The #1 barrier to green buildings is finance

In a rare opportunity to discuss the ins and outs of finance for environmental building upgrades, AECOM and Madgwicks Lawyers co-hosted an event with City of Melbourne and Sustainable Melbourne Fund this month.

Speakers included Ed Brown and Anne Hellstedt of AECOM, Scott Aitken of Madgwicks Lawyers and Sustainable Melbourne Fund’s Scott Bocskay.

Context for environmental upgrade finance.

The key barrier to environmental building upgrades for building owners has historically been a lack of access to capital.

To address this, the City of Melbourne unpacked the issue and identified two predominant pain points for owners:

1. Availability of finance – sourcing finance at an attractive rate for energy efficiency projects can be difficult.
2. The WIIFM debate (what’s in it for me?) – costs of energy efficiency measures fall at the door of the building owner, while the tenant reaps the benefit of reduced utility costs.

Environmental Upgrade Agreements (EUAs) are a direct response to these hurdles. 

Enabled through a change in legislation, an EUA is a financial mechanism used to pay for investment in existing buildings for improvements that result in environmental benefits (usually energy, water or waste efficiencies).

An EUA is repaid in much the same way as council charges are recovered, over a fixed period at fixed levels. The council then passes the payment through to the lender. The tenant can also make contribution to repayments through a special charged called the Environmental Upgrade Charge (EUC). (Check out our infographic on how an EUA works).

The fundamental draw cards of an EUA compared with alternative finance options are the mutually beneficial environmental and economic outcomes for both building owners and tenants; additional security to the lender via the council and the tenant contribution (via an EUC) that essentially creates a new revenue stream for the building owner.

Key insights from the panel of speakers.

The owner/tenant split incentive is a key component to truly unlock the full financial benefit of an EUA for both owner and tenant. Tenant engagement becomes fundamentally important to the EUA process.

With tenant consent, a building owner is able to share the costs with the tenant, by way of tenant contribution (up to 100 per cent). The extent of this contribution is a commercial decision that must be negotiated by both parties. The tenant should see cost savings in any contribution scenario.

Scott Bocskay of Sustainable Melbourne Fund views an EUA as simply a different mechanism to pay for an investment, stating that “an EUA can turn energy efficiency projects into a revenue generator, which should pique any CEO or CFO’s interest”.

AECOM speaker, Ed Brown, highlighted the Building Upgrade Tool developed by AECOM for Low Carbon Australia (now Clean Energy Finance Corporation) and the City of Melbourne.

This simple, web based tool models the financial relationship between building owner and tenant. While it doesn’t attempt to provide the definitive answer, it allows both parties to test how this investment might perform.

Scott Aitken, of Madgwicks Lawyers commented that EUAs are more a “financial play” than a sustainable one. From an owner’s perspective, sustainability benefits are a benefit that flow from a financially based decision. However, because of this, some may fear that it is “too good to be true”.

Anne Hellstedt, also of AECOM, emphasised that EUAs encourage awareness of building performance. The Next Wave report, produced by AECOM for Sustainability Victoria and released earlier this month quantified the size of the opportunity. The report found that a large proportion of the properties in the Melbourne City municipality are B, C, and D grade, built between 1960 and 1999; and ripe for investment.

Find out more about this event and read our Audience Q&A insights. 

Image credit: CJS*64 via Flickr Creative Commons