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A PRIMER ON GREEN BUILDING WHITE PAPER PREPARED BY MBA STUDENTS

AT THE UNIVERSITY OF NORTH CAROLINA’S

KENAN-FLAGLER BUSINESS SCHOOL

A PRIMER ON GREEN BUILDING: THE CURRENT LANDSCAPE FOR HOMEOWNERS AND DEVELOPERS, INCLUDING A DISCUSSION OF USING GREEN BUILDING TACTICS IN

AFFORDABLE HOUSING DEVELOPMENTS

Authors Jay Carlis (MBA 2007) Chris Jensen (MBA 2007) Jim Hutton Johnson (MBA 2007) Matt Liebhold (MBA 2007) Nathan Marvelle (MBA 2007) Allison Moy (MBA 2007) Ashley Pinkard (MBA 2007)

Abstract This paper examines the market for green residential housing, including the challenges and opportunities faced by home builders and home buyers interested in green housing. The authors analyze market demand for green building, finding clear indications that consumers are increasingly motivated by energy cost savings, personal health and comfort, and the ethical aspects of buying green. However, consumer willingness to pay a premium for green housing is highly volatile and depends on several external factors, including incentives offered by lenders and local governments. The authors present a matrix for rating the feasibility of four alternative energy solutions for green home-building: energy efficiency measures; wind turbines; solar panels; and, geothermal technologies. Finally, the authors analyze the social and economic factors driving the confluence of green building and affordable housing. They conclude that the key to making green building more prevalent in the affordable-housing market is focusing less on high-end technologies and more on basic good design and development.

Publication Date Keywords: green building, housing, real estate, alternative energy, building codes, LEED, Energy Star, residential, development, energy efficiency, solar, wind, geothermal, affordable housing

2006 ©2006 Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC, USA. Reprinted by permission. Available online at www.cse.unc.edu. This white paper was prepared by MBA students for class MBA815 Sustainable Enterprise, taught by professor Albert H. Segars. It is reprinted for educational purposes. Citations and source accuracy have been reviewed, but cannot be guaranteed; clarifications or comments may be directed to cse@unc.edu.

A PRIMER ON GREEN BUILDING

Table of Contents 1. Executive Summary 2. Consumer Landscape

Consumer Motivations Residential Green-Building Demand Consumer Willingness to Pay Consumer Profile

3. Regulations and Standards Building Codes and Regulations Standards National Standards International Standards

4. Incentives for Consumers Lending Tax Credits Local Initiatives

5. Incentives for Developers Governmental Non-governmental Summary of Developer Incentives

6. Alternative Energy Technologies Geothermal Heat Pumps Solar Power Energy Efficiency Strategies Wind Energy Renewable Energy Matrix

7. Green Building and Affordable Housing Employing Green Building Principles in Affordable Housing Benefits to the Resident Cost and Benefit to the Developer Incentive Programs and Standards for Greening Affordable Housing Recommendations for Promoting the Greening of Affordable Housing

The authors express special thanks to the following individuals who graciously shared their time and expertise:

Jonathan Coulter, Advanced Energy Tracy Dixon, Advanced Energy Scott Herr, Centex Homes

Lee Perry, East West Partners James Royster, Enterprise Communities Brad Wood, Cherokee GreenHome

1. Executive Summary Americans are going “green” – they are seeking more environment-friendly clothes, cars, food, and homes. On the advent of this movement, businesses and consumers are negotiating a tangle of new markets, technologies, regulations, and incentives. This paper analyzes green residential housing and includes a discussion of green affordable housing. We identify some of the challenges and opportunities faced by builders and home buyers in this space. Our analysis of the market demand demonstrates that while the data are opaque, there are clear indications that consumers are motivated by energy cost savings, personal health and

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comfort, and the ethics of green building. However, the data suggest that consumers’ willingness to pay for these features is highly volatile and depends upon external factors. Government and businesses offer numerous incentives to increase consumer demand for green housing including tax credits, advantageous loans, or free services. In parallel, green residential real estate developers can benefit from a complex and ever-changing web of governmental and non-governmental incentives. The largest incentives are typically offered by cities and counties with progressive agendas and large tax bases. With most incentives aimed at consumers, significant opportunity exists for additional incentives to encourage more green residential construction. Because green building strategies often include the deployment of renewable energy systems and incorporation of energy efficiency tactics, this paper looks at the feasibility of four alternative energy solutions for homeowners and developers: energy efficiency; small-scale wind turbines; solar panels; and, geothermal technologies. Additionally, this paper briefly compares four of the most prominent building standards and certifications for green building: LEED; NAHB; and, ENERGY STAR. Finally, this paper addresses the convergence of different thought and market forces that motivates the confluence of affordable housing and green building. Chief amongst these are: the general advancement of building sciences; increased information on the impact of poor housing conditions on health; and, proven performance of green building in the traditional market place. The key to making green building accessible within the affordable housing arena is to focus less on the high-end technologies and simply to understand the merits of good development design. A holistic design methodology incorporates green principles from the outset and transforms the entire building process. With a strong planning process, a developer can integrate green design into an affordable housing project for a relatively small cost premium, and with great benefit to the occupant in the form of reduced utility costs, reduced maintenance costs, and increased quality of health. Anticipating the new green frontier for affordable housing, many government entities and pioneering nonprofit organizations are paving the way for the furtherance of greening affordable housing through regulatory and financial incentives.

2. Consumer Landscape

Consumer Motivations To understand fully the residential green building market, we must first understand the motives of the green building consumer. Consumers offer a long list of reasons for purchasing green building products, ranging from the purely self-interested to the wholly altruistic. We have summarized these motivations below in six categories:

• Increase energy efficiency and decrease utility costs. In 2003, Professional Builder conducted a survey to determine consumer preferences with respect to green building. Remarkably, 92% of respondents indicated that energy-efficient features were either extremely important or very important upgrades for a new home.1 Since 2003, energy costs have continued to rise, and in 2006, a study by McGraw-Hill indicated that energy-efficient techniques are still the most important green building method.2 In short, consumers continue to demand more energy-efficient features – such as ENERGY STAR appliances, better insulation, programmable thermostats, fluorescent lighting, and ceiling fans – to save money on utility bills.

• Ensure health, safety and comfort in the home. Also of concern to purchasers of green

homes and products are personal and family health, safety, and comfort. In the past few years, the media has widely reported the danger of substances found in common building products (e.g. insulation, carpet and furniture) which off-gas chemicals into the air as they break down. These chemicals, namely volatile organic compounds (VOCs), reduce the quality of indoor air and affect the health and safety of the home’s occupants. In addition,

1 “The State of Green Building”. HousingZone.com - Green Building forum (www.housingzone.com), 2003. 2 “Residential Green Building SmartMarket Report”. McGraw-Hill Construction, June 2006.

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inadequately filtered air may contain pollen or other allergens that decrease the comfort of the occupant. Consumers have responded by demanding HVAC equipment that more effectively filters and exchanges indoor air. In addition, manufacturers now make formaldehyde-free insulation, solvent-free wood finishes, and low-VOC carpets that improve overall indoor air quality.

• Conserve natural resources. The rapid decline of natural resources, such as water, timber,

oil, open space, and even clean air, has motivated many consumers to alter usage patterns and consider new sources of energy. (For residents of dry western states, access to water is an especially important concern.) For example, in an effort to limit water usage, many consumers now opt for the installation of xeriscaping, water-conserving appliances, and low-flow fixtures in their new homes. Furthermore, local municipalities have adopted ordinances that preserve open space and regulate storm water runoff to preserve natural drainage, and consumers continue to take greater interest in renewable energy sources such as solar and wind to power their homes.

• Do the right thing. Although noted less frequently by consumers, doing the right thing to

protect the environment is still a primary motive for purchasing green homes and products. Consumers who are “doing the right thing” tend to make purchases based on personal morals and as a selfless expression of concern for the environment and the future of others. These consumers are likely to buy green products regardless of the demonstrated economic benefits, and they view energy efficiency as a means of being environmentally-friendly rather than as a way to save money.

• Build a better home. Some consumers equate green homes and products with higher

quality. These consumers have a strong belief that a green home will have lower maintenance costs and a higher resale value. Lower maintenance might result from the use of such practices and products as xeriscaping, hardwood flooring, fluorescent lighting, and durable building materials.

• Access and integrate with community. In addition to being energy efficient and

environmentally friendly, truly green communities provide homeowners with convenient access to public services and transportation, commercial shopping centers, and community open space. Consumers who purchase homes in green communities value the walkability of the neighborhood and interaction with neighbors.

