Transformative Opportunity to Invest in America’s Multifamily Housing

There is a generational opportunity to improve the homes of some of the 44 million households who live in multifamily housing through the $8.8 billion Home Energy Rebates programs that were authorized by the Inflation Reduction Act (IRA). Multifamily housing is significant because of the outsized role it plays, both in providing affordable housing and in reducing energy costs of housing. The new rebate programs recognize the significance of multifamily housing, requiring states to serve both single-family and multifamily housing types, and requiring that a portion of the funds benefit low-income multifamily properties.

These federal funds flow through State Energy Offices (SEOs), and states and territories across the U.S. are busy standing up their programs to deliver the rebates. The U.S. Department of Energy (DOE), which administers the new programs, has put out guidance intended to create an easier path for certain types of subsidized affordable housing and for households enrolled in means-tested programs. The affordable housing programs that can benefit from this “categorical eligibility” are typically administered by state housing finance agencies (HFAs) and public housing authorities (PHAs). For this reason, the potential to maximize the impact of these funds may rely on new collaborations. By understanding the opportunities to harness categorical eligibility for affordable housing, states may be able to more effectively deploy their rebate funds quickly and in a way that reaches low-income households and buildings with the most significant energy footprints. 

Overview of the Home Energy Rebates Programs

Sections 50121 & 50122 of the IRA include descriptions of the two home energy rebate programs: Home Efficiency Rebates Program (HOMES), and Home Electrification and Appliance Rebates Program (Electrification). States and territories must apply, or convey an intention to apply, for funds before August 16, 2024. Application documents and guidance were published by DOE in July 2023. SEOs can use up to 20% of program funds for administrative expenses, and 80% must go for investments in home energy efficiency projects. 

The Electrification program provides rebates for qualified electrification projects, with varying rebate amounts for different products—heat pumps, electric appliances, electric load service center, insulation, air sealing, and ventilation, and electric wiring. The rebate amount covers 100% of the project if the household income is under 80% of Area Median Income (AMI) as established annually by the U.S. Department of Housing and Urban Development (HUD), or where at least 50% of the residents of a multifamily building have incomes under 80% AMI. Otherwise, the rebate covers 50% of the eligible project cost. The maximum benefit per dwelling unit is $14,000.

The HOMES program must be used for energy efficiency upgrades that are predicted to save at least 20% of the home’s energy use. The guidance provides for two methods for making this energy use calculation—a modeled pathway and a measured pathway. The modeled pathway requires using calibrated home energy models consistent with the BPI-2400 standard. The measured pathway is based on energy usage data collected nine to 12 months post installation. In the modeled pathway, the rebate amount is between $2,000 and $8,000 per unit based on the amount of the modeled savings and the household income. In the measured pathway the rebate is between $2,000 and $4,000 based on household income and achieving the target energy savings.

A Focus on Low-Income and Multifamily

Both the HOMES and Electrification programs require that states and territories provide access to rebates for both single-family and multifamily properties. Both programs also require that at least 10% of rebate funds benefit low-income multifamily homes. In addition, low-income multifamily properties may be eligible for the maximum benefits in both programs. And finally, both programs provide categorical eligibility for certain types of subsidized affordable housing. Specifically, the program requires that each state:

• Allocate a percentage of its rebate funding for each of the rebate programs in line with its percentage of low-income households. 
• Reserve at least 10% of its rebate funding to serve low-income multifamily buildings. This allocation must be in addition to and separate from the allocation for low-income households. 
• Design each rebate program to be capable of delivering the rebate allocations to low-income single-family and multifamily households.
• Verify that (a) a participating single-family household’s income is less than 80% AMI, and (b) a participating multifamily building has at least 50% of households with incomes less than 80% AMI. Income must be verified at the household level. 

Based on these requirements, it is important that states design an efficient delivery system for ensuring that funds can reach low-income households and owners of low-income multifamily buildings. SEOs may benefit from taking advantage of categorical eligibility, understanding existing programs for affordable multifamily housing, and forging stronger partnerships with HFAs and PHAs. 

Removing Barriers Through Categorical Eligibility

DOE requires that states, “allow categorical eligibility determinations based on other federal programs that meet the income thresholds.” Categorical eligibility means that by participating in certain other federal programs, applicants can avoid having to demonstrate that they are income eligible, and under certain circumstances a whole low-income multifamily building can automatically qualify as eligible without having to income-verify every tenant in the building. 

It is also significant that categorically eligible low-income multifamily buildings may qualify for the maximum rebate amounts in both programs. In the case that buildings have both low-income and non-low-income tenants, if the property qualifies for whole-building categorical eligibility, all units in the building will qualify for the maximum rebate. 

DOE provides building-wide eligibility for the following types of properties that are supported by existing sources of capital and operating affordable housing subsidy:

These types of multifamily buildings relate to established affordable housing programs that are typically administered by HFAs and PHAs:

