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Legislation would authorize HUD ‘pay-for-success’ demonstration

August 18, 2015

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Last month, the U.S. House of Representatives approved the Private Investment in Housing Act of 2015. This bill would grant the U.S. Department of Housing and Urban Development the ability to seek private funding for affordable housing energy upgrades, otherwise known as a “pay-for-success” (PFS) system.

The current draft still needs approval from the U.S. Senate and President Obama before it becomes official, although the language of the bill includes a number of positives for the affordable housing industry.

HUD in search of utility cost savings
The impetus for the bill is cost savings. HUD is in search of effective methods to improve the energy efficiency of its affordable housing units across the country, but acquiring the appropriate federal funding has proven a challenge.

In fact, a previous HUD report found that the government agency spends upward of $7 billion annually on utility costs for affordable housing. Reducing utility costs would provide an immense benefit to HUD and potentially save tenants money.

The key problem in today’s fiscally restricted environment is the allocation of taxpayer funds. At the moment, HUD energy efficiency is low on the list. This is where the bill factors in – it would shift the financial burden to private investors, ensuring HUD can move ahead with any eco-friendly upgrades and that taxpayers won’t pay the bill.

The elements of the bill
It is important to note that the proposed bill is still in its infancy. It is likely that amendments will be made while pending approval from both the White House and the Senate, if the draft is voted into law at all. However, the elements of the bill have piqued the interest of many members of the affordable housing industry.

Introduced by Reps. Dennis Ross, R-FL, Jim Himes, D-CT, Emanuel Cleaver, D-MO and John Delaney, D-MD, the bipartisan bill would institute a four-year PFS demonstration within HUD. During that period, HUD would be able to accept investor contributions for energy-efficient housing upgrades. Those outside entities would then liaise with contractors to perform the upgrades. The investors could be compensated after the fact via performance payments from HUD. As a result, it may be a mutually beneficial agreement that cuts taxpayers out of the loop.

In order for the investors to be compensated, however, certain requirements have to be made. Specifically, the project has to return documented utility savings, and the housing unit has to be a property officially considered affordable housing. This mainly includes Section 8, Section 202 and Section 811 properties.

Bill could have widespread impact
Given that this is still just a proposal, it is expected that tweaks will be made to the language. However, if it becomes law as it currently stands, the legislation would have a widespread effect on affordable housing.

For starters, the PFS demonstration would improve as many as 20,000 affordable housing units across the country. That includes those in Section 8, housing for the elderly and housing for persons with disabilities. The bill would also streamline the funding process, so HUD can back energy upgrades without requesting federal funding.

There is also potential that HUD could drastically reduce its own energy costs through the legislation – even by as much as 20 percent, according to the Enterprise Housing Horizon blog.

For now, though, the affordable housing community will have to wait. This bill now joins another similar proposal – the Energy Savings and Industrial Competitiveness Act of 2015 – in the Senate, both with provisions for a PFS demonstration. Approval of both in the Senate and from the president would authorize the pay-for-success demonstration that would use private funds for energy-efficient upgrades to HUD multifamily developments.

If you have any questions about this proposal or its potential impact on the industry, contact your Clark Schaefer Hackett advisor.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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