Residential Green- Building Demand Estimates of residential green-building demand vary greatly. We believe the most likely cause of this variability is due to the broad definition of the term Green Building. Each market study tends to define green building in a slightly different way, resulting in drastic swings in demand estimates. For example, the Natural Marketing Institute (NMI) defines Green Building Users as consumers owning two or more green building products. Products are limited to those defined in the NMI study.3 McGraw-Hill, on the other hand, uses the more broadly defined National Association of Home Builders (NAHB) Model Green Home Building Guidelines as a basis for its study on the green building market.4 Due to these discrepancies in the definition of Green Building, we found it difficult to make direct comparisons between studies; however, we were able to identify general trends, which indicate whether demand for residential green building is increasing, decreasing or flattening.

3 Understanding the LOHAS Consumer: A Focus on Green Building”. The Natural Marketing Institute (NMI), January

2006. 4 “Residential Green Building SmartMarket Report”. McGraw-Hill Construction, June 2006.

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From the perspective of the nation’s homebuilders, the demand for green building (or at least the supply of green homes) is rapidly increasing. Consider these statistics from McGraw-Hill’s 2006 report on residential green building5:

• 31% of home builders are more than moderately involved with green building. • Green home building is projected to grow 30% in 2007. • By 2010, between 5% and 10% (or between $19 billion and $38 billion) of new construction

starts will be green projects. Trends highlighted in NMI’s annual LOHAS (Lifestyles of Health and Sustainability) report are equally encouraging and support the NAHB’s forecasts for rapid growth in green building. For example, in 2006, more than 50% of the general population of the United States stated that they were concerned about water quality and energy conservation, and between 25% and 50% of the general population indicated that they were concerned about other issues related to green building, such as global warming, forestation, water conservation, reliance on fossil fuels, indoor air quality, and open space.6

Finally, another sign that the green building trend is here to stay is the increasing number of local and national organizations that are rolling out green building programs. These programs include: the Energy Policy and Conservation Act of 2005 (Federal Government); LEED-H (US Green Building Council); Built Green (Colorado, Washington, California); Green Globes (National Association of Home Builders); and, Earth Craft (Greater Atlantic Home Builders Association).

Consumer Willingness to Pay Consumers appear most willing to pay a premium on upfront costs for energy-efficiency features that will reduce long-run operating costs and less willing to pay a premium for products with no promised payback. In 2003, a study in Seattle, Washington showed consumers were willing to pay a premium of approximately 1% for these features7, but in 2004, the Greater Vancouver Regional District reported that “more than 50% would pay 2% more and more than 20% would pay at least 5% more” for green features.8

In the past few years, energy costs have continued to rise, but the research we reviewed provides no conclusive evidence that the consumer’s willingness to pay has risen as well. For example, in February 2006, Rancho Mission Viejo (RMV) reported that 75% of homebuyers in Terramore – a village in Ladera Ranch, California – said they would add more than $25 per month (or $3.60 per square foot) to their mortgages to pay for green features (a 2.4% premium based on a square foot cost of $150). Furthermore, RMV stated that 35% of homebuyers would add more than $100 per month (or $14.40 per square foot) to their mortgages (a 9.6% premium based on a square foot cost of $150) to pay for green features.9

More recently, McGraw-Hill reported that consumers are willing to pay up to $3,569 extra for green features (based on a $250,000 home, this represents only a 1.4% premium).10 And, as recently as September 2006, Jerry Yudelson, a green building consultant, indicated that he believes a 5% premium is about the limit of what consumers will pay for green features.11

5 “Residential Green Building SmartMarket Report”. McGraw-Hill Construction, June 2006. 6 “Understanding the LOHAS Consumer: A Focus on Green Building”. The Natural Marketing Institute (NMI),

January 2006. 7 “Eleven Reasons Why the Green Home Market is Ready to Surge”. Jerry Yudelson, Greenway Consulting Group,

September 2006. 8 “But will consumers pay for ‘green’?” (Title of slide from survey results). Greater Vancouver Regional District –

BuildSmart Program (www.gvrd.bc.ca/buildsmart), 2004. 9 “Green Investment in Homebuilding: Lessons Learned at Terramor – Ladera Ranch, California”. Judi Schweitzer,

Rancho Mission Viejo, February 2006. 10 “Residential Green Building SmartMarket Report”. McGraw-Hill Construction, June 2006. 11 “Eleven Reasons Why the Green Home Market is Ready to Surge”. Jerry Yudelson, Greenway Consulting Group,

September 2006.

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In short, consumers appear to be willing to pay between 1% and 5% more for green features, but their willingness to pay is highly volatile and depends upon a variety of factors, including the general health of the economy, financial incentives provided by government and private organizations, and energy costs.

Consumer Profile The surrogate profile frequently applied to the typical consumer of green homes and products is that of the LOHAS consumer. While the attributes of the LOHAS consumer may not be entirely transferable to the green building consumer, we believe they are close enough to provide some valuable insights for those wishing to target green building consumers specifically. Based on the LOHAS consumer profile, we believe green building consumers have the following attributes12:

• Slightly more likely to be older; • Slightly more likely to be female; • Slightly more likely to be college educated; • Slightly more likely to be married; • Less likely to have children in the household; • Likely to be white/Caucasian; and, • An average income of $48K.

A study performed by the advertising firm Thomas, Taber and Drazen on the public’s awareness of Built Green in Denver, Colorado – documents similar findings on the attributes of age, education, and marital status. However, this study found that those likely to be aware of the Built Green program had an average income two to three times greater than the average income of the LOHAS consumer.13

3. Regulations and Standards Prior to building a new home, a perspective home owner or builder may want to take the various certifications into account. As mentioned above, there are many competing standards in the marketplace, in addition to many local and state building codes.

Building Codes and Regulations In the United States, the building codes are established at the state level. This creates significant differences from state to state, with places like California having much stricter standards than North Carolina. Additionally, municipalities and counties may also have additional codes that supersede the state code. Finally, many neighborhoods have building covenants as well, dictating appearance and materials. This complexity is illustrated in a recent Chapel Hill, North Carolina, regulation, approved by the North Carolina Building Code Council, which states that there may be no rules against using solar or wind power generators in new or remodeled home construction. In North Carolina, applications for permits are made on a county/municipality level, but the building codes are set by the aforementioned North Carolina Building Code Council.14 The council is appointed by the governor of the state and is made up of 17 members. These members range in occupation from mechanical engineers to building inspectors and architects. The code is reviewed

12 “Understanding the LOHAS Consumer: A Focus on Green Building”. The Natural Marketing Institute (NMI),

January 2006. 13 “2005 A&U Survey Results”. Thomas, Taber and Drazen, August 2005. 14 http://www.ncdoi.com/OSFM/Engineering/BCC/engineering_bcc_home.asp

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in multiple subcommittees and presented to the main council for modification. Towns and counties may also petition the council for exemptions or amendments. In the future, the leverage point for adoption of green building codes will exist at a state level in the United States. While a national initiative may speed local adoption, the codes are so customized to local needs that changes would have to be made state by state. For example, a state that is extremely arid may not have to build and plan for the same stresses as one that gets large amounts of snow every year. There are several states at the forefront of greening their building codes (California, Oregon, Washington, Colorado), but improvements do not happen evenly across the country.

Standards Because there is no federal mandate or central agency coordinating the green building movement, there are at least thirty different local standards, in addition to several national and international ones. At the micro level, cities such as Scottsdale, Arizona; San Jose, California; and Portland, Oregon, have all created independent standards and certification/rating systems. There are also many regional systems, such as the aforementioned Built Green system in California, Washington, and Colorado, or the Green Home Program of New York. Many of these resources are not necessarily rating systems or standards that are checked by a governing body, but are more guidelines and resource aggregators to assist builders and consumers.

National Standards There are four well-recognized standards that exist today in the United States. They are the ENERGY STAR ratings, the National Association of Home Builders (NAHB), Earth Craft, and Leadership in Energy and Environmental Design (LEED). While LEED is rapidly becoming the defacto international standard, each of the others is worth examining.

• ENERGY STAR. This rating program is run by the Department of Energy and the Environmental Protection Agency. The stated goals of the project are to help citizens save money and protect the environment through energy efficient products and practices.15 Products are given ENERGY STAR ratings based on the amount of energy they save compared to standard products, while new homes can earn an ENERGY STAR rating if they are at least 15% more efficient than homes built to the 2004 International Residential Code.

• NAHB. This rating system is targeted primarily at single family homes, with a focus

on the mainstream home builder. There is no formal certification process associated with this standard, however there is a strong affiliation with many trade organizations, and it is well know throughout the building industry. NAHB does not yet have a specifically “green” strategy, and will host a conference in 2007 to discuss how this flexible, self-rating system can incorporate green practices.

