low-cost financing: overview » introduction
Successful energy-efficiency financing tools rely on a concept known as "life-cycle costing." Traditional financing methods consider only the up-front costs of new development, such as building design and construction, without factoring in the reduced energy consumption and projected savings associated with high-efficiency buildings. In contrast, a life-cycle costing approach takes a longer-term view, accounting for prospective operating and maintenance costs over the life of the building in addition to the initial first costs of the upgrades.

Split incentives and the assisted housing stock

As in many market-rate properties, tenants in Low Income Housing Tax Credit-financed units often pay their energy bills directly to the utility, based on actual monthly usage. When property owners calculate the eligible rent for these units, they must factor in a standard "utility allowance" that accounts for this payment to ensure that gross rent does not exceed 30 percent of the targeted household income level. Until recently, property owners had a limited set of methods for establishing these utility allowances, and most relied on estimates generated by the local public housing authority for Section 8-subsidized units. These "comparable" units tend to be older than Tax Credit units, resulting in inflated utility allowances -- particularly in highly efficient buildings, reducing the resulting rental funds available to the building owner to support building operations.

A new option, made effective in final regulations published January 2009 (with additional guidance issued in May 2009), allows property owners to work with a licensed engineer or energy rater to determine utility allowances. This Energy Consumption Model accounts for building-specific factors such as unit size, design and materials, mechanical systems, and appliances, and should result in more accurate utility allowance calculations in newer developments and at properties where the owners have implemented energy-efficiency retrofits and other energy-saving measures. Lower utility allowances mean that property owners may collect additional rental income to pay for the energy-efficiency upgrades or cover other operating and maintenance costs.

View a discussion on the HousingPolicy.org Forum that addresses this issue in greater detail.

Click on the links below to learn more about tools for financing energy efficiency:

Make available energy efficient mortgages, which fold the cost of energy-saving upgrades into a new mortgage or refinance

Offer special assessment programs
that allow the costs of energy upgrades to be repaid through existing utility and municipal bills and largely offset through lower energy usage

Provide interest rate buy-down programs
and other low cost loans to lower borrowing costs for energy-efficient improvements