Using QECBs for Multifamily Housing Upgrades: A Case Study

In early 2009, Boulder Housing Partners (BHP), which manages affordable housing in Boulder, Colorado, for residents at or below 30 percent of area median income, was on the lookout for American Recovery and Reinvestment Act programs that might help BHP upgrade furnaces, water heaters, and toilets in eight multifamily housing properties. BHP began to consider qualified energy conservation bonds (QECBs).

There were a couple of issues particular to using QECBs in the multifamily context. First, BHP was receiving a subsidy for utilities from the U.S. Department of Housing and Urban Development (HUD) each year, soBHP would have to coordinate with both the Governor’s Energy Office and HUD to determine whether QECBs could be used to improve energy efficiency and, in particular, whether the HUD subsidy could be used to help pay debt service on QECBs. In addition, the project would require cooperation from the residents, who would experience disruptions while auditors and contractors carried out their work.
To address the latter issue, BHP held gatherings with residents to familiarize them with the proposed program and what would be occurring, and conducted surveys to request input on what residents would like to see in the buildings.
Overall, the residents were willing to put up with disruptions to receive the upgrades, BHP Development Project Manager Kevin Knapp said.

In April 2009, BHP released a Request for Proposals for an energy services company (ESCO) to complete energy performance contract work on BHP housing. Three companies responded. In May 2009, BHP awarded the work to Johnson Controls (JCI) because of the company’s specialized expertise in managing the HUD approval process. Over the summer of 2009, JCI performed energy audits on eight BHP properties to determinethe most cost-effective improvements.
BHP also consulted with its maintenance department about the planned changes, because the staff would be unfamiliar with the new equipment.

In February 2010, BHP’s Board of Commissioners passed a resolution to allow BHP to enter into an energy performance contract with JCI, and HUD’s Denver Office of Public Housing approved the contract. The Final Energy Services Agreement (ESA) documenting the work to be completed (including staff training by JCI) and the guaranteed energy savingswas completed by JCI and BHP executed in March 2010.
On November 16, 2009, BHP applied for the QECB allocation, and it received $1.5 million on February 11, 2010. In May 2010, it issued a Request for Proposals for bond counsel. BHP received five responses and selected Ballard Spahr. Since BHP’s issuance would be one of the first QECB issuances nationwide, there were some questions regarding the scope of use of QECB proceeds. In particular, BHP sought a ruling from the IRS on whether its water conservation improvements would qualify as an eligible use. The IRS was unable togrant a favorable ruling, so BHP had to revise its plans and issue a small amount of Build America Bonds for the portion of the funds needed for the water conservation improvements.

In August 2010, BHP issued $1.45 million of 16-year QECBs to finance the improvements as well as issuance and bond counsel costsassociated with the offering. BHP
experienced some difficulty placing the bonds due to the small size of the offering. However, with the assistance of Eric Duran at Denver investment bank DA Davidson, the BHP QECBs were sold in a private placement to Bank of America. Construction commenced in September 2010 and is now nearly complete; at the time this article went to press, BHP was going through the final punchlist items. The energy savings realized, combined with the HUD subsidy, cover the interest and principal payments on the bonds.
Kevin Knapp estimates that traditional financing would have cost 2 percentage points more than was achieved with this offering.