Your guide to environmental upgrade agreements
Retrofitting buildings for improved environmental performance
Sustainable buildings deliver greater financial returns, and have lower vacancy rates and greater value than non-sustainable buildings (Building Better Returns by the Australian Property Institute and the Property Funds Association and Green Property Investment Index produced by IPD (Investment Property Databank), March 2011)
Improving the efficiency and environmental performance of a building through retrofitting can make an existing building more attractive to tenants, particularly in light of the introduction of the Commonwealth’s Commercial Buildings Disclosure program, which makes it easier for tenants to find and lease more efficient space.
Greener buildings have the added benefit of lowering utility bills and providing protection against rising energy prices in the future.
Environmental upgrade finance
The City of Sydney’s environmental upgrade finance scheme is making it easier for building owners to access capital for building retrofit projects, allowing both owners and tenants to reap the benefits of operating a greener building.
An Environmental Upgrade Agreement (EUA) is an agreement between a building owner, a finance provider and the City of Sydney, through which a finance provider advances funds to a building owner to complete upgrade works to improve the environmental performance of an existing building. These funds are then repaid to the finance provider through collection by the City of Sydney as an Environmental Upgrade Charge.
The City of Sydney will currently enter into EUAs if:
- The building is an existing one within the City’s local government area
- The building is non-residential and not strata titled
- There are no outstanding amounts (rates or other debts) payable to the City in respect of the property and its owner
- There are no outstanding orders that have been issued in respect of the property, its owner or tenants
- The building owner agrees to be bound by the City’s EUA Policy.
The City of Sydney’s EUA Application Form and Policy are available at cityofsydney.nsw.gov.au/eua
Types of work
To enter an EUA, a building owner must agree to carry out environmental upgrade works to an existing building.
Environmental upgrade works are works that improve the energy, water or environmental efficiency or sustainability of the building to which the EUA relates. A proposed upgrade could include activity to:
- Increase the efficiency of energy or water consumption
- Reduce energy or water consumption
- Prevent or reduce pollution
- Eliminate or reduce discharge of waste
- Reduce the use of materials
- Enable the recovery or recycling of materials
- Encourage or facilitate alternative methods of transportation to the use of a private motor vehicle (such as walking and cycling)
- Enable monitoring of environmental quality
- Reduce greenhouse gases.
- Examples of environmental upgrade works
- Examples of environmental upgrade works include:
- Lighting upgrades
- Building management system improvements
- Lift motor upgrades
- Improvements to heating, ventilation and air-conditioning – variable speed drives on ventilation motors, floor-by-floor shutoff valves for chilled or heated air, and installation of energy-efficient
- Installation of water-saving equipment – rainwater harvesting systems, cooling towers, evaporative condensers, blackwater treatment system, toilet and urinal efficient-unit replacement and water fixtures
- Solar thermal heat installation
- Glazing improvements
- Software upgrades for energy efficiency
- Installation of renewable energy – solar and wind
- Boiler improvements and installation of energy-efficient fixtures
- Improvements to energy efficiency of data centres and information and communication technology.
Potential benefits of financing works through an EUA
- Removes the need for upfront capital thereby improving cash flow
- Ability to pass on repayment costs to tenants so that the costs are shared between building owner and tenants
- Access to longer term fixed rates compared to typical bank financing thereby supporting major upgrades
- If ownership changes the structured repayments can stay on the land
- Energy efficiency savings effectively pay back the capital outlay
- Improves asset value and NABERS rating
- Improves leasing opportunities
- Reduces operating costs
- Improves amenity or working environment leading to increased productivity
- Demonstrates commitment to working sustainability
- Adds value to client offering
- Opportunity to increase the implementation rate of proposals
Impact on tenants
Some building owners may seek contributions from their tenants towards the Environmental Upgrade Charge. The EUA legislation offers full tenant protection, ensuring this amount cannot exceed the savings the tenant would otherwise receive from reduced outgoings.
Before an EUA is entered in to, the building owner must provide an estimate of the cost savings their tenants can expect. This estimate must be prepared by a suitably qualified person using approved calculation methods.
An Environmental Upgrade Charge amount equal to or less than the calculated cost-saving estimates will appear on the tenant’s invoice issued by the building owner. This contribution must remain cost neutral for the tenant; for example, be 100 per cent offset by a reduction in their energy and water bills.
Building owners will then report actual savings against the outlined estimates on an annual basis to the tenants and to the City of Sydney. Should the difference be significant and the estimate no longer be reasonable, building owners will resubmit their cost saving estimates and review tenants’ contributions (Section 3.4 (d) EUA Template, 52N (2) EUA Regulations. The EUA template requires the estimated cost savings (above which the owner cannot recover from a lessee) to be recalculated if the estimate is no longer accurate.)
