New Utility Allowance Regulations Facilitate Use of Energy Consumption Models at Submetered Properties and Properties With Onsite Renewables

Today the IRS published in today’s Federal Registrar two sets of regulations that will facilitate the ability of owners of LIHTC properties to use a consumption-based utility allowance at properties that are either submetered or generate and sell energy using on site renewables.

The first regulation finalizes a temporary rule that was adopted in 2012.  The practical effect is that it allows LIHTC owners that submeter utilities at their properties (note that utility submetering is the implementation of a system that allows a landlord of a multi-tenant property to bill tenants for individual measured utility usage) to use the energy consumption model for calculating utility allowances.  Previously, an owner could only use the energy consumption model if the tenant paid the utility bill directly to the utility company (i.e. this was not allowed through a submetered arrangement).  This is significant in that the owner of a property where the units are not individually metered can now submeter the property, bill the tenants for their actual energy usage (much as a utility would) and now customize the utility allowances to reflect actual consumption, using the established methodology previously adopted by the IRS.

This is an important step towards addressing the “split incentive” problem associated with many energy efficiency transactions.  A split incentive problem occurs in a transaction where the benefits do not accrue to the person who pays for the transaction – in the case of the energy split incentive the building owner pays for retrofits, but cannot recover savings from reduced energy use that accrue to the tenant.

Before this rule change, LITHC properties that were submetered were not economically incentivized to make utility improvements in the resident’s units since investments made were not reflected in the utility allowance and thus could not be captured over time.  The change also should result in a second practical value for owners and energy efficiency professionals — it is often difficult to get actual consumption data from utilities.   With these regulations finalized some owners may opt not to individually meter apartments but rather choose submeter so they can have easier access to the data.

The second temporary regulation would extend the same treatment to LIHTC properties that generate energy onsite by renewables that is subsequently sold directly to the tenant based on actual usage.  It also establishes rules as to how much the owner can charge (not more than what the utility is charging).

These regulations are effective as of March 3, 2016.