Sustainable Business Australia Environmental Upgrade Agreements - Commercial building retro-fits Brendan Bateman, Partner 13 April 2011 © Clayton Utz

What is an EUA? Voluntary agreement involving a building owner, local government authority and financier to facilitate energy efficiency and environmental upgrades to existing buildings Utilises a council's rating powers to repay funds advanced for upgrades, secured by a first charge over property PACE model in US - Property Assessed Clean Energy financing The rates reflect the payments required to amortise the cost of the energy efficiency retrofit investment Financiers rely on position as the assignee of the rates and the beneficiary of the rate as security to finance the projects. Objective to create low cost funding through "no-risk" lending

EUA - Victorian model Local Government and Planning Legislation Amendment Act 2001 (Vic) received Royal Assent 15 September 2010 Introduces new Part 4B to The City of Melbourne Act 2001 to enable a PACE like financing mechanism to be implemented but in Melbourne only New Part 4B provides for entry into EUA to fund works that improve the energy, water or environmental efficiency or sustainability of a building 'Primary parties' to EUA's are MCC, building owner and financier Existing buildings used predominantly for non-residential purposes

EUA - NSW model Local Government Amendment (Environmental Upgrade Agreements) Act 2010 passed Nov 2010, supported by regs and Guidelines for EUAs Amends LG Act to include new Part 2A to permit entry by a council into an EUA for works to improve energy, water or environmental efficiency or sustainability of a building and anything declared in regs. (see Part 5A of LG regs - includes alternative methods of transport) Parties include a council, building owner and financier Existing buildings used predominantly for non-residential purposes, plus multi-residential strata schemes with more than 20 lots EPC form part of EUA

Provisions of EUA Outline the works to be undertaken Financier to advance funds to the owner on the following conditions: owner uses the funds to conduct works; the owner or any occupier or both pay the charge levied by the Council; and the Council uses the funds to repay the lending body the principal plus interest. Specify the total amount being advanced, the charges to be levied and the repayment schedule May impose a penalty interest rate payable to the lending body.

Council's obligations Declares environmental upgrade charge in respect of the land and levy the charge by sending a notice to the person liable to pay Charge must be the agreed amount specified in the EUA Total amount of the charge to be used by Council to make repayments to the lending body in accordance with the agreement (administrative costs and penalty interest may be excluded) Unpaid charge becomes a charge on the land. Council "may" take action to recover unpaid charges (NSW must use best endeavours) Council is not liable to repay the lending body until charges paid or until charges recovered

EUA prerequisites PrerequisitesVicNSW Notice of charges to lessees Yes Lessee's consentYesNo if lease permits Mortgagees notifiedYesNot required Financier certificateYesNot required

Dealing with split incentives - NSW Facilitates lessee contribution to charge by: operating retrospectively by deeming existing leases that require lessees to pay charges incurred by lessor to include EUA charges contributions not treated as a capital costs for purposes of s23 Retail Leases Act 1994 lessor's obligation to pay rates, taxes and charges under Residential Tenancy legislation does not apply But lessee can only be required to pay a reasonable contribution commensurate with reasonable estimate of cost savings

Potential issues Lender assumes the risk of non repayment. Council has no obligation to assume the debt or pursue payment. Charge over land benefits Council, not the lender Confirmation that the total value of the charges when added to existing debts and other charges will not exceed the capital improved value of the land Split incentive - lessee's consent can mean that a single tenant could frustrate entry into an EUA. NSW model preferred? How do you characterise the advance of funds to the building owner? Negative pledge covenants, tax and accounting implications Implications for scalability and cost

Questions ?