SMF CEO takes closer look at EUAs with the U.S. PaceNow

Scott 1 500x1000Kristina Klimovich, ‎Director of Communications and Market Research at PACENow talks to Scott Bocskay, Chief Executive of Sustainable Melbourne Fund and David Gabrielson, Executive Director of PACENow about EUAs.

This article originally appeared in PACE Talk by PACENow, an organisation which promotes improved energy efficiency in buildings and use of Property Assessed Clean Energy (PACE).

Kristina Klimovich: Scott, tell us what brought you to the Sustainable Melbourne Fund and what are Environmental Upgrade Agreements or EUAs?

Scott Bocskay: I came to Sustainable Melbourne Fund having led the Clinton Climate Initiative in Australia where my goal was to overcome the barriers to investment in energy efficiency and renewable energy upgrades to buildings. An Environmental Upgrade Agreement or an EUA is a financing mechanism aimed to improve performance of non-residential buildings, using a repayment mechanism similar to property taxes. Similar to PACE finance, an EUA unlocks 100 percent of the funding required for upgrade projects with repayments being collected through the local council rates (property tax bills) over terms up to 20 years.

An EUA overcomes the traditional barriers to EE/RE projects by enabling tenants and landlords to share in the financial benefits of such projects. The comparative terms of an EUA supercharges the business case for energy efficiency or renewable energy projects, turning them from often marginal projects to profitable projects, directly adding to shareholder value. EUAs were invented and pioneered in Melbourne, in parallel to PACE financing, and later adopted in 5 municipalities in the New South Wales, with enabling legislation being prepared in the State of South Australia and an expansion of the legislation currently being debated in the Victorian Parliament.

We have leveraged the US experience through my work at the Clinton Climate Initiative. Here in Australia, the cities are still driving the push to energy efficiency upgrades on the local level. The City of Melbourne invited me to run the Sustainable Melbourne Fund (SMF) to promote EUAs. The SMF was set up 12 years ago as a unit trust, with the city as a shareholder and has been successfully investing in this space for 12 years.

KK: The similarities between EUAs and PACE are apparent. Both offer a long term source of capital to make buildings more energy efficient and both are local in nature. David, can you provide a high level overview of the PACE market?

David Gabrielson: Very briefly, PACE is an innovative financing mechanism that offers building owners up-front funding for up to 100 percent of the cost of energy upgrades; the money is repaid with assessments added to property tax bills for as long as 20 years. A PACE assessment stays with the building upon sale and allows the owners to pass payments through to tenants who enjoy the benefits of improved energy efficiency and lower utility costs.


Map of PACE program and legislative activity

Today, there are over 25 PACE programs operating throughout the US in 9 states and the District of Columbia. In CT, for instance, a centralized program operated by the state’s Green Bank offers PACE financing to any participating city or town.

In other states, programs operate in one city or a handful of communities. Most programs have completed at least one project and governments and private actors running the programs are learning from experience and refining their processes. Many projects are large, involving office buildings, hotels or shopping malls, requiring complex engineering solutions and these may need considerable time for project development.

The good news is that nearly 300 buildings have used PACE to pay for a good mix of energy efficiency and renewable energy projects. Total funding volume is at nearly $85 million and programs report a considerable pipeline of over $300 million.

PACENow has been spearheading outreach to leading real estate companies and we have been pleasantly surprised that many are very receptive to PACE. Our sense is that PACE lets them do projects that capital committees were not approving otherwise, e.g. projects with longer pay back horizons or projects involving tenants, where the assessment is passed through to tenants.

PACE is still very much in its infancy in terms of the number of building owners who know about PACE or even have access to PACE financing. But, the market is building steadily and program administrators are learning from a growing base of experience. We’re pleased to see that PACE financing works very well for a broad range of buildings and energy upgrade projects.

KK: Scott, what property owner outreach tactics work in Australia? And how many buildings took advantage of EUAs?

