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Dear Colleagues,
---I wanted to share an audit we recently completed for a national client of ours. Hedgerow’s Energy Consumption Modeling (ECM) based utility allowance analyses generated potentially an estimated $3,921,112 in additional net revenue across their Low Income Housing Tax Credit (LIHTC) portfolio for CY 2025. This analysis assumes properties were near maximum allowable rents and able to realize rent increases enabled by ECM-derived allowances in lieu of Public Housing Authority (PHA) schedules. The results demonstrate a material, repeatable financial benefit that compounds as this company continues to acquire new assets.
Beyond near-term revenue lift, ECM allowances provide greater accuracy, compliance confidence, and resilience against volatility in utility pricing and PHA update cycles. Given this company’s aggressive expansion strategy, continuing to partner with Hedgerow represents a high-ROI operational decision that scales efficiently with portfolio growth.
Context and Methodology
- Context: LIHTC properties commonly rely on PHA utility allowances, which can lag actual building performance and utility costs particularly for newer, energy-efficient assets.
- Approach: Hedgerow applied property-specific Energy Consumption Modeling (ECM) to estimate realistic resident-paid utility costs based on building systems, unit characteristics, and operating assumptions.
- Outcome: Where ECM allowances were lower than PHA schedules, properties gained incremental rent headroom while remaining compliant with LIHTC rent and utility allowance rules.
Note: The $3.92M figure reflects a high-level aggregation based on provided data and assumes realization where properties were close to maximum rents.
Financial Impact
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Estimated incremental net revenue: $3,921,112
- Reduced utility allowances increase allowable gross rent, enabling rent increases without exceeding LIHTC limits.
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Quality of earnings: Recurring, compliance-driven revenue that persists annually, not a one-time adjustment.
Importantly, this revenue is unlocked without capital expenditure, tenant disruption, or operational risk making it among the most efficient levers available to LIHTC owners.
Strategic Rationale for Continuing ECM Services
1. Scales with Portfolio Growth
As this company continues to acquire and develop properties, each additional asset represents a new opportunity to:
- Replace conservative PHA allowances with more accurate ECM results
- Capture incremental rent headroom from day one of stabilization
- Standardize allowances across markets with inconsistent PHA methodologies
The financial impact scales linearly with unit count and compounds over time.
2. Outperforms PHA Allowances in Modern Buildings
PHA schedules are often backward-looking and geographically averaged. ECM allowances:
- Reflect actual building performance
- Properly credit investments in energy-efficient systems
- Avoid leaving value on the table in high-performing assets
For newer or renovated properties, ECM is increasingly the only method that aligns allowances with reality.
3. Reduces Regulatory and Audit Risk
Hedgerow’s ECM analyses are:
- Defensible and well-documented
- Consistent with IRS and state housing agency guidance
- Less exposed to sudden PHA revisions or timing mismatches
This improves predictability in rent setting and strengthens compliance posture across the portfolio.
4. High ROI, Low Operational Burden
- No tenant behavior changes required
- No capital investment needed
- Minimal internal staff time once data is provided
Relative to the multi-million-dollar revenue upside demonstrated here, the cost of ECM services represents a small fraction of value created.
Forward-Looking Opportunity
If ECM allowances are deployed systematically across:
- Newly acquired properties
- Properties approaching Year 15 or undergoing recapitalization
- Assets with energy upgrades or newer mechanical systems
…the annualized revenue benefit can exceed the $3.9M estimate presented here, with cumulative gains growing meaningfully over a multi-year horizon.
Conclusion
The analysis confirms that Hedgerow’s ECM-based utility allowance services unlock significant, recurring net revenue (over $3.9 million in this initial effort alone) while enhancing compliance confidence and operational consistency. For a company actively growing its LIHTC portfolio, continuing to engage Hedgerow is not merely advisable; it is a financially strategic decision that directly supports asset performance and long-term value creation.
Sincerely,
Walter Mendoza
Managing Partner
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