Energy Efficiency as a Tool for Developing and Preserving Affordable Housing
Apr 19, 2022
With spring bringing warmer weather, households across Connecticut rejoice as temperatures rise and home heating season comes to an end. A recent survey found that the average monthly energy bill for Connecticut consumers is $411 the highest in the nation. Together with the threat of climate change, international conflict, and disrupted supply chains, increasing the energy efficiency of households is front of mind. This is doubly true for the state’s low- and moderate- income residents who bear an increased burden of high energy costs. A 2020 report from the American Council for an Energy-Efficient Economy found that low-income households faced the greatest energy burden of all income types, meaning they spent the largest percentage of their income on energy costs. Furthermore, low-income renters, who have limited ability to increase the energy efficiency of their homes, face a greater energy burden than those who own their homes. Low-income renters living in multifamily buildings spent 5% of their income on energy costs, compared to non-low-income renters who spent just 1.5% of their income on utilities. Given that one third of Connecticut residents are renters and over 300,000 of them make under 80% of the area median income, it is critical to consider energy efficiency in the construction and preservation of affordable housing.
Figure1: Low-Income Renters Energy Burden. (Source: Joint Center for Housing Studies at Harvard University)
In order to ease the energy burden on low-income renters, the development community must come together to increase energy efficiency of new and rehabbed buildings. The primary obstacle at hand is that for many landlords and developers the costs of improvements, such as transitioning to LED lighting, installing new appliances, and better insulated windows, does not appear to outweigh the benefits. This is especially true for buildings where tenants pay their own utilities. In these cases, the incentive to reinvest in the property is fairly low. This concept is called a split incentive or incentive disconnect.
Evidence of split incentives is clear when examining the condition and age of the state’s housing stock. According to CHFA’s 2020 Housing Needs Assessment, nearly 30% of Connecticut renters live in a home that is a least 80-years old and has some level of deferred maintenance. In 2016, CoStar conducted a national review of affordable housing stock utilizing a five-star rating system for properties. In their findings, one-to-two-star properties (which reflect a lack of continued investment such as outdated fixtures, small windows, and an absence of on-site facilities) make up between 15-17% of affordable housing stock in Connecticut. These properties were also earmarked as unlikely to be green or energy efficient buildings. Such deferment has worsened in the wake of the COVID-19 pandemic during which many landlords did not receive monthly rental payments, depleting replacement and maintenance reserves. A survey conducted by the Center for Joint Housing Studies at Harvard University found that 31% of landlords deferred maintenance spending in the first year of the pandemic, compared to just 5% in 2019. Deferred maintenance and an overall aging housing stock are contributors to the high energy burden borne by low-income renters. To overcome these obstacles, incentives must be available to landlords and developers to reduce the incentive disconnect between themselves and their residents.
Incentivizing Energy Efficient Construction Methods
The residential real estate industry makes up one fifth of the United States’ greenhouse gas emissions, with multifamily properties contributing a significant carbon footprint (JCHS Harvard). It is critical that as Connecticut moves to meet the growing need for additional affordable housing units, attention is paid to creating and maintaining buildings that are both affordable and sustainable. As Connecticut’s allocating agency for Low-Income Housing Tax Credits (LIHTC), CHFA has prioritized energy efficiency measures in the development of the Qualified Allocation Plan (QAP), the guiding resource for proposed tax credit projects in the state. In fact, CHFA has consistently ranked as a top “green” Housing Finance Agency (HFA) for its dedication to bettering the environmental impact of affordable housing construction through its QAP. In the most recent plan, energy efficiency and green building measures represent 13% of all possible points, with additional points available for projects that include adaptive reuse of a historic or vacant property, as well as remediation of brownfield sites.
Projects may earn up to four points in the sustainability category for having a Home Energy Rating System (HERS) index rating under 70 for preservation projects and 50 for new construction. The HERS index is a simple scale that assesses the energy efficiency of a home relative to a “reference home” of the same size and shape; the lower the score, the more efficient the home. To put things in perspective, the average HERS rating on a new construction home in Connecticut is 100; CHFA’s specifications call for an even greater level of energy efficiency for any project receiving LIHTCs, thereby reducing the split incentive between developer and resident. Residents benefit from decreased utility costs while developers gain access to project subsidy in the form of tax credits and energy rebates from utility companies that can be used to fill gaps in project financing.
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A recent CHFA-financed project that features innovative energy efficient design is Oak Tree Village located in Griswold. Completed in 2021, the property was designed using the passive house model, and features 144 units of mixed income housing. Passive house design represents a set of building specifications that aim to maximize a building’s energy efficiency. Buildings with passive house design include features such as an extremely airtight building envelope with continuous insulation, preventing heating and cooling loss. This reduces energy expenditures when compared to non-passive house homes. Tenants at Oak Tree Village enjoy lower utility costs as a result of these features on two accounts. First, the highly efficient design enables the property owner to cover the cost of heating the entire building, thus insulating the low-income tenants from unexpected increases in monthly utility expenses. Second, tenant-paid electricity costs, such as air conditioning, are reduced because the airtight building envelope helps regulate overall climate control. And while property-specific utility costs are not yet available, case studies conducted on similar buildings have demonstrated impressive returns on these types of investment. Community Preservation Corporation released a case study that showed its passive house buildings in Brooklyn, NY spent an average of 64-66% less on utility costs compared to standard buildings (see Figure 2).
Preservation and rehabilitation projects, which address deferred maintenance and improve the overall quality of a property, also benefit from energy efficient design measures. In 2021, CHFA closed on a deal to rehab 120 units of elderly housing in New London’s Huntington Towers. Construction work will include new windows, a more efficient HVAC system, and improved insulation between units. Such improvements are predicted to lower utility costs for tenants at the property by up to 10%.
Figure3: Oak Tree Village, Griswold CT (Source: Apartments.com)
Several programs also exist at CHFA’s partner organizations that are right-sized for smaller projects. For example, the CT Green Bank offers pre-development and term loan financing for multifamily energy efficiency improvements. EnergizeCT, as well as Capital for Change, also offer additional programs to multi-and single-family property owners to address energy efficiency and overall safety improvements. These programs serve as an important resource for tackling the split-incentive issue for property owners in the state. Through this funding, landlords can improve the overall quality of a property and strengthen their financial investment while providing a higher caliber home for tenants. Marketing these programs and educating property owners on the benefits of such an investment is a key component to increasing the energy efficient housing stock and creating a more sustainable future for Connecticut families.
To learn more about CHFA’s green initiatives, check out our housing design, construction, and energy efficiency guidelines. And be sure to listen to a recent presentation on Making Affordable Housing Climate Ready, featuring CHFA’s own Jennifer Landau.
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Kayla Giordano is a Senior Program & Data Analyst in the Research Marketing and Outreach department. She holds degrees in Political Science and Economics from Eastern Connecticut State University as well as a MA in Community Development Policy & Practice from the University of New Hampshire.