• Earth Craft. This standard is found only in the Southeastern United States. Currently, this

voluntary building standard is used in South Carolina, Tennessee, Georgia, Alabama, and Virginia. While this program is much more rigorous than NAHB’s, it still is perceived as mainly a marketing tool. There is currently only one tier of certification, and it is done via a very manageable process. The system is aimed primarily at mainstream homes (over 3000 have been certified to date), and primarily targets energy efficiency and building materials. Currently, there are no plans to expand the standard outside of the southeast.

• LEED. The Leadership in Energy and Environmental Design standard is emerging as the

leader in the field, and is becoming internationally recognized as the most robust green building standard. The US Green Building Council uses over 6,300 members and member

15 “About Energy Star”; http://www.energystar.gov/index.cfm?c=about.ab_index

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organizations to form committees to build this comprehensive certification system. The multi-tiered standard was initially created for commercial spaces, and is currently undergoing a pilot program for neighborhood development and residential buildings. It has been used in all fifty states and adopted by twelve. Although the process management is a bit cumbersome, it uses third party verification and validation to ensure that the standards are met. LEED encompasses much of the ENERGY STAR efficiencies and savings, and uses them as points towards the overall score. The comprehensive standard can be expensive, but it is also what has been responsible for bringing the concept of “green building” to the mainstream.

International Standards While the US has taken the lead in green building standards, many other countries have begun to create their own. The most innovative standard outside of the US can be found in the United Kingdom, started by BRE. The BREEAM (BRE Environmental Assessment Model) is a commercial product that was created in 1988.16 The program has already certified over 65,000 buildings, and has recently rolled out its “EcoHomes” program for residential buildings. Other countries, including Canada, Australia, India, and Japan all have a national green building standard as well. In each of these cases, the standard has been based either solely on LEED, or on a combination of LEED and BREEAM. Local exceptions exist, mainly caused by lack of resources or lack of certain products in the local market. For example, India’s system does not assign points for using alternative energy because there is no commercially available product for the general populace that can supply the needed power.

Summary While LEED is the most comprehensive standard, it also is currently the most expensive. Over the life of a house, the efforts taken to achieve a LEED certification will provide reduced costs, and as the market leader in certification, the overall value of the house will increase as well. Most building codes and regulations are covered in the standard, and in many places the requirements are already mandated by local ordinances.

4. Incentives for Consumers Consumers of all incomes interested in building a green home or retrofitting an existing home with green technology can take advantage of a number of incentives provided by federal, state, and local agencies. Most of these programs require the individual to submit to an audit or follow recognized standards. Governments and private organizations provide these incentives in order to improve energy efficiency in communities, reduce pollution, and provide better housing. Below are examples of incentives in North Carolina.

Lending Individuals can attain advantageous home financing when purchasing a new home that is energy efficient or when refinancing or remodeling an existing home that can be made energy efficient. These special lending options, called Energy Efficient Mortgages (EEMs), are available under the U.S. Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA) for qualified military personnel, Fannie Mae and Freddie Mac. Recognizing that energy efficient homes cost less to operate on a monthly basis than standard homes, EEM lenders offer various incentives to make mortgages more flexible. The rationale is that

16 http://www.bre.co.uk/service.jsp?id=829

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buyers can spend more on housing expenses because they are spending less on energy costs. Table 1 shows a simplified example17 to demonstrate this dynamic: Table 1: Simplified Example of Energy Efficiencies Offsetting Mortgage Payments

Older Existing Home

Same Home with Energy Improvement

Home Price (90% mortgage, 8% interest)

$150,000 $154,816

Loan Amount $135,000 $139,334

Monthly Payment $991 $1,023

Energy Bills +$186 +$93

Monthly Savings -- $61

All EEMs require that a professional home energy rater report on the home’s current and potential energy efficiency. The home energy rater inspects the homes and measures insulation levels, window efficiency, and the heating and cooling system efficiency among several characteristics. The home receives a score on a scale to 100. For homes that are already efficient, the report will provide the value of the monthly energy savings and the value of the energy efficient measures. For homes that need energy improvements, the report will list measures to improve efficiency and the resulting estimated savings. The lender then uses the home energy rating savings report to determine the specifics of the mortgage. HUD EEM mortgages allow buyers to finance energy improvements for costs up to 5% of the property’s value (not to exceed $8,000) or $4,000 – whichever is greater.18 Up to $200 of the cost of the energy rater report can be included in this total. Improvements must be cost effective, meaning they can be included in a borrower’s mortgage only if the total cost is less than the total dollar value of the energy saved over the lifetime of the improvement. The lender places the money for the energy improvements in an escrow account. After the loan closes, the improvements are installed and inspected for verification, then the money is released to the borrower. HUD places a limit on the amount of the mortgage, which may change with inflation. In Orange County, NC the maximum mortgage in 2006 was $200,160 for a single-family home. The final loan amount can exceed the maximum by the amount of the energy efficient improvements. For homes with existing energy efficiencies, HUD EEMs allow lenders to stretch the debt-to-income qualifying ratios, allowing a larger percentage of the borrower’s monthly income to be applied to the monthly mortgage payment. The stretch gives the buyer more borrowing power based upon the same income. VA EEMs are very similar to HUD EEMs. The only difference is the amounts that can be financed. Under the VA program, up to $3,000 in upgrades may be financed solely on documented costs (rather than $8,000 under HUD). Up to $6,000 may be financed if upgrades are deemed cost

17 Example taken from Pacific Gas and Electric Company. (1996). Energy Efficient Mortgage Home Owner Guide.

Reproduced by U.S Department of Housing and Urban Development. Retrieved December 6, 2006 from http://www.hud.gov/offices/hsg/sfh/eem/eemhog96.cfm.

18 U.S Department of Housing and Urban Development. (October 26, 2001). FHA Energy-Efficient Mortgages. Retrieved from December 6, 2006 from http://www.hud.gov/offices/cpd/energyenviron/energy/apply/fha.cfm.

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effective. Additionally, only qualified military personal, reservists, and veterans are eligible for this program. Fannie Mae and Freddie Mac EEMs vary by lender. Unlike the Federal EEMs, these loans do not have mortgage limits. Moreover, energy improvement of up to 15% of the value of the home for existing and 5% of the value for new homes can be financed. In North Carolina, Greater Bay Funding, HomeFirst Mortgage Corporation, Indigo Financial Group, State Employees’ Credit Union, and Wachovia Mortgage Company offer EEMs. The debt-to-income ratio stretch is determined by adding the estimated monthly energy savings to monthly income, up to a 2% ratio increase.

Tax Credits The Federal government provides tax credits to individuals who purchase certain energy efficient products. The law allows for a 10% credit for buying qualifying items. The maximum credit is $500 over two years, 2006-2007, and includes the following items: insulation systems; exterior windows or doors; metal roofs; circulating fans; furnaces; or, hot water heaters.19 The components must meet or exceed the criteria established by the 2000 International Energy Conservation Code. In addition, Federal law makes a credit available to taxpayers who add qualified solar panel systems, solar water heating equipment, or a fuel cell power plant to their residences. Individuals are allowed a credit of 30% of the investment for each of these three systems up to a maximum of $2,000. However, the fuel cell power plant credit may not exceed $500 for each 0.5 kilowatt of capacity. States also provide tax credits in order to promote energy efficiency. In North Carolina, a statue revised in 1999 and renewed in 2005 for five years provides a tax credit of 35% of the cost of renewable energy property constructed, purchased, or leased.20 The credit has several limits depending on the specific system:

• A maximum of $3,500 for residential active heating, combined active space and domestic water-heating systems, and passive heating;

• A maximum of $1,400 for residential solar water-heating system, including solar pool-heating systems; and,

• A maximum of $10,500 for photovoltaic, wind, or other renewable-energy systems for residential use.

The cost of the equipment, associated design, construction costs, and installation costs are eligible for the credit.

Local Initiatives Utilities, non-profits, and local governments provide incentives for energy efficient homes across the country. In North Carolina, utilities provide incentives ranging from loans for energy efficient equipment to six months of free dial-up internet access. A notable example is Progress Energy Carolinas. The company’s Energy Efficient Financing Program offers financing to help customers purchase heating and cooling systems, storm windows and doors, insulation, and other energy efficient products.21 Homeowners can receive loans up to $20,000 for 10 years with no collateral and 19 U.S. Treasury Department and Internal Revenue Service. IRS Newsroom. (February 21, 2006). Treasury and IRS

Provide Guidance for Energy Credits for Homeowners. IRS Press Release. Retrieved December 6, 2006 from http://www.irs.gov/newsroom/article/0,,id=154657,00.html.

20 Database of State Incentives for Renewable Energy. North Carolina Incentives for Renewable and Efficiency. Retrieved December 6, 2006 from http://www.dsireusa.org/library/includes/incentive2.cfm?Incentive_Code=NC20F&state=NC&CurrentPageID=1&RE=1&EE=1.

