Utility Allowances for Fun and Profit

by ‐ Tags: alternative energy, affordable housing, building science

Using "utility allowances" and "fun" in the same sentence is a bit of a stretch, but knowledgeable property owners can increase profitability through good management of utility costs.  Affordable housing property owners have to continually find a balance between the revenues they can generate through rent and their tenants' utility costs.  Most affordable properties are subject to a "gross rent" limit.  The gross rent limit is the maximum combined amount tenants can pay each month in rent and utility expenses.  High utility costs for the tenants means lower rent revenue for owners.  Some progressive developers have started to take concrete steps to ensure they maximize the rent they can collect.   

It is important to both property owners and tenants that utility allowances are accurate.  For an owner, if the calculated utility allowance is too high, that means they aren't able to charge as much in rent.  If it's calculated too low, they charge more rent, but they will be out of compliance and may have to refund tenants the excess they were paying.  For tenants, it is essential that the allowances be accurate so they can be assured of having an affordable place to call home.  

Since utility expenses will vary based on tenant behavior and occupancy, there are a number of ways that averages are calculated.  The two most common ways are engineering based and consumption based.  

Engineering Based
Under this method, building characteristics and engineering calculations are utilized to create estimated usages for different end uses, such as heating, water heater, and cooking.  No actual utility data needs to be collected from tenants, which can be a significant time-saver.  Also, since the allowances are based on usage calculations instead of actual data, they do not need to be recalculated each year.  However, since no real utility data is utilized, the calculations may turn out to be too high, resulting in the property charging lower rents than they could be, or the calculations could be too low, resulting in tenants paying more than they should each month.  

Consumption Based
This method involves collecting utility consumption data, cleaning out bad data, and determining the typical consumption for each unit type.  It is more labor intensive because data for the units must be collected from the local utility companies.  However, this allows an accurate reflection of what tenants are spending on utilities.  Property owners can then charge fair amounts that allow them to maximize the amount of rent they can collect while keeping the tenants' monthly expenses manageable. 

Maximizing Rents

Often affordable housing properties will go 10-15 years between major capital investments.  For owners that want to maximize their revenue, planning for these investments is the time when it is critical to carefully consider energy efficiency measures.  Higher levels of energy efficiency will keep utility expenses lower and more predictable between capital investments. 


Some progressive affordable housing developers are beginning to take a more proactive approach to managing costs.  They are doing this through two methods--tracking actual utility costs and setting consumption and cost goals.  To set goals, they consider what they would like utility expenses to be until the next planned capital investment, estimate fuel escalation rates, and determine what the consumption should be to hit those targets.  Having a consumption target allows them to plan measures that fit within their budget and allow them to reach their goal.  It also encourages teams to pay more attention to details such as air sealing, duct sealing, and quality installation as these are inexpensive efforts with significant long term payback.  

Once construction is done, monitoring the units' actual consumption provides an extra level of quality assurance to ensure that measures are working as planned.  It also will satisfy utility allowance reporting requirements in most cases.