SB: To put this discussion in perspective, the Australian economy is the 14th largest economy and California is the 7th largest economy in the world. We would love to see 200+ buildings being on board. EUAs are currently offered in 6 municipalities in Australia: Melbourne, Sydney and several cities in New South Wales. Nationally, A $43.6 million has been invested through EUA finance with Melbourne making up a majority of the projects (62.5%) and New South Wales delivering much larger projects. The environmental benefit of these projects amounts to 8,800 tCO2-e being abated annually.


501 Swanston Street: EUA CASE STUDY: $7m project includes upgrade of the plant room, PowerPax chillers, boilers and solar film for windows.

The fundamental difference between PACE and EUAs is that in Australia, there is no municipal bond funding, instead we have the big four banks and several second tier banks providing capital.

Energy efficiency projects are tough to put together in non-residential buildings. There are a lot of moving parts and participants involved. The complexity of these commercial projects affects the outreach strategies. We are launching a program, spearheaded by a website,, supported by the federal government, in partnership ClimateWorks Australia. This initiative has involved engagement with the EUA marketplace and all its stakeholders with the ultimate aim of simplifying the key messages about the opportunities of EUAs. This program will see us run a series of webinars and events in the coming months communicating in a simple and unified message promoting EUAs.

It has been our experience that the messaging needs to be simple, while programs need to take people through the journey rather than explaining it all in the very beginning. Our goal at Sustainable Melbourne Fund is to guide the development of programs and use common language when we talk to customers across the country.

As a daily participant in energy efficiency projects, we understand the opportunity of energy efficiency, however it is often forgotten that what we see as a solution is in fact a problem for our customers. Energy efficiency is another thing that building owners or tenants need to deal with along with their ordinary course of business. There are many buildings that need to get up to the curve on EE/RE. Ultimately, we want to provide a solution as opposed to creating a problem.

Outreach and market education is a hot priority as well as enlarging the market beyond the existing 6 municipalities. As far as our outreach to the various market segments, we hope to see the uptake from the more sophisticated parties, however we understand that they may need to digest EUA mechanism as an organization. The challenge here is an institutional one: there are many people involved, from a sustainability officer, to legal departments, to accountants, to property managers. There has to be a champion within the organization who would be willing to educate all the parties.

We have seen more opportunity in B and C grade buildings and EE/RE projects that are already in the process of being developed and have institutional buy-in. Additionally, we are focusing on rooftop mounted solar for industrial and retail buildings using the EUA mechanism. This is particularly driven by the City of Melbourne which set an ambitious target for 25% of the City’s energy consumption to come from renewable sources by 2018.

The secret sauce with EUAs and PACE is sharing the benefits between landlords and tenants. In Australia, there is a slight difference in enabling legislation between Victoria and New South Wales. But the key in both states is having a positive relationship between a landlord and a tenant.

KK: David, in the US we’ve also seen B and C class buildings taking advantage of PACE, can you elaborate about the reasons?

DG: The owners of these buildings typically do not have the deep pockets of many of the A class property owners. So for them 100% PACE financing can, make all the difference in doing a project or not. We are finding that B and C grade buildings are where most of the PACE business is coming from.

KK: Scott, do you find different reactions in places around Australia? Maybe attitudes towards sustainability differ or energy prices?

SB: A lot of it is driven by market dynamics. In Sydney, there is a high proportion of listed property trusts and corporate property ownership, while Melbourne has a high proportion private companies and individual owners with different levels of appetite towards sustainability. Many public entities have shareholder obligations, while some of the private ones do not. For instance, GRESB has noted that Australia is leading the world in sustainability in commercial office space.

Also, macroeconomic issues are driving the vacancy rates, which in turn drive sustainability efforts.

KK: Scott, who is administering the program and driving the outreach to the building owner community?

SB: In Melbourne, the Sustainable Melbourne Fund is a third party administrator. In New South Wales – each local government administers the program internally. Third party administrative model has proven to be the cheapest and easiest to use. Through my role at the Clinton Foundation I learned that it is preferable to have a simple administrative model that allows large commercial real estate owners and lenders to use financing platforms equally in the various municipalities. Right now, there are slight differences among the program structures in municipalities in the New South Wales.

