Preservation of older affordable housing has vaulted from far down the list of state and federal priorities for funding to near the top, thanks to concern about the environmental impact of carbon emissions. Money started flowing in 2009, and Washington is poised to throw even more cash in the direction of preservation this year.
States are also getting involved, with California in the vanguard. Assembly Bill (AB) 758 requires the California Energy Commission to develop and implement a comprehensive program to achieve energy savings in existing residential and commercial building stock that falls significantly below the current Title 24 building standards for new construction.
The first influx of federal money came from American
Recovery and Reinvestment Act of 2009, which allocated the following:
The federal Weatherization Assistance Program (WAP) for low-income Americans, run by DOE, has traditionally been used primarily for single-family homes, duplexes, and such. In most states, it has not been used on any scale for multifamily. Funds that flow to states are then administered by community action programs (CAPs); few of these agencies have expertise with multifamily.
To remove one cost obstacle to the use of WAP funding in assisted housing, DOE is expected to issue regulations that permit WAP providers to rely on the low-income certifications already carried out by owners of HUD-assisted rental properties.
The main challenge with increased funding is coordination of the various funding sources in an effort to avoid wasted effort. Weatherization of single-family homes is a fairly well-established contracting specialty and a well-established use of government funds. However, multifamily weatherization is not well established, and few contractors have experience with it. Likewise, for government agencies and private contractors that understand home weatherization, multifamily projects represent a very substantial learning curve.
Some states are trying to encourage them to work with apartment owners. Colorado, Florida, Rhode Island and New York have specifically portions of the WAP funding for multifamily. New York has established temporary subgrantees to focus on multifamily buildings. Oregon exempts subsidized housing from income verification requirements. In perhaps the most dramatic departure from past practice, Pennsylvania allocated 10% of its WAP funding to the Pennsylvania Housing Finance Agency (PHFA) for use in affordable multifamily housing to support owner networks, train auditors, conduct audits, gather data, and bring together other resources, including its own reserves and grant funds. The result will be a comprehensive statewide approach.
But other states aren’t doing much to change the CAP priority for individual homes. In Massachussetts, for example, the CAPs say they have a backlog of one to four-family weatherization applications and cannot put any money aside for multifamily.
State Energy Programs
California’s State Energy Program is using $110 million for programs focused on existing residential and commercial building energy efficiency (and water efficiency) retrofits. Projects that incorporate onsite solar electric generation may be eligible for funding if energy efficiency measures are also applied. Local jurisdictions, nonprofits, and private organizations can create partnerships and apply for program funding under a competitive solicitation process for three different areas: the California Comprehensive Residential Building Retrofit Program, the Municipal and Commercial Building Targeted Measure Retrofit Program, and the Municipal Financing Program.
HUD Is Taking Action
HUD’s Office of Affordable Housing Preservation relies on a network of private contractors to oversee funding. Program guidance was provided in Housing Notice H-09-02. HUD concluded that financial incentives were critical to get owners to participate, so it provided them.
Initial funding was snapped up quickly, and the agency stopped taking applications in November 2009, but new funding may be appropriated if a new jobs bill is passed. HUD accepted more than 200 properties for processing and began closing loans and grants late last year. HUD says 20,000 properties are eligible.
HUD concluded that capital improvements alone might not be of much value unless projects also had green operating and maintenance programs in place. There is an upfront incentive owners can get at closing the retrofit financing, an efficiency incentive payable upon timely and satisfactory completion of rehab and the potential for an "incentive performance fee" annually from surplus cash.
More Funds on the Way?
More money may be in the pipeline. Congress is debating a new bill to further stimulate the economy through job creation. There is talk of as much as $9 billion for green retrofits, although the initial version of the jobs bill passed by the House in December 2009 had no funding for this purpose.
From the environmental angle, Congress is considering climate change and "clean energy" legislation that might include funding to retrofit assisted housing. The American Clean Energy and Security Act (ACES), as passed by the House last June, would provide several forms of incentives for energy conservation in multifamily housing.
Finally, House Banking Committee Chairman Barney Frank is looking at the issue in the context of preserving multifamily affordable housing. He has drafted a bill that would overhaul the programs for preserving federally assisted housing, including upgrades to energy efficiency.
Setting a New Pace
Recognizing the economic benefits of generating jobs retrofitting older buildings, many cities are using a new financing structure that goes by the acronym PACE, or “property assessed clean energy.” In simple terms, a city uses municipal bonds to finance improvements to private properties and then recovers the investment through property taxes on the improved property.
