South Australia Embraces Environmental Upgrade Agreements

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Monday, January 4th, 2016
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Environmental Upgrade Agreements
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Adelaide has taken another step toward its goal of becoming the world’s first carbon neutral city, with the South Australian government passing new legislation which allows for an innovative new mechanism that will help fund upgrades to improve the carbon footprint of existing buildings within the city.

Passed into Parliament with the support of the Greens, independent John Darley and Disability Party representative Kelly Vincent, the new law for the first time creates a legal mechanism through which environmental upgrade agreements (EUAs) can be entered into.

Designed to enable finance to be provided for upgrades to improve the environmental performance of commercial buildings at rates which are lower than that of a normal commercial loan, EUAs involve the provision of funds from a financial institution to a building owner for works which will improve the energy efficiency and environmental performance of buildings.

Rather than repaying their financier directly, repayment is made through an upgrade charge collected by the council in addition to regular council rates and subsequently passed on to the lender.

Because the loans are secured to council rates, this arrangement represents a lower form of risk from the viewpoint of the lender and thus enables lending at a lower rate than what would be the case under a normal commercial loan.

Also, EUAs often unlock longer term financing than that available through traditional mechanisms and allow landlords to share part of the cost of the upgrade with tenants (limited to the expected operational cost reductions).

The first such agreement was struck in Melbourne in 2011, and involved $400,000 worth of improvements to Varga Brothers’ 460 Collins Street premises, including the installation of an energy efficient chiller and a building management system upgrade.

Since then, a handful of agreements have been entered into in Victoria and New South Wales.

For South Australia, the move follows the state government’s announcement in September of its intention to decarbonise its economy and have Adelaide become the first carbon neutral city in the world.

According to a strategy paper released at that time, the state plans to attract at least $10 billion in low-carbon investment throughout the state.

South Australia Climate Change Minister Ian Hunter says the legislation would help overcome barriers to environmental upgrades of commercial buildings while helping to stimulate economic activity and job creation as well as emissions reductions.

Hunter said benefits from EUAs include net reductions in operating costs, improved indoor amenity, staff productivity, and contributions toward corporate social responsibility goals from the viewpoint of commercial tenants and higher yields, improved asset values and greater ease in the attraction and retention of tenants from the viewpoint of commercial property landlords.

“This Bill has the potential to create hundreds – if not thousands – of important jobs and free up more than half a billion dollars in potential CBD capital investment,” he said.

“It clears the way for building owners to begin revitalising our ageing building stock, which will have the added benefit of advancing our plans for Adelaide to become the world’s first carbon neutral city.”

Property Council of Australia SA executive director Daniel Gannon said the move would help commercial property owners access lower cost funding to improve their buildings.

He said with a vacancy rate amongst D-grade office space at almost 20 per cent, the Adelaide CBD had a large number of existing buildings in need of significant retrofitting.

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