Richard Branson

21 September 2011 – It’s got Richard Branson and his Carbon War Room and potentially billions of dollars of investment in the United States. Australia is also in on the act and Melbourne and Sydney are vying to be the first to market.

It’s the race to roll out the first batch of energy efficiency retrofits for commercial buildings that pay for themselves through savings on the power bills, and use private investment funding repaid through local government rates.

The City of Sydney has recently posted a draft template for what an environmental upgrade agreement template might look like and Parramatta and North Sydney councils are close behind. The NSW Office of Environment & Heritage has posted a set of guidelines for the state wide legislation that governs the agreements.

Melbourne already has its guidelines for a program confined initially to its 1200 buildings program and could be close to the first deal involving a building of more than 40,000 and a retrofit worth between up to $14 million.

In Australia the agreements have been fostered using seed funding from Low Carbon Australia and private investment from NAB and Eureka Funds Management.

But the US is also steaming in this direction. In fact it started the trend.

According to news yesterday from The New York Times that had the Twittersphere working double time under the hash tag #green buildings, Richard Branson’s Carbon War Room has led a consortium for the first batch of commercial buildings awaiting the green light.

“The consortium is led by a company called Ygrene Energy Fund of Santa Rosa, Calif., which has already won an exclusive contract to manage a retrofit program for a half-dozen communities in the Miami area, with the city expected to join in a few weeks. It is in the late stages of completing a contract with Sacramento, and is seeking deals in other cities,” the newspaper said.

Essentially the concept in both countries is that energy efficiency upgrades for buildings are initially funded by private investment, and the investment recouped through council rate charges, but are cash flow positive for the tenant (at worst neutral) because of savings on the power bill.

The US was first to develop the idea and applied it initially to residential property, but this floundered because of complications associated with mortgage security issues. It could be a much smoother ride for commercial property.

In Australia, Melbourne developed its own version of the concept through its Melbourne 1200 program but industry sources say the legislation is onerous, requiring agreement of all tenants in a building.

The Sydney EUA template
In NSW, the legislation requires that tenants are no worse off but does not need tenant agreement.

According to Napier & Blakeley joint managing director Peter Frith there is considerable interest from some parties to get the EUAs finalised but in his opinion the draft template agreement released by the City of Sydney was “clunky” and could do with some shaping up.

“It would be useful if it was split slightly. The council and the financiers know it backwards but building owners will be coming fresh to it each time so a document that has more defined sections relevant to the building owner would be better.”

Mr Frith’s company recently launched a new operation, Verdigris Capital, to take advantage of the emerging opportunities offered through the initiative and kept a close eye on developments ever since. He was recently invited to review the documentation in Melbourne, to “offer a fresh set of eyes” he said.

His verdict? The EUA draft document from the City of Sydney should be more workable than the final EUA document in Melbourne, Mr Frith said.

“Melbourne’s legislation is probably more difficult because it requires all the tenants to agree before an EUA is entered into. Whereas in Sydney tenants are protected in that they can’t be any worse off, but agreement is not required.”

Property interests in Melbourne are looking to have the legislation modified, Mr Frith said, but maybe after a trial period. “I think they might let it run its course and see if it’s as prohibitive as people say it is. But if they do some transactions they might leave it.

“If Sydney leaps ahead, you can assume Melbourne will water down some of the aspects.”

Mr Frith said he understood “the objective is to have the document in Sydney finalised by September/October.”

Mr Frith said Verigris was working on an agreement in Melbourne on a deal worth between $7 million and $15 million for a building of more than 40,000 square metres and he believed a handful of other deals are under way.

He said the industry was “keenly awaiting finalised documentation as as one potential mechanism around split incentives [where owners are reluctant to pay for upgrades that benefit tenants.]”

Larger institutional won’t be the early movers, said Mr Frith, but are likely to change their minds when they see that tenants can be cash flow positive from the start.

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