With a PACE bond, proceeds are lent to commercial and
residential property owners to finance energy retrofits (efficiency measures
and small renewable energy systems). The owners then repay their loans over 20
years via an annual assessment on their property tax bill. PACE bonds can be
issued by municipal financing districts or finance companies, and the proceeds
can be used to retrofit both commercial and residential properties.
One problem with the PACE program is that property taxes assessments are senior to other obligations; that feature is essential to the ability to sell the bonds. One apartment owner said that few lenders will allow their existing debt to be subordinated. A state official said efforts are being made to persuade lenders to be flexible and that some big banks have agreed to subordinate their debt to PACE loans, including Wells Fargo.
Sonoma: A Trend Setter
Implementation of the property tax-based financing scheme is well underway in Sonoma County, north of San Francisco. Construction-related jobs in Sonoma County increased 8.4% between January 2009 and September 2009 after the implementation of the $100 million Sonoma County Energy Independence Program (SCEIP).
The Sonoma County Water Agency and County of Sonoma jointly pledged up to $100 million to fund energy efficiency and water conservation improvements for residential and commercial property owners. SCEIP allows property owners to finance energy efficiency, water efficiency, and renewable energy improvements through a voluntary assessment attached to the property, paid back through the property tax system over time.
“It was our goal to develop a program that would benefit the environment and economy,” said SCWA Chairman and County Supervisor Paul Kelley. “SCEIP is a model for the nation on how to build green jobs, reduce greenhouse gases and conserve our energy and water resources.”
More than $5.6 million in SCEIP projects were contracted in July and August 2009 at the same time a spike of 500 new construction jobs were reported by the California Employment Development Department.
Property owners who want to use SCEIP funding must agree to repay the program through an assessment on their property taxes over a term of 5, 10, or 20 years. The tax assessments are tied to the properties, and may, therefore, be passed from one owner to the next.
Energy efficiency, water conservation, and renewable energy generation upgrades must be permanently attached to the property to qualify. Items not permanently attached such as dishwashers and other appliances are not allowed. Improvements like insulation, cool roofing, heating and air conditioning systems, waterless urinals, solar panels and energy efficient windows are acceptable. Improvements must be for existing buildings; new construction does not qualify.
Additional Sources of Funding
Many utility companies offer programs to finance energy retrofits. In California, the Public Utilities commission requires regulated utility companies to spend $310 mil this year to improve building efficiency. Unfortunately, as one state government official put it, the program managers for these companies "don't get multifamily at all." Their requirements are at odds with the practices and requirements of HUD and other agencies that finance affordable housing.
All these programs were developed in isolation from one another, using differing theories of change and widely different vehicles for implementation. According to Bill Kelly, President of Stewards of Affordable Housing for the Future, “[w]hat will be needed for the long-term is an approach that integrates the funding streams, relying in part on grant or equity funding and largely on debt funding.” SAHF is a network of nine national social enterprise nonprofits who own and operate 90,000 affordable apartments around the country. SAHF is engaged in data gathering, strategic development, and policy work around energy conservation in affordable rental housing
Grant or equity funding could flow from federal or state programs, from utility public benefit programs, or from monetization of a proposed energy conservation tax credit. The debt would have to be at relatively low interest rates, suggesting that partial or full federal loan guarantees would launch the market. To keep transactional costs under control, says Kelly, “[g]uaranteeing a portfolio of loans originated by an intermediary such as SAHF or a housing finance agency would be far more cost effective than having the government underwrite each loan.” DOE is analyzing the extent to which it may have legal authority to do this and is contemplating how it would use possible new authority for a “green bank,” proposed to be included in climate change legislation.
State governments and federal agencies need to come to agreement on how to determine what specific measures are needed in retrofits and how to conduct energy audits of multifamily buildings. In addition to modifications that would make programs mesh better, a set of intermediaries who understand both rental housing and energy conservation may be needed to serve as brokers between the money and the properties.
A Look Ahead: California Sets Another Trend
Building owners can't complain about Washington throwing money at energy efficiency. They might have a more trouble with the idea of state regulations that tell them how efficient they must make their buildings. But that's exactly what might be coming down the pike in California.
Under AB 758, the California Energy Commission will initiate a rulemaking proceeding in Spring 2010 for buildings that do not meet the state's Title 24 standards for newly constructed buildings. The CEC is planning to focus on financing, public outreach and education and workforce trainings. It has indicated that it will move slowly on regulation, recognizing the limits of its ability to implement or enforce a new regulatory regime.