Loans for environmental upgrades have come a long way in the past 10 years. Owners can now enjoy one of three tailored products, including the Capital Fund, which becomes part of a developer’s capital stack, reduces cost and provides a greater return on equity.
Building an attractive business case for onsite solar, green roofs and LED lighting swap outs is not always easy but Sustainable Australia Fund’s innovative suite of loans could change that.
The company offers fixed-rate, long-term loans for environmental upgrades, covering up to 100 per cent of the capital costs, paid back through council rates.
“It’s essentially taking money already being wasted on energy and putting it into upgrading their building,” Sustainable Australia Fund chief executive officer Scott Bocskay told The Fifth Estate.
“Using our long term finance is the secret sauce that puts money into the pockets of businesses today.”
Paying the loan back through council rates addresses the split incentive issue – a key barrier to environmental upgrades for commercial building owners. Instead of worrying about who will benefit from the arrangement most, with a SAF program the chief beneficiary of the upgrades, the tenant, makes the repayments through council rates as part of normal outgoings.
Without SAF it’s the owner who typically cops the cost of upgrades without any renumeration through energy savings.
The loans end up tied to the building rather than the owner, and are easily transferred to a new owner when sold.
An existing idea reinvented for a fast decarbonising economy
Experiencing a sense of déjà vu? That’s because this innovative financing model is not entirely new.
Environmental upgrade agreements (EUAs) have been around for nearly 10 years and are already well-established in Victoria, which was the first state to introduce the legislation that allows repayments to be paid through local government rates.
Bocskay got the first EUAs up-and-running in Melbourne in 2010 through a revolving loan fund established by the City of Melbourne.
Now common in Victoria, with more than 70 loans made through the scheme, Bocskay wants to see other jurisdictions embrace EUAs.
The expansion is already underway and kicked off with a financing partnership with customer-owned Bank Australia for $200 million, announced in May. The company has since been engaging councils to open up the EUA marketplace further.
- See our story EUAs get a new name and go national – at last
The program is gunning for NSW and South Australia as its big expansion opportunities, as the only two states outside Victoria that have EUAs legislation.
There’s hope for the rest of the country though, with activity to enable this form of finance underway in just about every jurisdiction.
Environmental upgrade agreements 2.0 comes with a list of suppliers
Sustainable Australia Fund brings the EUA jigsaw together, making it easy for councils and owners to participate. As well as its partnership with Bank Australia, it has hundreds of industry partners for installing solar panels and other systems.
The program’s existing wins are across a range of industry sectors.
The last 10 years has been more than enough time to iron out any kinks in the process, including digitisation where possible, and bring down the administrative costs as low as possible.
What’s on offer now, according to Bocskay, is “EUAs 2.0”.
Three new products
To help make EUAs easier for customers to navigate, Sustainable Australia Fund is launching three different loan products. The products will target different needs for commercial customers, including agriculture, commercial office buildings, tourism, commercial and industrial properties.
The targeted products will help customers choose a funding model that suits them.
“You’re talking across a spectrum of customers, and the narrative changes. Different clients need different outcomes.
“A farmer in Gippsland is not interested in how the model works in the CBD of Melbourne, so we created a product that works for each type of business.”
Customers interested in solar will use the Solar Fund, which is a specialist EUA product designed “to put more money in your pocket today”.
Pitched at owner occupiers that want cash in hand as quickly as possible for operations, the Solar Fund loan is up to 20 years of fixed interest finance for solar and “increasingly batteries as we progress that forward.”
The Upgrade Fund covers other environmental upgrade projects, such as water recycling, LEDs and HVAC upgrades. Like Solar Fund, it’s a long term fixed interest loan.
Bocskay says these products will appeal to customers that are particularly sensitive to increasing energy prices, such as agriculture and industrial properties, who want to see cashflow outcomes from these projects.
The third product, the Capital Fund, is a novel capital solution designed for repositioning assets, like an office building into a hotel.
Developers can secure capital for any environmental works, such as a new energy efficient HVAC system or shading, as part of a repositioning project.
A $10-15 million or so loan becomes part of the developer’s capital stack, reducing the cost for the developer and giving them a greater return on equity.
Bocskay says that it’s a new approach to EUAs that will make large, complicated projects in busy urban centres easier.
“Those projects are really quite challenging, there are a lot of moving parts.”
The product might make a refurbishment a financially appealing option for the large number of commercial buildings in Melbourne and Sydney approaching end of life, saving these buildings from demolition and the embedded carbon that goeswith it.
Examples of EUAs with a WeWork tenant
One example of EUA finance arrangement was the upgrade of an 80-year-old commercial building in Melbourne’s CBD, 401 Collins Street.
An EUA covered a chiller replacement, pipework insulation, outside air system upgrade, toilet exhaust system upgrade, BMS upgrade, and electrical sub metering, with funds for other renovations sourced via a traditional bank loan.
The upgrades resulted in a 32 per cent reduction in electricity use, and 16 per cent drop in gas use. The renovations have also attracted coworking franchise WeWork on a 15-year lease.
Leveraging EUAs as part of the renovations reduced bank loan and equity requirements, minimised long-term financial risk, and increased short-term cashflow.
Green has never looked so good for Australian businesses
Clever businesses are recognising that the transition from a centralised, fossil fuel-reliant economy to a decentralised and decarbonised economy is happening – and fast – and want to future proof their business models by making the appropriate upgrades to physical assets.
The need for action will only increase as Millennials become more influential in the corporate structure, Sustainable Australia Fund chair Mark Woodall told The Fifth Estate.
Woodall expects sustainability will be top of mind for the incoming generation of tenants that are making decisions about property.
The same goes for consumers, who are becoming more attuned to environmental issues. They will expect major operators, such as the major supermarkets, to be greening their supply chains.
“People want to know what the carbon content is of the product you are delivering.”
Financing mechanisms like EUAs will make it easier for these companies to undertake the necessary upgrades to their stores, factories and other physical assets, Woodall says.
He also says Sustainable Australia Fund’s customers are increasingly concerned about the security of their energy supply and keeping their energy costs down.
Getting councils across the line
Convincing councils that EUAs are beneficial to the municipality has posed a challenge in the past.
Although this form of funding has the potential to bring in jobs, investment and help reach local government sustainability targets, the possibility of additional administrative work can be enough to scare off time- and resource-poor councils.
Sustainable Australia Fund has spent a lot of time demystifying EUAs and taking away both the administrative and financial burden away from councils.
The company plans to build on its experience with more than 37 councils in Victoria as it expands into NSW and SA.
Woodall expects the next 12 months will be about educating and engaging stakeholders so that “we have a platform that can funnel highly attractive and value adding funding to achieve outcomes.”
The following 12 months will be about finding projects for the $200 million in financing secured so far, with more potentially in the pipeline.