The Sustainable Melbourne Fund is talking to more municipalities about how to allow capital to flow to their communities. Local governments are concerned that EUA program could be costly and hard to set up. However, we are seeing that energy efficiency financing programs prevent capital leakage from the communities and help capture the value. Market making is a challenge and also a biggest opportunity, we need more assistance on this front.

KK: In the US we are seeing a varied landscape as well, there is a number of city and county administered programs as well as third party administered consortium programs that enroll several municipalities. Now I’d like to compare the two financing mechanisms. First, by looking at eligible property types and improvements. Scott and David, can you both briefly address eligibility.

KK: Let’s talk about financing in more detail now. David, what does it cost and who provides it?

DG: There are many options on the financing side. I’ll note that PACE financing is a very strong credit because it’s secured by a highly over-collateralized first claim on the property. PACE is now a rate-able asset class, attractive to investors at relatively low interest rates.

As for the financing options, we have seen PACE projects (1) bundled together and sold as taxable municipal bonds, (2) funded directly by governments (3) packaged and sold to third party investors as municipal bonds or as direct investments, or (4) funded directly without municipal bonds structures.

We certainly recommend to states that are working on PACE legislation, to craft PACE laws to allow for as much flexibility as possible in terms of financing options. Minnesota’s PACE program is a good example. There, PACE financing is available statewide through the St. Paul Port Authority, which can issue bonds. Additionally, a local bank is prepared to provide warehouse financing and any third party investor can fund projects directly. Building owners and project developers have lots of choices.

Although many funding mechanisms are being developed, the market is still very small and therefore, illiquid, which means that if you invest in a PACE project now, it could be difficult to sell it easily to a new investor. That’s the main reason that interest rates are a bit higher than they should be, given PACE’S strong credit.

KK: Scott, what financing models for EUAs are available in Australia?

SB: There is no municipal bond or local government funding, all money is provided by the private sector. There are a couple of large Australian banks offering financing and we are having discussions with several second tier banks. Banks set up special purpose vehicles or hold the EUA obligations directly on their balance sheets. EUA’s are, similar to PACE, over-collateralized obligations, while the market for them is illiquid. It is the chicken or the egg dilemma: on the one hand, demand grows when the market become more sophisticated, and, on the other hand, market becomes more sophisticated when there is more demand for this type of financing, at some stage as the addressable market grows we will reach a tipping point.

The SMF was the first investor in EUAs in the country. At the time, in 2011, investors liked the EUA mechanism but wanted to see the proof of concept. We currently hold the original EUAs on our books and I am happy to say they are performing very well.

Relative to any other form of financing, EUA is cheaper than anything else you can get on a similar term. The term allows projects to be cash flow positive or neutral on day one.

KK: What was your experience working with existing mortgage holders?

SB: We do not have a consent requirement; those consents are generally embedded into the existing finance agreements. The attitude of the commercial property lenders improved over time once they understood the superior value to a property, after seeing the data. Essentially existing mortgage holders receive the full valuation uplift as a result of the projects while never being exposed to the entire cost of the project, that is they get something for nothing.

KK: David, can you speak to the topic of lender engagement on this continent?

DG: I think many people thought that a building’s mortgage lender would be automatically opposed to PACE and that this would be a difficult issue to resolve. What we learned, however, was that we could work with lenders if we gave them a right to say “yes” or “no” to projects. Our strategy has been to educate lenders on project attributes and convince them that energy efficiency and renewable energy projects will make their collateral, the building, more valuable. The lender consent requirement certainly hasn’t made it easier to get projects done, but it hasn’t been a major impediment either. Consent from an existing lender also gives project funders comfort that the project makes sense.

PACENow tracks data on all commercial PACE projects and to date, over 80 different lenders, ranging from local and regional banks to global lenders like Citi and J.P. Morgan Chase have consented to PACE projects for their customers.

KK: Thank you, Scott and David, for taking the time to speak to me about EUAs and PACE. 

For more information about the use of Property Assessed Clean Energy (PACE) visit PaceNow.


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