• Public Housing: Housing financed through HUD’s Public Housing program, typically owned and managed by PHAs who charge rents to tenants based on standards established by HUD and where the tenant pays no more than 30% of their household income on rent and utility costs.
• FHA Multifamily Programs: HUD oversees a number of programs to finance multifamily development, including the two categorically eligible programs specified by DOE—the 202 program for housing for the elderly, and the 811 program for persons with disabilities. Properties financed with these programs receive project-based rental assistance.
• Vouchers: Low-income tenants may benefit from rent assistance in the form of housing vouchers (also known as Section 8 after the section of the federal code that authorizes it). HUD provides vouchers that allow households to pay no more than 30% of their income on rent and utilities. The main types of vouchers are Project Based Vouchers (PBV) and Project Based Rental Assistance (PBRA) which are tied to a housing unit, and Housing Choice Vouchers (HCV) which are provided to a specific tenant who then rents a unit from a private landlord. Over two million households in America receive HCVs. 
• LIHTC: The most common form of subsidy for multifamily affordable housing construction is the Low-Income Housing Credit (commonly referred to as LIHTC), a tax incentive created in 1986 (described in 26 USC 42) that allows investors to receive tax benefits for investing in a qualified low-income rental housing project. In turn, at least a portion of the units in the property have to be income restricted for a minimum of 30 years. LIHTC is responsible for financing more than 3.5 million housing units over 52,000 projects across the US and its territories.¹

While the four categories listed above are the options for whole-building eligibility, there is another set of programs that can allow households to be categorically eligible. These are a set of means-tested programs, most of which are administered by state agencies: LIHEAP, Medicaid, SNAP, Head Start, Lifeline, Food Distribution Program on Indian Reservations, National School Lunch Program, HIP, Housing Opportunities for Persons With AIDS, Supplemental Security Income, Weatherization Assistance Program, Special Supplemental Nutrition Program for Women, Infants, and Children.

This provision to allow categorical eligibility could significantly reduce barriers to entry and create a more streamlined approach for states to meet and exceed their 10% low-income multifamily requirement. 

Requirements for Multifamily Owners

DOE requires owners of low-income multifamily buildings to comply with certain requirements for two years after receiving rebates. The specific requirements are:

• The owner agrees to rent the dwelling unit to a low-income tenant. This is a minimum requirement and affordability requirements should be commensurate with total rebate amount awarded.
• The owner agrees not to evict a tenant to obtain higher-rent tenants based upon the improvements.
• The owner agrees not to increase the rent of any tenant of the building as a result of the energy improvements with the exception of increases to recover actual increases in property taxes and/or specified operating expenses and maintenance costs.
• The owner agrees that if the property is sold within two years of receipt of the rebates, the aforementioned conditions apply to the new owner and must be part of the purchase agreement.
• In the event the owner does not comply, the owner must refund the rebate.
• A specific and verifiable mechanism (e.g., addendum to the lease) is in place for providing tenants with written notice of their rights and their building owner’s obligations.
• Enforcement and penalties are clear and sufficient to act as a deterrent for owner violations and provide for damages and attorney’s fees recoverable by tenants. 

DOE does not currently specify the means of enforcing these requirements, nor do they specify the recourse and penalties for noncompliance. 

An important consideration here is that building owners who already participate in the affordable housing programs that are options for categorical eligibility are likely already following more stringent compliance requirements than the ones required by DOE for the home energy rebates. 

Combining Home Energy Rebates and LIHTC

DOE has contemplated states combining these programs and issued a case study to help states and property owners navigate the challenges and opportunities related to combining HOMES and LIHTC. DOE also issued a FAQ that clarified a key question in the industry, stating that any member of the multifamily building’s ownership entity can “apply for and receive a rebate as the building’s owner” so long as the ownership entity authorizes the applicant in writing to apply for and receive the rebate, that the applicant will be the sole recipient of the rebate on behalf of the entity, and that the applicant is authorized to carry out the work on behalf of the ownership entity. 

One important consideration is the fact that DOE does not permit SEOs or their subgrantees to loan the rebate funds to a rebate recipient. This may create a challenge because federal grants within a LIHTC-supported project can reduce the project’s eligible tax credit basis. Parties seeking rebate funds within a LIHTC project should consult with their tax accountant to understand the project impacts and tax impacts of the rebate funds.

The Role of Housing Finance Agencies and Public Housing Authorities

As mentioned earlier, SEOs are the recipients of the Home Energy Rebate funds; however, in order to maximize the impact of these funds for low-income multifamily properties, and for low-income households more generally, SEOs may wish to partner with HFAs and PHAs, among other partners, in order to create the collaboration necessary to bridge the nexus between energy efficiency and affordable housing.

Due to their key function of financing the construction and rent subsidy on low-income multifamily homes, HFAs and PHAs are key stakeholders in providing access to properties that are categorically eligible. HFAs and PHAs frequently hold relationships with affordable housing developers and landlords. For this reason, they are important entities to help SEOs identify and access eligible developers, landlords, and households. They can also help design rebate programs that successfully coordinate with other affordable housing financing programs. 

How Guidehouse Can Help

If implemented properly, these state programs have enormous potential. However, program design and delivery will be complex, and as discussed here, effective program delivery requires multidisciplinary coordination. 

Guidehouse is a proven leader in federal grants, energy programs, and affordable housing. We look forward to the opportunity to help states and territories design effective programs that can move the needle on energy affordability and market transformation across the country. Our combined capabilities make Guidehouse uniquely positioned to serve public-sector and commercial clients alike as they seek to navigate the complex web of federal programs.

• Guidehouse combines its experts in energy, affordable housing, and federal grants management to seamlessly offer leading solutions for public-sector and commercial clients.
• Guidehouse specializes in working with state, county, and local governments in implementing large-scale federal programs in ways that are effective and efficient.
• We know leading practices in state and local government, energy, and housing, and we help our partners apply those practices to ensure highly effective program delivery.
• Guidehouse employs best-in-class technology solutions for federal grant support, which can be customized to meet local needs.
• We provide ongoing insights through presentations, webinars, thought leadership, and presentation to industry partners across the U.S.