Sustainable affordable housing: strategies for financing an inclusive energy transition

Summary of the Federal Reserve Bank of New York report

Summary and highlights from the report released by the Federal Reserve Bank of New York on how we can build sustainable, energy-efficient and climate resilient housing.

As global leaders increasingly acknowledge the imminent and long-term threats that climate change poses for our civilization, there have been efforts across the world to pass legislation that encourages climate action. The New York State’s Climate Leadership and Community Protection Act (CLCPA) and New York City’s Local Law 97 (LL97) are two landmark legislations that mandate significant climate action. Each of them have established a set of goals and requirements, which if complied with, can accelerate New York's climate resiliency.

A series of goals and requirements established by the CLCPA (Source: Original Report)

Although the legislation is a step in the right direction, compliance with these laws will be particularly challenging for buildings housing low- and moderate-income New Yorkers. The 'Sustainable Affordable Housing Report' by the Federal Reserve Bank of New York came out with important recommendations for households, government agencies, nonprofits, and private operators, on how to comply easily with climate laws. These recommendations are paired with strategies for developing financial tools that accelerate the mission of decarbonization of built environment in New York. In this article, we will be highlighting some of the main recommendations of the report.

Scope of the Problem

7.4 million occupied housing units in New York State. 54% own their home and 46% are renters.
Within NYC, nearly 70% of units are occupied by renters and 65% of units are multifamily. Outside of NYC, more than 70% of units occupied by the owner and 70% of units are single-family homes.
Nearly half of all households in New York State are considered low or moderate income - 2.4 million classified as low-income and 1.2 million considered moderate-income. 66% of LMI households live in multifamily properties.
59% of households in New York use natural gas and 24% use fuel oil/propane to heat their homes. Only 13% of households use electric heating.

"Over 6 million households in New York would need to transition to electric heating or low-carbon fuels to decarbonize, and over 700,000 would need to transition from electric resistance heat to heat pumps."

The report outlines the four main challenges that key actors would face, in implementing these decarbonization efforts:

high costs of decarbonization and access to capital
uncertainty and risk
lack of common reporting methodologies
lack of awareness and education.

Recommendations for countering high costs of decarbonization and increasing ease of access to capital

LOWER THE COST OF FINANCING DECARBONIZATION BY ADJUSTING UNDERWRITING:

Reduce risk for loans to decarbonized buildings. Provide financial incentives to owners for reducing lenders’ climate-related financial risks.
Provide longer amortization for decarbonization centric loans to lower the debt service and improve the coverage ratio.
Explicitly state costs of noncompliance to the building owner, in underwriting.
Demonstrate the increased future value of carbon neutral buildings along with sufficient evidence of improved cash flow from these investments (e.g., lower insurance premiums).

PROVIDE TAX INCENTIVES AND REGULATORY RELIEF, PARTICULARLY TO EARLY ADOPTERS:

Create property tax abatement for electrified buildings.
Use tax breaks to incentivize utility companies to reduce electricity rates charged to decarbonized buildings.
Leverage tax credit allocations on the state and local agency level, including Low Income Housing Tax Credits, Historic Preservation Tax Credits, New Markets, and Brownfield.
Offer density bonuses or increased floor area ratio (FAR) limits as incentives for decarbonation of new housing developments and the preservation of existing buildings.

LEVERAGE POLICY- AND MISSION-MOTIVATED INVESTMENTS TO INCREASE SUPPLY OF CAPITAL:

Mandate disclosure of carbon emissions in loan portfolios and securitized assets. Rate lenders based on the carbon intensity of their loan portfolios.
Mandate decarbonization of the underlying assets as a condition of sale for distressed single and multifamily loan portfolios sold by HUD and GSEs to large investors and nonprofits.
Incentivize regulated institutions that invest in affordable housing and decarbonization, buy giving them additional Community Reinvestment Act (CRA) credit.
Layer Medicare/Medicaid funding into investments in decarbonization of affordable buildings to create healthier homes and monetize the health benefits of decarbonization.
Tap the carbon offset market to introduce another funding stream.

Recommendations for countering the high perceived project risk

Accelerate and standardize the local approval process for decarbonization projects. Pass local building and energy codes calling for decarbonization.
Increase Section 8 base rents for decarbonized buildings to increase cash flow while not increasing low-income renters’ cost of living. Increasing housing assistance payment (HAP) contracts of Project-Based Section 8 Rental Assistance for multifamily-properties can be a good first step to allow owners to collect greater rents and do the work up front.
Collect evidence of improved cash flow from these investments (e.g. lower insurance premiums, lower maintenance costs, improved occupancy and tenant satisfaction, etc.).
Develop Direct-To-Consumer financing options, including mortgage-like products to help owners and renter finance up-front costs of retrofits.
Reduce variability in utility rates across localities within the same region. Reduce utility penalties/surge pricing in clean energy buildings that rely on the grid during evening hours.

Recommendations to institute clear measurement standards

Develop new certification standards, or evolve existing ones, related to decarbonized buildings. There should be a set of common key metrics to assess quality.
Treat carbon emissions as a pollutant - Include carbon in property Benchmarking Reports and Integrated Physical Needs Assessments (IPNA), which provide a holistic assessment of a property’s physical conditions.

Increase awareness and education among all relevant stakeholders

There isn't enough private investment backing climate retrofits today. This model needs to change if the aggressive mission to decarbonize New York is to be realized. Besides that, there is a glaring lack of education and awareness about the profitability and need for climate retrofits. The paper recommends launching awareness and education campaigns for all relevant stakeholders. There needs to be a state wide effort, by both public and private actors, to educate the public on the dire need for decarbonization.

Find the full report here.