The Retrofit Financing Power of EUAs

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Friday, July 5th, 2013
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A relatively new type of instrument is having a profound impact on financing arrangements with regard to the retrofitting of major office towers and other types of commercial property in NSW, a senior project officer within the New South Wales government says.

Glenn May, Senior Project Officer – Stakeholder Management in the Office of Environment and Heritage at the Department of Premier and Cabinet (NSW) said Environmental Upgrade Agreements (EUAs) – special lending instruments aimed at funding upgrades to improve commercial building performance in areas such as energy, water and waste, are gaining traction in the market.

While essentially still a loan from a financial institution, EUAs differ from traditional lending arrangements in that loans are tied to the property rather than its owner and interest, and repayments are collected by local councils through additional charges on rate invoices rather than paid directly to the lender. Furthermore, landlords can enter into agreements whereby tenants contribute toward the upgrade costs and are compensated for by reductions in operating costs gained through improved building performance.

Concluded in October 2011, the first such arrangement in the world involved building owner Varga Brothers spending $400,000 installing an energy efficient chiller and upgrading building management systems at 460 Collins Street in Melbourne, resulting in annual CO2 reductions of 170 tonnes. In addition to NSW, EUAs are available in Victoria and will soon be available in South Australia.

Under a much larger scale agreement finalised in March, Frasers Property Australia is spending $26.5 million installing a two-megawatt trigeneration plant using natural gas engines to produce low carbon thermal energy for its part-owned Central Park development on the former Carlton and United Brewery site at Broadway in Sydney.

Trigenerator EUA

Trigenerator installed under EUA at Central Park, Sydney

Apart from offering landlords the ability to split upgrade costs with tenants, the biggest area of appeal behind EUAs revolves around their ability to provide funding at competitive interest rates and having repayments closely matched to savings gained from more efficient operations.

The competitive interest rate stems in part from the loan being tied to the property rather than the owner as well as the council’s high ranking as a creditor in the event of landlord insolvency.

“Basically it’s a commercial loan which is paid back through local council rates,” said May, who will give a presentation about EUAs at the Retrofit & Refurb Conference & Expo in Sydney later this year.  “It can transfer to a new owner if the property is sold.  But its main appeal is that it offers a new way to get those projects underway to raise building performance like lighting or expensive refrigerant gas replacement for HVAC.”

He said EUAs make for a strong option as they offer competitive fixed interest rates that stretch beyond the usual five-year terms and offer tenants a chance to pay as they save.

“Depending on their existing funding arrangements, an EUA can allow flexibility in capital management by not impact on existing credit lines, and projects have of course the potential to increase the value of the asset once completed,” he added.

trigeneraton plant

Above trigeneraton plant being installed at Central Park

May says keys to a successful EUA agreement revolve around careful consideration of landlord and tenant requirements as well as early engagement with tenants on the part of the landowner.

He says the Office of Environment and Heritage is raising awareness about the instruments in his state though engagement with media and industry stakeholders, while a number of councils are engaging directly with property owners regarding the potential benefits of such arrangements.

“I think it has a lot of potential, particularly where there are tenants involved and the landlord is looking to upgrade and has interest in keeping the tenants with them in their tenancy,” he said. “The main barrier quite simply is that it’s new.  But that’s why events like Retrofitting and Refurb are the very opportunities we are targeting to get the message out there to the right audience.”

“The more people become aware of EUAs, what the benefits are for the landlord and tenant, the more I think we will see this as a popular choice for optimising  cost savings sooner rather than later.”

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