21 Progress Energy Carolinas, Inc. (2003). The Energy Efficiency Financing Program for energy-saving home improvements. Retrieved on December 7, 2006 from http://www.progress-energy.com/custservice/carres/financing/index.asp.

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no closing costs. The program is a partnership between Progress Energy, Fannie Mae and Volt VIEWtech. In addition, Progress Energy Carolinas offers a 5% discount off of energy bills for homeowners who have ENERGY STAR qualified homes.22 All 50 states and the District of Columbia have Weatherization Assistance Programs (WAPs) which assist low-income families who lack resources to invest in energy efficiency.23 Using funds provided by Congress, the State WAPs send qualified staff to low-income homes to test and then improve energy efficiency. Typical measures may include: installing insulation, sealing ducts, tuning and repairing HVAC systems, mitigating air infiltration, and reducing electric base load consumption. Weatherization crews also perform health and safety tests including: testing heating units and appliances for combustion safety, carbon monoxide, and gas leaks; assessing moisture damage; checking electrical system safety; replacing unsafe HVAC systems; and installing smoke and carbon monoxide detectors. WAPs create average energy savings of $218 per year and reduce a household’s annual gas heating consumption by 33%. According to the North Carolina WAP, the program serves over 3,000 families each year.24 Unfortunately, these programs are not expansive enough. According to the National Consumer Law Center, if no new poor were to arise and no weatherized low-income would ever need to be re-weatherized, it would take 100 to 150 years for all low-income units to be reached.25

Government agencies and private businesses offer a range of incentives in order to promote green building. Currently, these incentives are not organized to best affect consumer behavior. Opportunities exist for public-private or business-to-business partnerships which can better reach out consumers and offer more comprehensive benefits. 5. Incentives for Developers 26

The promotion of green residential construction is a priority at all levels of government, within state and local home building associations and utility commissions, and is the mission of many non-profit organizations. While no one would argue that interest and involvement from multiple spheres of society is unnecessary or unwanted, the end result is a complex web of incentives and benefits for builders of green homes. A developer of green residential buildings must have intimate knowledge of the incentive landscape in order to realize all the benefits for which a green project or green-oriented firm is eligible. This section provides an overview of the sources and types of incentives that are available to green housing developers, and highlights notable programs. Sources are divided into two groups: governmental and non-governmental – with each group providing a different set of benefits that are based on its particular expertise or capacity.

22 Progress Energy Carolina, Inc. (2006). Energy Efficiency Program/Energy Star. Retrieved December 7, 2006 from

http://www.progress-energy.com/custservice/carres/energyhome/index.asp. 23 Weatherization Assistance Program Technical Assistance Center. (November 27, 2006). Weatherization Assistance

Program Overview. Retrieved December 7, 2006 from http://www.waptac.org/sp.asp?mc=what_overview_program.

24 North Carolina Community Action Association. (2002). Weatherization Overview. Retrieved December 7, 2006 from http://www.nccaa.net/weatherization.htm.

25 Colton, Roger D. Energy and Low-Income Housing: Part I, Energy Policy Hurts The Poor. National Housing Institute. Issue #76, July/August 1994. Retrieved on December 7, 2006 from http://www.nhi.org/online/issues/76/energy1.html.

26 A comprehensive summary of these and other federal and state governmental incentives can be found at http://www.dsireusa.org/summarytables/FinEE.cfm?&CurrentPageID=7&EE=1&RE=1. The research conducted and analysis presented does not account for the many state-level incentives for the installation of alternative energy generation systems (e.g. solar and geothermal), which are often incorporated into green residential buildings. The language of most of the incentives that were reviewed indicated that only the consumer that ultimately purchased the home was eligible to receive grants or tax credits. There may be circumstances in which the developer could directly or indirectly (through a higher sale price) receive state tax incentives. The research and analysis does not account for incentives for green commercial, green neighborhood, or brownfield development.

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Governmental Two things are certain with government: taxes and bureaucracy. Savvy governments at least realize that a reduction of these two certainties can be a powerful stimulus for action. To promote green building practices, governments at all levels are providing financial incentives and/or reducing bureaucratic delay around residential green construction.

Source: www.dsireusa.org

State does not offer tax or grant incentives to developersState offers tax or grant incentives to developers

Puerto Rico

D.C.

Source: www.dsireusa.org

State does not offer tax or grant incentives to developersState offers tax or grant incentives to developers

Puerto Rico

D.C.

Puerto Rico

D.C.

The only Federal tax program exclusively for developers was included in the Energy Policy Act of 2005. It provides developers with tax credits of up to $2,000 for an energy-efficient home built and sold in 2006 and 2007. The amount of the tax credit is dependent on the type of home and level of energy efficiency achieved by the home – a site-built home that achieves a 50% reduction in energy use relative to the International Energy Conservation Code, for example, is eligible for the full credit. This tax credit program is currently set to expire at the end of 2007. Although most states have many incentives for owners or renters of green homes, only a few states have incentives specifically for the builders, developers, or contractors that construct green residences. Maryland provides tax credits for incorporating alternative energy generation capabilities into green homes or for a residential green project as a whole if it is on a brownfield site or in a priority funding area. Illinois provides housing developers with grants of up to $4,500 for green low income housing construction. Michigan and New Jersey have grant programs that provide developers up to $8,000 and $2,900 respectively, for a subset of ENERGY STAR rated homes constructed in the state each year. Finally, New York has a pool of grant money set aside to help fund technical assessments of energy-efficiency measures in building designs and green residential developers can receive tax credits for up to $7.50 per square foot for eligible green apartment building expenses. Many of the state grant programs are competitive and only lightly funded, thus limiting their reach and potential. Moreover, states without these programs should recognize an underutilized opportunity to directly incent developers to construct green residences. This is especially appropriate for rural or less wealthy areas of states, given that most local governmental incentives are concentrated in densely populated areas with larger tax bases.

Figure 1: State Government Tax and Grant Incentives for Green Residential Developers

Owning to the notion that all real estate is local, developers are primarily being incented at the county and city level. These levels of government are not relying on tax breaks; rather most incentives are aimed at educating developers on green practices and/or appealing to a builder’s innate sense of time equaling money. Programs can be complex and differ dramatically in each locality. Nevertheless, a developer should consider the time spent getting to understand local incentives for green residential construction a solid investment. King County (WA) recently launched a program aimed specifically at green developers. Green residential developers are now eligible to receive up to $25,000 to help offset incremental design costs and LEED registration and certification fees. An additional carrot that will help mitigate costly bureaucratic delay is that green residential developers will receive expedited building permit reviews. Sarasota County (FL), Marin County (CA), Arlington County (VA), the County of San Diego (CA) and the cities of Chicago (IL), Boulder (CO), Cincinnati (OH), and Scottsdale (AZ) are among the many jurisdictions across the country that offer some combination of expedited building permits, technical assistance, or grant funds to developers of green residences. Green residential developers clearly stand to benefit from activity in these progressive jurisdictions. Concrete data on the number of jurisdictions that have adopted incentive programs for green residential development does not exist, but it is safe to conclude that widespread adoption has yet to occur. Green residential developers that operate in jurisdictions without incentives stand to benefit from lobbying or other efforts that encourage adoption of similar incentives.

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Non-governmental While governments often partner with local non-governmental organizations to provide technical or educational aspects of their green incentive programs, significant activity also occurs independent of government involvement. Non-profit organizations and trade associations offer incentives to green residential developers largely in the form of access to intellectual capital, networks, or public recognition. Some utilities have made the connection between their operational model and the energy efficiency of the residences they serve. Utilities can provide monetary incentives, as well as offer technical assistance to developers of green residences. Many non-profit organizations have the promotion of green building as their mission. Non-profits are often independent experts whose tighter budgets typically require that they provide developers access, as opposed to capital. Access can be to a variety of opportunities: consulting and technical services, inclusion in directories of green businesses, education and training, certification, marketing support, or affiliation with a well-known local standard setter. Earth Advantage in Portland, OR is a self-sustaining 501(c)3 that bills itself as the “Northwest’s premier green building program” for healthy homes. Member companies gain unparalleled access to Earth Advantage’s expertise, consumer brand recognition, and a large network of other green businesses. Similar organizations exist across the country and should be one of the first places a green residential developer turns for expertise and local market insight. Green developers will often establish their own trade or home builder associations (HBA) to facilitate knowledge transfer, networking, and business development opportunities around green building. Although HBAs offer many of the same benefits enumerated above, they have the advantage of being established and managed by member companies. As a consequence, they tend to have higher funding levels, little competition, and can influence the entire chain of development – government regulation, consumers/public, developers, and municipalities – whereas non-profits tend to focus on one or two of the links in the chain. California Green Builder and Built Green (Denver, CO) are examples of a state-wide and a local HBA that focus on serving the needs of residential green developers. The final non-governmental sources of incentives to developers of green residential buildings are utilities and utility commissions. Utilities have access to funds, technical expertise, and their own incentives for reducing energy use in their service areas. Utilities typically secure funds for such programs through voluntary or mandatory premiums charged to their customers. Incentives most often take the form of rebates, both to developers and consumers. Developers of homes in Pacific Gas & Electric’s (PG&E) (CA) service area that qualify for inclusion in the statewide ENERGY STAR New Homes program are eligible to receive rebates of up to $500 per home. PG&E also provides training courses to builders, developers, and contractors on energy efficient design, products, and specifications. Most of these courses are free or carry a nominal fee. Alaska’s Golden Valley Electric Association offers rebates of up to $300 to home builders that incorporate electrical energy efficiency measures during construction. Much like the state programs described above, utilities and utility commissions are large providers of incentives to consumers who integrate energy efficiency into their homes. A large opportunity exists to incent developers, builders, and contractors directly for green residential construction.

