Not exactly what the code says out your way, but here in NC we would be required to have a break in the insulation for a termite inspection gap. Even if it is not required by code, it is a good idea. Foam board is a perfect nesting area for termites.
- Since you have the gap anyway, putting the foam on the interior of the crawl space should be fine.
- In theory, having a continuous thermal line is ideal, but you are not really losing much by moving it into the interior -- be sure you insulate the rim joist well.
Using an HRV is an interesting idea -- most closed crawl space designs use a supply-only or an exhaust-only ventilation system -- using a balanced system seems a little unnecessary, but I do not really see anything wrong with it.
- Assuming you are bringing hot dry air into the crawl through your HRV should be OK from a moisture and condensation problem, although there could be an energy penalty associated with that.
- Is your HVAC equipment in the crawl space?
Advanced Energy actually did a study of closed crawl spaces in Flagstaff. I would review that prior to making any final decisions.
Good luck -- love Habitat -- great organization. Here in Charlotte, we just celebrated the 25-year anniversary of our local chapter.
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Check our home foam insulation Q&A to see what other homeowners and contractors are saying about foam board insulation, etc."