing.

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