Summary of Developer Incentives Individually, the incentives to developers of green residential buildings may seem too insignificant to dramatically affect the supply of newly-built green homes. While far more incentives are offered to home owners or tenants who undertake energy efficiency projects, governments and non-governmental organizations are starting to understand the developers’ role in this issue. Efforts to incent developers to build green homes are well-designed for they directly address two areas that developers consider paramount – the bottom line and the development timeline. Many incentives are well-funded and scalable for the developer. Once expertise is developed and green principles operationalized, a builder can reap the benefits of green development with successive residential projects. It can be reasonably expected that the pervasiveness of incentives to developers of green

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residential buildings will continue to increase. Developers are strongly advised to become familiar with the incentives for which they could be eligible, as well as keep abreast of new incentives that may appear in the markets in which they operate.

6. Alternative Energy Technologies Green building strategies often include the deployment of renewable energy systems and the incorporation of energy efficiency tactics. This section looks at the feasibility of four alternative energy solutions for homeowners and developers: geothermal technologies, solar panels, energy efficiency, and small-scale wind turbines.

Geothermal Heat Pumps Residential geothermal heating and cooling systems are slowly gaining acceptance in the United States. Geothermal technology utilizes the earth’s temperature to heat and cool air and water in homes. The systems are incredibly energy efficient and dependable. They concentrate natural heat rather than using fossil fuels. In addition, they are noiseless and virtually maintenance-free. However, the high price of installation and lack of consumer knowledge results in geothermal systems use only growing 2-3% annually.27

Obstacles to Mass Deployment:

• Cost. Consumers interested in installing residential geothermal heat pump systems must bear a high initial price. A typical system used to heat a family home costs approximately $13,500.28 The payback period can be relatively fast, especially if the system being replaced is outdated and energy inefficient. The energy savings equal the initial investment in 2 to 10 years.29

• Consumer Knowledge. The average consumer is unaware that geothermal technology can

be used in a residential setting. Only 750,000 homes in the US use geothermal systems, equaling less than 1% of the entire heating and cooling systems market.30 As a result, few homeowners have exposure to the technology. If geothermal technology use is to increase, consumers need to envision geothermal technology working in their setting and how it benefits them environmentally, socially and financially.

• Installation. Geothermal pump systems need to be installed by a highly qualified and

certified contractor. The integrity and efficiency of systems depend on proper installation. Engaging a qualified individual could be intimidating for homeowners. In addition, installation requires a large portion of land where coils that trap the earth’s temperature can be buried. Landscaping after installation may increase the cost of the project.

Feasibility for Individual Homeowners. Retrofitting homes on an individual basis can be expensive, but costs can be recouped quickly. Pumps carry the ENERGY STAR label providing access to alternative financing for geothermal installation. The cost is easier to bear when constructing new homes because the installation cost can be rolled into a 30-year mortgage. Again, open land and an educated, available contractor will be required. Feasibility for Large-Scale Developers. Adding geothermal technology to an entire community will add a premium to each home. However, this premium will be far less than the premium for installation on one home. Developers who wish to install geothermal pump systems need to be convinced that consumers will absorb the higher cost of the homes. If consumers are unfamiliar with geothermal pump systems, it becomes the responsibility of the developer’s sales team to 27 http://www.homeenergy.org/archive/hem.dis.anl.gov/eehem/94/940703.html 28 http://powermarketers.netcontentinc.net/newsreader.asp?ppa=8kowu%5DZmoljnxyZUgc%22EN%26bfel%5D! 29 http://www.eia.doe.gov/cneaf/solar.renewables/rea_issues/html/geotsurv.html30 http://powermarketers.netcontentinc.net/newsreader.asp?ppa=8kowu%5DZmoljnxyZUgc%22EN%26bfel%5D!

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educate the consumer on the benefits of geothermal technology. Because of this challenge, developers may choose to stay away from geothermal technology until it is more widely used and accepted. One benefit: it is much easier and faster to install geothermal systems in new home construction during lot preparation and subdivision.31

Solar Power Residential solar technology has been in use since the 1970s. Acceptance has grown and technology has improved in leaps and bounds over the last 30 years. Today, over a million homes use solar technology of some kind.32

Obstacles to Mass Deployment:

• Equipment. The equipment used to harness solar energy has been considered unattractive for much of its history. Until recently, solar panels were large and had an unconventional appearance. The wide use and acceptance of solar technology has made the look of the panels more acceptable. In addition, advances in solar technology have produced more attractive forms of capturing solar power. Panels are now smaller and mimic the appearance of skylights. Solar shingles are also available in lieu of panels.

• Cost. Residential solar systems responsible for complete home power can cost $10,000 to

$20,000 to install.33 Solar hot water systems alone can cost $4,000.34 Consumer savings as a result of solar installation are difficult to estimate because conventional electricity cost and incentives differ from state to state. For example, the cost of electricity is extremely high in New York, making solar systems more attractive in that state. Incentives are managed by each state resulting in different tax credits, rebates and loan programs across the nation.

• Installation. Most solar systems are difficult to install and consumers will need to hire a

professional. It is possible for a homeowner with experience in roofing, plumbing and carpentry to install a solar hot water system. In some cases, the solar system interacts with the electrical grid. In these instances a certified electrician will need to perform the installation. Solar systems are dependent on directionality and slope of the roof. Occasionally, older homes do not meet the directional requirements needed for the solar panels. In addition, these metrics may be difficult for consumers to understand and assess.

Feasibility for Individual Homeowners. Homeowners have a surprising number of options and flexibility within solar systems. The systems can range from water heating to entire home power. Systems can even connect to the electrical grid, feeding back excess power generated. This rolls the consumer’s electric meter backward, reducing their electric bill and sending energy back to the grid for use by other consumers. Although incentives vary state to state, programs have been available for many years. Information about incentives is available and generally easy to understand. Solar technicians are available in most communities across the nation. One disadvantage of retrofitting homes is consumers tend to wait until current systems disintegrate before rolling over to solar technology rather than replacing healthy, existing systems. Feasibility for Large-Scale Developers. Buyers are more apt to choose solar powered homes when they can roll the cost of installation into a 30-year mortgage. This is an advantage for developers who are building solar neighborhoods. Large installations of solar power demonstrate economies of scale. The larger the installation, the lower the cost per system.35 In addition, the cost of installing a solar system in a new home is lower than the cost of retrofitting a home.36 Developers also get to

32 http://www.csmonitor.com/2003/0903/p12s01-lihc.html 33 Ibid. 34 Ibid. 35 http://www.lbl.gov/Science-Articles/Archive/sabl/2006/Jan/07-photovoltaics.html36 Ibid.

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maximize the benefits offered by incentives. Tax credits, rebates and loan programs can bring equity into each large-scale project.37

Energy Efficiency Strategies Increasing energy efficiency is the low-hanging fruit for homeowners seeking to reduce their contribution to pollution from the burning of fossil fuels. Homeowners can improve efficiency by taking a wide range of actions to retrofit their homes. At the bottom-line, an energy efficient home has a tight building envelope to prevent air seepage in and out of the residence; maintains a comfortable air temperature without overdependence on artificial conditioning; and, uses low impact methods to conserve natural resources. There are several strategies that can achieve these goals without adding significant cost to design, as long as they are considered in the early phase of project planning. Generally, green features become more costly in subsequent stages of the housing development process. But because many the following tactics do not necessarily depend upon each other, homeowners can work at their own paces and within their own budgets, making retrofitting for energy efficiency a good entry point for most homeowners. A representative list of tactics follows. It is by no means all-inclusive.

