Green affordable housing: Cost-benefit analysis for zoning incentives

US states have integrated green building with affordable housing programs to achieve multiple environmental objectives, e.g., improving energy efficiency and water conservation, increasing indoor environmental quality, providing safe, healthy, and productive built environments, and promoting sustainable environmental stewardship. Simultaneously, empirical measures have shown that green building increases housing affordability, through energy-efficiency savings that constitute a significant percentage of the annual income of extremely low-, very low-, and low-income families.

To analyze the costs and benefits of different policies and programs, and to estimate the incentives required to offset the upfront cost of green affordable housing in the residential sector, local governments need substantial empirical evidence on viability in the local housing market. In the paper " Green Affordable Housing: Cost-Benefit Analysis for Zoning Incentives", Drs. Andrew McCoy, Steve Hankey, and Armin Yeganeh investigate the potential benefits and policy implications of the integration of green building and affordable housing by analyzing the construction costs, sale prices, and spillover effects of affordable and market-rate houses, built to local green building standards.

The authors employ pooled cross-sectional construction cost data from Low Income Housing Tax Credit (LIHTC) projects in Virginia to analyze the impact of an increase in the level of EarthCraft Virginia certifications — a regional green building rating system — on the total construction cost of affordable housing projects between 2011 and 2019. The authors use pooled cross-sectional sales price data from Multiple Listing Service (MLS) transactions, the primary source of real estate market information in the US, to provide evidence on the magnitude and statistical significance of sales price premiums associated with market-rate EarthCraft VA certified single-family houses in Montgomery County, VA.

Based on an analysis of 422 LIHTC projects that applied for income tax credits between 2011 and 2019 across VA, the study results suggest that an increase in the level of EarthCraft certification, from Gold to Platinum, increases the cost of rehabilitation and new construction by 12.60% and 4.60%, on average, while controlling specifically for statistically significant attributes of the residential area, number of stories, age of existing buildings, coordinates, and year of construction. The result of the cost premium on new construction is supported by previous studies, as small increases in the level of green building certification of new constructions have statistically insignificant cost impacts. However, similar increases in the level of certification in rehabilitation are associated with large and significant cost premiums. A potential reason for this cost premium is the impact of green building criteria on building enclosures, which typically constitute a large part of rehabilitation projects.

Houses certified under the EarthCraft VA program in Montgomery County, VA are associated with significant sale price premiums, with an estimated average of 15.06%, of which about 2.79% could be attributed to locational characteristics that were not captured. Therefore, the 12.27% premium translates to a dollar value of about $32,105, considering the average home sale price for the county, of $261,660 in 2018. Anecdotally, EarthCraft VA reports an upfront cost premium of 0.5–3% based on local builders, suggesting that the capitalization of green building features into transaction prices, on average, substantially exceeds upfront cost premiums. In the current study, the impact of EnergyStar certification on housing unit prices is smaller (around 5.81%) and not always statistically significant.

The density bonus estimates suggest that to recover 3%, 6%, and 10% incremental cost premiums associated with for-sale single-family houses in Blacksburg, VA, homebuilders need about 5–10%, 10–20%, and 25–40% increases in floor area, respectively. More precise estimates can be achieved based on the structural and locational characteristics of individual buildings. Nonetheless, housing prices are also confounded by dynamic market-driven factors, making it difficult to forecast housing prices using conventional methods. It is likely that regulatory and technological reforms affect certification costs and willingness to invest in certified buildings. Factors such as builders’ capacity and experience in green building, the energy literacy of households, availability of professional training programs and financial solutions, and recognition of green buildings in the market, are important to the economic viability of green buildings. It is also likely that local opposition to affordable housing causes construction delays, delays in leasing or selling units, etc. Therefore, such thresholds could provide local planners with some level of flexibility in decision-making.

To read or cite the full article: Jeddi Yeganeh, A., McCoy, A. P., & Hankey, S. (2019). Green affordable housing: Cost-benefit analysis for zoning incentives. Sustainability, 11(22), 6269.