Q&A on Environmental Upgrade Finance

Following on from our post on the retrofit finance event Madgwicks Lawyers and engineering firm, AECOM hosted with City of Melbourne and Sustainable Melbourne Fund, below is a series of Q&A that were discussed by speakers and audience members.

Speakers included Ed Brown and Anne Hellstedt of AECOM, Scott Aitken of Madgwicks Lawyers and Sustainable Melbourne Fund’s Scott Bocskay. A small group of building owners and consultants in the built environment came together to ask questions and share thoughts and issues expertise and here is what they had to say.

Q. What is the cost of finance?

A. The cost of finance is determined on a project by project basis. It was queried whether commercial investors (e.g. real estate investment trusts) would be attracted by this finance as they can probably source cheaper money elsewhere. While this may be the case in some circumstances, in others, the EUA is more attractive because of the term of the loan available (with Bankmecu offering terms up to 15 years and NAB offering terms up to 10).

Q. How are risks and benefits shared between landlord and tenant? 

A. One of the key features of the EUA is that the tenant(s) can contribute to the investment, and on paper, should derive a financial benefit. But this benefit is dependent upon a number of assumptions: a good design, effective operations and correct assumptions about future energy price rises.

As a basis, both parties therefore need to undertake some form of due diligence to ensure that the investment is a robust one and that there is confidence in the forecasts. Extending this further, the question was raised whether consideration could be given to establishing some form of performance guarantee between the landlord and the tenant such that there is increased confidence that the tenant is getting what they are paying for. This was raised specifically in relation to heating and cooling installations, the performance of which, unlike lighting, is very much tied to the controls, maintenance and usage patterns. Green Leases were discussed, and it was agreed that these can be useful mechanisms to firm up commitments from both parties.

Q. What about residential properties in the CBD?  

A. There are plenty of large, residential apartment buildings in the city municipality, many of which would benefit from an environmental upgrade. However, the current legislation only applies to properties that are use for predominantly non-residential purposes (office, industrial or retail). This leaves space for more mixed-use buildings, but closes the door (for now) on pure residential properties.

Q. Who are the lenders for EUAs? 

A. There are currently two lenders in the market place: - NAB (with Eureka Funds Management and Low carbon Australia) – lending up to 10 years; and bankMECU – lending up to 15 years (negotiable).

Q. What is the extent of tenant contribution to repayments? 

A. The nature of the contribution from the tenant is all subject to a commercial discussion between building owner and tenant. Up to 100% contribution from tenants based on the percentage of net letting area in the building, would see the owner in a cash neutral position. In theory, even at this level of contribution the tenant should be better off where the finance terms are structured correctly.

Q. What is the role of CitySwitch in engaging tenants to create demand for environmental upgrades? 

A. The tenant has a strong vote when building owners are considering what to do with their buildings. Tenant retention is usually the number one priority. CitySwitch is a program run by the City of Melbourne to encourage and support tenants in their own energy efficiency activities, whether through direct investment in their own space or through engagement with others. Sustainable Melbourne Fund works closely with CitySwitch Victoria to support tenant engagement activity.

Q. What is the role of Sustainability Victoria? 

A. Sustainability Victoria is able to make funding available for energy audits on a match funding basis. Energy audits are a mandatory part of the EUA process. The intention is to reduce the initial barrier to investment in energy efficiency measures as the audit should identify the scale of the need (i.e. financial exposure through non-action in response to increasing energy costs) and conversely the scale of the opportunity.

For further Q&A opportunities, connect with us on Twitter or LinkedIn; our enthusiastic consultants await you.

Image credit: Raymond Bryson via Flickr Creative Commons

 

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