• ENERGY STAR products. The U.S. government developed the ENERGY STAR label for products that require significantly less energy than their counterparts with equal performance levels. Products range from kitchen appliances to consumer electronics, light bulbs and even entire homes. “If every household and business switched to ENERGY STAR products, over the next 15 years the carbon dioxide reductions would be equivalent to taking 17 million cars off the road for each of those years. And the country would save $100 billion in energy bills.”38

• Improving insulation. Homes that hold inside temperatures more effectively require less

energy for heating and cooling. Replacing or adding to existing insulation in walls is one tactic. Sealing cracks around windows and doors that generate drafts is another. Replacing old windows with more efficient windows can also improve efficiency. “Windows account for approximately 5 percent of all building energy use, according to the U.S. Department of Energy.”39

• Daylighting. Daylighting seeks to reduce the need for artificial light. Windows, skylights

and open floor plans can enable homeowners to limit artificial light in the home, thereby reducing the need for electricity. Ensuring a southern-facing orientation of the home is the best way to maximize natural daylighting, with appropriate shading on the southern windows to prevent excessive sun exposure in the summer.

• Design elements. Passive solar heating uses south-facing windows to allow sunlight and

the corresponding heat to enter the home in the winter. The sunlight heats masonry or water tanks that then slowly release the heat into the air during the day. Good passive solar design also blocks excess heat from entering the home during the summer by using awnings, shutters or other devices for shade. Another strategy for improving energy efficiency utilizes the earth to improve constancy of indoor temperatures. Homes built partially underground or into the sides of mountains or hills maintain a more constant temperature.

Obstacles to Mass Deployment:

• Cost. The retrofitting of existing homes to promote energy efficiency clearly requires additional investment on the part of the homeowner, but cost is not a major deterrent. There

37 http://www.csmonitor.com/2003/0903/p12s01-lihc.html 38 http://www.ucsusa.org/clean_energy/renewable_energy_basics/energy-star-label-saves-energy-and-money.html39 http://www.ase.org/section/topic/windows/

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is a wide range of tactics, enabling homeowners to select the actions that offer the greatest improvement for their budgets. Homeowners can take small steps, like replacing dead light bulbs with compact fluorescent bulbs that require very small investments. Cost is not a significant issue in new construction.

• Lack of knowledge. The major obstacle is a lack of widespread knowledge on the costs and

benefits of pursuing energy efficiency. Historically, residential energy costs are very small as a percentage of household income. In 1997, the average household spent 2.3% of its income on residential energy.40 Reducing residential energy needs has not been a priority for homeowners. With prices rising sharply over the past decade, however, spending on residential energy has increased 33% for the average household,41 creating a more hospitable environment for discussions about reducing energy usage in the home. As fuel costs continue to rise, homeowners will see greater benefit to improving the energy efficiency of their homes. There is a wealth of available information on the topic. The challenge is getting it into the hands of homeowners, builders, general contractors and large-scale developers.

Feasibility for Individual Homeowners. Energy efficiency is highly feasible for individual homeowners. The range of available tactics allows homeowners to select the actions that offer the greatest improvement for their budgets. Purchasing ENERGY STAR products and improving insulation are easy for homeowners looking to retrofit existing homes. Increasing daylighting and the introduction of design elements like passive solar remain feasible for retrofitting, but will prove more challenging and costly. Undoubtedly, retrofitting for some design elements will be cost-prohibitive. Energy efficiency is most effective when multiple tactics are incorporated into an integrated design, making new construction ideal for implementing energy efficiency strategies. An integrative design improves payback for any additional construction costs. Further, additional costs are rolled into the home mortgage. New construction is only constrained by budget and the knowledge and abilities of the contractors and designers. Feasibility for Large-Scale Developers. New residential developments are ripe for the incorporation of energy efficiency strategies. Any and nearly all tactics are available to the developer during the planning of the new development. Additional costs are minimal when incorporated into the blueprints. Further, developers can differentiate their homes in the marketplace by incorporating energy efficiency strategies.

Wind Energy Wind is the fastest growing renewable electricity source in the world.42 The vast majority of this electricity is produced by utility companies in large wind farms with multiple 100-300 foot tall turbines. Microturbines make wind energy accessible on a much smaller scale for residential homes. When compared to other alternative energy sources for residential needs, however, wind is less feasible for mass deployment.

Obstacles to Mass Deployment:

• Variability. “A wind turbine should experience year-round average wind speeds of at least 12 mph” to be economically practical.43 This is a severe limitation to the effectiveness of wind energy because the technology does not yet exist to enable the storage of wind-generated electricity. Homeowners who require constant access to electricity must have

40 www.balancedenergy.org/docs/ABEC%20Member%20Documents/Energy%20Price%20Impact%20Study.pdf 41 Ibid. 42 http://www.worldpress.org/Americas/2482.cfm43 http://www.energy.iastate.edu/renewable/wind/wem/wem-08_power.html

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access another source of electricity. While new technology enables turbines to be more responsive to greater variability in wind gusts, the technology is not yet available in consumer turbines.

• Cost. Installing a residential wind turbine can be a costly proposition. Small turbines range

in price from $6,000 to $22,000, depending on the size and service agreements with the manufacturer.44 A wind turbine is also a long-term investment. The payback period can range from six to fifteen years.45 This is a hefty investment for a system that cannot guarantee consistent access to electricity without additional sources.

• Aesthetic Concerns. Wind turbines undoubtedly alter the skyscape. Aesthetic impacts have

stalled the construction of virtually pollution-free utility scale wind farms in places as environmentally progressive as Massachusetts and Vermont. While some view utility scale turbines as majestically beautiful, microturbines do not convey the same magnificence. Some view microturbines as downright ugly.46 Wind turbines must exist 30-100 feet of the ground, clearly generating potential eyesores in neighborhoods.

• Installation. Installing a wind turbine requires similar skills and expertise as solar panel

installation. Working with the home electrical system and connecting to the existing utility grid requires a trained and licensed professional.

Feasibility for Individual Homeowners. Wind is not feasible for most individual homeowners. Cost and the variability of electricity supply are major deterrents. A microturbine currently requires supplementation with solar panels, another generator or a connection to the grid to ensure constant supply of electricity. As long as energy from utilities remains relatively inexpensive, the cost of wind turbines will remain unattractive until new technology enables electricity storage or energy generation from lighter, less-consistent winds. Further, aesthetic concerns could stymie a homeowner’s deployment of a turbine if neighbors and local regulators seek to block permitting. Rural homeowners and farmers are potential exceptions. Where aesthetic concerns are not as great and the wind blows more consistently, installing a microturbine will be easier and make more economic sense. These users will still require an alternative strategy for producing electricity on windless days. Feasibility for Large-Scale Developers. Wind is more feasible for new, large-scale residential development. In places where the wind blows steadily enough, microturbines could be part of an effective alternative energy system. Wind variability still requires supplementation, but the costs can be spread evenly across all the homes in the development. Aesthetic concerns could still be an issue, but a large-scale developer may have more leverage in the permitting process. Further, the turbines can be integrated into the design of the home development so as to minimize negative aesthetic impacts.

44 http://www.awea.org/faq/rsdntqa.html45 http://www.awea.org/faq/rsdntqa.html46 Conversation with Brad Wood., Project Manager, Cherokee Mainstream GreenHome on November 12, 2006.

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Renewable Energy Matrix The thumbs indicate how each factor affects feasibility of implementation.

= Positive = Neutral = Negative

Cost Installation Consumer Awareness Variability

Environ. Reward

Cost savings over time

Feasibility – individual

homeowner

Feasibility – large

developer

Solar Power

Wind Power

Geothermal Systems

Energy Efficiency

Table 2: Renewable Energy Matrix

7. Green Building and Affordable Housing While “green” as a building methodology has gained significant ground in the conventional home production market, it has played a more muted role in affordable housing development. The US Department of Housing and Urban Development estimates that 1.3 million people live in publicly subsidized housing.47 Additionally, one of the most highly utilized affordable housing subsidies – the Low Income Housing Tax Credit program (LIHTC) – has supported the construction of over 2 million affordable rental units since its inception in 1986.48 Imagine the impact of greening the national affordable housing inventory. Because the first point of focus with green building tends to be on the innovative technologies, affordable housing developers often dismiss greening as a feasible element of affordable housing construction. However, the most basic tenants of being green stem from having a strong design methodology that looks at a residential dwelling as a system of interrelated components and processes.49 It also evaluates a home as an integrated part of a larger community that promotes the

47 “Greening Affordable Housing”, Environmental Building News, Vol. 14, No. 3, BuildingGreen Inc., March 2005. 48 “An Even Greener Plan for Affordable Housing: How States are Using the Low Income Housing Tax Credit To

Advance Healthy, Efficient and Environmentally Smart Homes”, James Tassos, Enterprise Community Partners, August 1, 2006.