EUA and selling property
No party may assign its rights under an EUA without the prior written consent of each party. The City of Sydney cannot unreasonably withhold or delay giving its consent, but it will not do so unless the purchaser agrees to comply with the City of Sydney’s EUA Policy. The selling owner and purchaser must enter into a deed through which the purchaser becomes bound by the terms of the EUA and the City of Sydney EUA Policy.
Alternatively, the selling owner may elect with 14 days’ notice in writing to pay out the balance owed by the EUA either before or on settlement of the sale of the property.
EUA and land value
An EUA cannot exceed the unimproved land value as determined by the Valuer General.
EUA and mortgages
As an EUA is a council charge it takes priority (with rates) over all other debts on the land.
To ensure transparency, the City of Sydney’s EUA Policy stipulates that the building owner must notify any existing financier of their intention to enter into an EUA. Building owners must provide the City of Sydney with confirmation that the relevant parties have been notified.
The existing financier then has 21 days to notify the City of Sydney if they object to the EUA.
Defaults on the EUA loan
In the event that there is either a default in paying a mortgage or non-payment of a quarterly Environmental Upgrade Charge then either the mortgagee or City of Sydney may initiate either foreclosure in the case of a mortgage, or debt recovery action in the case of an unpaid Environmental Upgrade Charge against the
The City of Sydney’s EUA Enforcement Procedure details what debt recovery action may be taken against a building owner for an unpaid Environmental Upgrade Charge that has been levied.
The City of Sydney’s EUA Enforcement Procedure is available at cityofsydney.nsw.gov.au/eua
GST applies to the City of Sydney’s administration service fee that is charged to recoup costs incurred by entering into and administrating the agreement. The Environmental Upgrade Charge does not, however, incur a GST liability.
The building owner must pay, or immediately on demand reimburse the City of Sydney and the financial provider for all taxes that may be payable or determined to be payable by the building owner, the City of Sydney or the financial provider.
Completing calculations and reports
All calculations and reports should be completed by a suitably qualified person i.e. somebody who has relevant industry experience and/ or is a member of a relevant professional association. To verify this the City of Sydney requires a letter from the building owner that confirms this is the case and provides the following details of the suitable qualified person:
- Name and contact details
- Company name and ABN (where applicable)
- Brief outline of their relevant experience, professional memberships and qualifications
- Declaration that the calculations are accurate, reasonable and in accordance with the EUA legislation
- The calculation methodology used
- Signature of the qualified person and/or the company director.
9 steps to an EUA
A building owner may approach the City of Sydney to discuss potential projects and eligibility for an Environmental Upgrade Agreement.
The building owner obtains finance approval from a finance provider.
The building owner completes the City of Sydney’s Environmental Upgrade Application Form.
The City of Sydney assesses the application.
Once approved, the building owner, the finance provider and the City of Sydney complete the Environmental Upgrade Template Agreement.
Once completed, the finance provider makes available the funds for the upgrade.
The City of Sydney imposes an Environmental Upgrade Charge on the land via the rates system and levies the charges to the building owner – charges are payable each quarter (coinciding with regular rate payments) for the life of the EUA.
The City of Sydney collects payment from the building owner and forwards to the finance provider to repay the loan.
The charge stays on the land until all Environmental Upgrade Charges are paid.
Registration of a caveat on the title of the land
Where the value of the proposed environmental upgrade works (plus interest) exceeds $5 million, the building owner may be required to consent to registration of a caveat on the title of the land subject to the EUA. The caveat (if applied) will disclose the City’s interest in the land and the total amount of the charge that will be levied on the land. Projects with a value of less than $5 million will not require registration of a caveat.
EUA and land exempt from rates
An EUA can be entered in to in respect of an existing building that is on land that may otherwise be exempt from the payment of rates, for example universities.
The legal framework for Environmental Upgrade Agreements is governed by the Local Government Act 1993, the Local Government (General) Regulation 2005 and the Office of Environment and Heritage EUA Guidelines.
The amendment in 2011 to the Local Government Act 1993 established the EUA mechanism. Amendments to the Local Government (General) Regulation 2005 then support the operation of EUAs extending to compliance with the EUA guidelines and the mandatory adoption of an EUA template.
The relevant legislative extracts to the Local Government Act, Regulations and Guidelines can be found on the Office of Environment and Heritage website.
The City is ready to enter into EUAs now.
Last updated: Friday, 8 February 2013