49 Advanced Energy, http://www.advancedenergy.org/buildings/about/.

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use of public transportation and walkability. A well-designed, affordable, green home generates cost savings for the occupant, reduces health risks (and thus medical costs), improves quality of life and provides a more durable building that requires less long-term maintenance expenditure. To date, non-profit community development corporations have been the pioneers of greening affordable housing, but the convergence of several key market forces has underscored both the necessity and feasibility of greening affordable housing. The urgency of creating higher quality affordable housing stock has been heightened by increased investigation into the impact of housing on the health of low-income individuals and a realization, by environmental advocates, that the poor are disproportionately affected by environmental concerns. Moreover, because the financing subsidy regime for affordable housing is already highly regulated, there are ready frameworks for the implementation of green regulation. Lastly, advancements in building science and green building standards have brought greening to a new level of efficacy. With the prominence of green building standards such as LEED, the performance of green buildings is becoming more fact rather than fiction, and the marketplace has started to view greening as a less risky proposition.50

Employing Green Building Principles in Affordable Housing Some of the particular challenges of incorporating green building into affordable housing revolve around the fact that:

• Most Federal subsidies target multi-family affordable housing projects that are rental. Therefore, the decreased utility costs resulting from green features in the dwelling unit are typically accrued by the occupant and not the developer. While the developer (turned property manager) can reap financial benefit in the form of more durable buildings requiring less maintenance, in general, it takes longer for the affordable housing developer to see any strong economic benefit from going green.

• For-sale, affordable housing developers are particularly focused on keeping costs low

because they cannot bake green cost premiums into the price of the home. Thus, the focus of applying green tenets to affordable housing development should concentrate on transforming building philosophy and processes rather than technology implementation. Early design decision making – drawn from the expertise of all the relevant parties (e.g., architects, site planners, contractors, engineers, subcontractors, etc.) – is the foundation for the cost-effective greening of affordable housing. As discussed in Section 5 of this primer, building green does not necessarily entail investment in a geothermal pump or an active solar system, but rather, it involves planning smarter buildings that simply work better. In the affordable housing arena, a focus on energy efficiency strategies is the most prudent approach and can go a long way toward improving the quality of affordable housing stock.

Benefits to the Resident Housing is considered affordable if: (1) the total living expenses (including mortgage, utilities, insurance, etc.) comprise no more than 30% of the household income; or (2) the dwelling is affordable to individuals earning 80% or less of area median income. For these residents, the benefits of greening affordable housing are significant.

• Energy savings. Energy costs as a percentage of a low-income person’s income are very high, and utility bills are one of most common reasons for people falling short on rent or mortgage payments. Enterprise Community Partners estimates that low-income

50 Conversation with James Royster, Program Director, Green Communities Enterprise Community Partners, Inc on

December 12, 2006.

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individuals spend 17% of their income on energy costs.51 Green building has the potential to reduce these costs up to 50%.52

• Health improvement: Approximately four million children in the US have asthma, and 40%

are related to residential exposure. The incidence of asthma is 40-50% higher amongst minority children in urban areas,53 and medical bills are the primary cause of most bankruptcies. Green design reduces harmful residential exposure by decreasing moisture and thus mold, providing better air circulation, preventing pest infestations and using healthier materials that prevent introduction of harmful chemicals into the indoor environment, such as VOCs.

• Better quality of life: In well designed, walkable communities, with proximity to mass

transit, low-income residents have greater access to job opportunities, are encouraged to exercise and rely less on car transportation, which can cost up to $0.40 per $1 of income.54

• Decreased long-term home repair expenditures: Energy savings are relatively easy to

quantify, but low-income homeowners can also benefit from the use of more durable materials that reduce maintenance and replacement costs for the home. Developers of affordable rental housing can also enjoy the same benefit when their properties revert to asset management post-construction.

Cost and Benefit to the Developer A recent study completed by New Ecology Inc. (NEI) measured and compared the costs of 16 green affordable housing projects. The projects did not use sweat equity (i.e. volunteer labor), and at least 80% of the units had to be reserved for low- to moderate-income households. Excluding one outlier project, NEI data shows a relatively minimal green premium of 3.72% of total development costs on average (2.98% without the photovoltaic panels, which are very pricey). The highest of these was 9.09% (or $9,700 more per unit in net present value (NPV) terms), but this dropped to 4.68% if photovoltaic panels were excluded.55

Perhaps one of the most significant factors contributing to the increased cost of construction is lack of familiarity with green building principles amongst construction professionals. This lack of knowledge may require upfront soft costs to either educate the contractors or to pay a premium to hire contractors familiar with green building. Additionally, the education process can add time to the development schedule, and in real estate, time is money. As the field matures, though, and the industry develops a stronger experience base, the costs associated with construction delays will be minimized. To mitigate these upfront costs of green building, developers need to understand the landscape of incentive programs, but they can also focus on developing mixed-income projects. The market rate portion of the project can help offset some of the costs of the affordable piece, and in so doing, the developer will also be creating more diverse neighborhoods.

51 Marketing materials for Enterprise Community Partners’ Green Communities Program,

http://www.enterprisecommunity.org/resources/green/index.asp. 52 “Affordable housing goes ‘green’”, Apartment Professional, March/April 2005,

http://www.enterprisefoundation.org/resources/green/downloads/AffordableHousingGoesGreen.pdf. 53 Marketing materials for Enterprise Community Partners’ Green Communities Program,

http://www.enterprisecommunity.org/resources/green/index.asp. 54 Ibid. 55 “The Costs and Benefits of Green Affordable Housing”, New Ecology Inc., 2005. One project’s costs (Erie Ellington)

totaled 18.33% less than comparative conventional affordable housing. However, this was excluded from the averages referenced above because it was the only instance in which the cost of the green project fell below conventional affordable.

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The same NEI study also demonstrated that in 11 out of 16 cases, the benefit to the developers outweighed the costs of implementation. NEI used a life-cycle approach (see Figure 2),56 in which the costs of operating the building for the long term were factored into the NPV equation along with the upfront construction costs. The NPVs of the cost benefit to the developer ranged from $34,764 above costs to $9,730 below, where a NPV above costs indicates that the value of the benefits exceeded the costs. A developer’s place on this broad spectrum depended largely upon two things: (1) if the developer had a long-term interest in the building (e.g., it is a rental property versus for-sale); and (2) if the developer is responsible for utilities costs.57 In addition to these financial benefits, developers can inure other benefits from building green because in many cases, greening will enhance the developer’s standing in the competitive LIHTC allocation process. In the affordable housing arena, though, where the majority of the projects are rental housing, the pie of benefits is disproportionately allocated to the resident of the affordable unit. The occupant does not incur any of the upfront construction costs but is the group that typically enjoys the benefit of utility cost savings. Even in the case of for-sale affordable housing, the owner usually wins out over the developer because the developer is unable to recover green construction premiums by boosting the sale price of the home.

Figure 2: Life-Cycle Approach to Cost-Benefit Analysis

Incentive Programs and Standards for Greening Affordable Housing As is the case in many parts of the affordable housing world, nonprofit organizations are providing the incentives to encourage innovation. Two pioneering nonprofits in particular have paved the way for greening affordable housing. Enterprise Community Partners’ Green Communities Program (GCP). Over five years, GCP will help place $555 million in capital to build more than 8,500 environmentally healthy homes for low-income families that meet GCP’s Green Communities Criteria. GCP is similar in purpose and form to LEED, but GCP specifically targets developments for low-income residents. Additionally, GCP’s criteria are focused heavily on energy-efficiency strategies. Developers whose project plans meet the criteria can receive assistance in the form of grants, low-income housing tax credit (LIHTC) driven equity and low cost financing, to help defray the costs of design, planning, charrettes, predevelopment and construction for a green affordable housing development.58 Launched in October 2004, GCP has far exceeded its one year targets, with green developments in 21 states, creating 4,300 environmentally efficient homes for low-income families via $179 million in grants, loans and equity. Based on the 4,300 green units underway, cost premiums are between 2-3% (or $2,000-5,000 per unit) in a multifamily development. Premiums for single family homes tend to be higher. Each of these homes will use 7,000 fewer gallons of water and will save $350 in energy bills per home, saving a grand total of 30 million gallons of water and $1.5 million in energy costs per year.59

One of Enterprise’s specific goals through the program is to help re-shape state level affordable housing policy by influencing how states distribute their annual allocation of LIHTC. LIHTC is the single largest affordable housing subsidy. Each year, LIHTCs are allocated to state housing finance agencies (HFAs) by the Federal government on a per capita basis. In turn, HFAs distribute the

56 Diagram reference, Ibid. 57 Ibid. 58 See http://www.enterprisecommunity.org/resources/green/index.asp for more information about GCP. 59 Hardcopies of marketing materials for the Green Communities Program.

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state’s LIHTC allocation to affordable rental housing developers, through competitive criteria set forth in a HUD-approved Qualified Allocation Plan (QAP). One of Enterprise’s missions via GCP is to influence the criteria set forth in these state QAPs, and to encourage HFAs to collaboratively fund green affordable housing projects. Through GCP’s first year efforts, more than 10 states have included green policies and criteria in their QAPs.

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2001 2002 2003 2004 2005 2006 (est.)

x

Advanced Energy’s SystemVision. This program looks at a house as a system with interdependent components, and lays out specific, certification criteria for ensuring an energy efficient home. Affordable housing developments in North Carolina committed to SystemVision certification, may receive building grants of $4,000 per green home from the NC HFA. Projects must meet rigorous quality control standards administered by Advanced Energy staff. The upgrades to meet SystemVision standards total approximately $1,700, and the cost of the Advanced Energy quality control check is $1,050. Since its inception in 2001, over 1,000 homes have been SystemVision certified, in conjunction with 56 affordable housing building partners.60 Figure 3: Homes Certified via SystemVision The unique aspect of SystemVision is that the program not only ensures construction of affordable green homes, but it also ensures efficient use of the home through its Energy Use Guarantee Program. For the first two years of ownership, if the heating and cooling costs of the house exceed a pre-calculated “Guaranteed Usage” amount, Advanced Energy will pay the difference, provided that the homeowner’s energy consumption pattern has been prudent,61 taking into account any upward adjustments to utility rates. The immediate benefit of the guarantee program is that is expresses the cost savings of greening in dollar figures that the consumer can easily grasp, and in the long-term it helps change individual behavior. To date, the reported payout to homeowners has been a mere $2,764.12 for the 500+ homes built by 2005.62 In addition, because SystemVision homes meet US EPA ENERGY STAR Homes standards, owners receive 5% off of their utilities from Duke Energy and Progress Energy. Expected Long-Term Accomplishments. Recently, Enterprise and Advanced Energy collaborated to further enhance their abilities to influence affordable housing building methodologies on a national scale. Enterprise’s GCP criteria in combination with SystemVision’s quality control component will introduce a comprehensive green building standard for affordable housing developments nationally. Together, these organizations hope to create a base of trained building professionals, and to capture the hard facts (cost, health, energy savings, etc.) that support the emotional side of the green affordable housing argument.

Recommendations for Promoting the Greening of Affordable Housing There are three unique issues areas that pose distinct challenges for wider scale acceptance of green building within affordable housing development: (1) Narrow scope of loan underwriting. Permanent loan underwriting is based on the price of the house or development, and does not take into account the longer term savings that could derive from energy efficiency. Therefore, affording the loan for a green home or development is out of reach for most low-income persons or affordable housing developers. Lenders should adopt a life-

60 Conversation with Jonathan Coulter and Tracy Dixon from Advanced Energy on December 6, 2006. Data in graph

provided by Mr. Coulter. 61 See http://www.advancedenergy.org/buildings/about/systemvision_guarantee.html for the exact stipulation of the

owner’s responsibility under the Energy Guarantee Program. 62 Conversation with Jonathan Coulter and Tracy Dixon from Advanced Energy on December 6, 2006.

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cycle approach in loan underwriting, which would include the operational savings of the green home/program in the initial loan qualification process, thereby increasing the income level against which the homeowner/developer is evaluated. Some lenders have already started to do this via energy efficient mortgages in the conventional lending market as discussed in Section 3 of this primer. This trend is particularly salient for affordable housing financiers. Other lending sectors (e.g., for commercial and office construction) have started to think this way, as evidenced by the increasing number of lending to green office and commercial buildings. As more data on the success of such lending becomes more readily available, hopefully affordable housing lenders will also begin to feel more comfortable with an expansion of their underwriting methodologies. One nonprofit took this discussion a step further and created a program to help introduce flexibility into the mortgage underwriting process. The national offices of the Local Initiative Support Corporation (LISC) are considering a credit enhancement program that would guarantee the increased net operating income created on affordable green projects. The credit enhancement would permit lenders to make larger loans without inheriting substantially increased risk.63

(2) Public subsidy cap on per unit development costs. Many public subsidy programs institute a cap on per unit costs of affordable housing developments. Other programs also levy design limitations. Imposing such restrictions on a project greatly discourages green building in affordable housing projects.64 The government agencies responsible for overseeing such programs need to reevaluate how such provisions constrain energy efficient building, and should revise program rules. (3) Constant focus on upfront costs. As mentioned earlier, developers of affordable housing have a particularly vigilant focus on keeping the cost of construction low since any premium incurred for building green cannot be recovered in the sale price of the home or in increased rent rates. They rely on a myriad of complex subsidy programs to make the economics of their projects feasible. To encourage developers to bring green into their affordable housing equations, subsidies that focus on affordable housing should be tied to the implementation of green design. LIHTC is the most important source of affordable housing financing. In the highly competitive, state-level process for winning LIHTC allocations, a few points in an evaluation process can make the difference in whether or not the developer receives this critical subsidy. Encouraging state HFAs to include green criteria in their QAPs would provide essential support to green building though policy frameworks that influence the developers’ pocketbooks. Over 40 states include energy efficiency in their QAPs to some degree,65 but the extent of inclusion varies greatly in substance. Some states just use energy efficiency language in generalities, simply mentioning it as something that the state would like to see executed in affordable housing projects. Other states have gone beyond talk and implemented competitive criteria that are clearly linked to greening. The strongest method is to include greening in the minimum performance criteria required to even be considered eligible to apply for LIHTCs. A report published by Global Green USA highlights some of the more innovative tactics states are employing in their QAPs:66

• California awards points for using low to zero VOC interiors (e.g., carpets and paints); • Nebraska requires a pre-construction energy audit; • Kansas requires that development plans be approved by a certified home energy rater using

the Kansas ENERGY STAR Home Energy Rating System;

63 “Special Section on Green Building”, Affordable Housing Finance, March 2006,

http://www.housingfinance.com/aft/articles/2006/mar/002_greenmar06.htm. 64 “Can Housing be Green and Affordable”, Partners in community economic development, vol. 16, no. 2, 2006,

http://www.frbatlanta.org/invoke.cfm?objectid=7E448AB7-5056-9F12-1273CD2B2C3B6231&method=display_body and “The Costs and Benefits of Green Affordable Housing”, New Ecology Inc., 2005.

65 “Making Affordable Housing Truly Affordable: Advancing Tax Credit Incentives for Green Building and Healthier Communities”, Global Green USA, December 15, 2005.

66 Ibid.

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• Tennessee awards points to developments (not including rehabilitation) that meet a 15-year maintenance-free exterior standard;

• Georgia awards points for the preservation of existing trees and vegetation; and, • Massachusetts development principles require reduction in construction material waste.

These innovative states should be held up as an example of how a QAP can be used to influence the affordable housing development mindset. However, to date, such initiatives have been driven mostly by the local climate. Because LIHTC is a national program, governed by legislative stipulations, there is a valuable opportunity to encourage the greening of affordable housing at the national level by putting forth mandatory green criteria that must be included in all HUD-approved QAPs of all states. Conclusions.67 While developers wait for policy frameworks to catch up with green innovation, developers can still push to keep green building affordable at the project level in their own processes. Including green in the project design from the outset will ensure that these issues are considered before costs are incurred, and will allow a developer to determine which green features are truly cost-effective for their affordable housing project. Similarly, developers should be sure to integrate all members of the design team early on, including local planners, designers, contractors, subcontractors, property managers, owners, etc. Involving all the necessary parties in the greening process will help minimize cost, time, design and construction surprises in the future. Additionally, it will help the project team have a clear plan for how to achieve green goals. From a cost standpoint, developers should have someone on their team who is continually looking at the cost benefit of the green aspects of the project. Balancing strong budgetary discipline with benefit/impact assessment will help the developer prove the case to themselves and investors. Additionally, developers should be sure to engage in the proper commissioning and testing of onsite systems during and immediately post construction to ensure that green features and energy efficient methods are properly executed. Such assurances will help guarantee that operational cost savings do in fact result from the energy efficient strategies executed. Lastly, developers of affordable housing should provide sufficient education to the owners/occupants of their green affordable dwelling units. Doing so will encourage better consumer behavior and ensure that the energy consumption within the dwelling unit is consistent with the original intent of the green design.

67 Ideas drawn from a number of readings, but most notably, “Can Housing be Green and Affordable”, Partners in

community economic development, vol. 16, no. 2, 2006, http://www.frbatlanta.org/invoke.cfm?objectid=7E448AB7-5056-9F12-1273CD2B2C3B6231&method=display_body and “The Costs and Benefits of Green Affordable Housing”, New Ecology Inc., 2005.

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