Greening Victoria's Buildings: E-Alert August 2010

Greening Victoria's Buildings: A new mechanism to finance retrofits through local government

A Bill has recently been introduced into the Victorian Parliament to amend the City of Melbourne Act 2001 to allow Council to use its rating powers to help secure private lending for building owners, which will fund environmental upgrades to commercial buildings in the City of Melbourne.

The effect of the proposed amendments is as follows:

• Council, a lending body and owner of rateable land that is used entirely or predominantly for non-residential purposes may enter into an 'environmental upgrade agreement' (EUA).
• Under an EUA, the lending body advances money to the owner on condition that the owner undertakes the agreed upgrade works.  In exchange, the owner or occupier must pay the environmental upgrade charge to the Council.  The money received by Council must be used to repay the lending body.  The Council is not liable to repay the lending body until the environmental upgrade charge is paid or recovered.
• Pursuant to the Local Government Act 1989, an unpaid environmental upgrade charge becomes a charge on the land and Council may take action to recover such charges.
• Certain pre-conditions must be fulfilled before an EUA can be entered into.  Among other things, Council must receive notice from the lending body that the total value of the proposed environmental upgrade charges, combined with any other taxes, rates, charges and mortgages owing on the land, will not exceed the existing capital improved value of the land.
• In the event that land subject to an environmental upgrade charge ceases to be rateable land, the owner or occupier must continue to pay the charge.

It is hoped that this new financing mechanism will provide building owners in the City of Melbourne with low cost finance for retrofits as part of the 1200 Buildings Program.  This program involves the retrofit of 1200 buildings in Melbourne's CBD to make them more sustainable.  The entities that have signed up to the program, including the City of Melbourne, have committed to reduce greenhouse gas emissions from their buildings by 38 per cent.  The types of measures that will be implemented to give effect to this objective include improving the supply of heating, ventilation and air conditioning systems, insulation, window fittings, double glazing and energy efficient lighting technologies.

The main advantages of environmental upgrade agreements are:

• EUAs address the problem of finding up-front capital to finance building retrofits, which could deter upgrade works being undertaken particularly in cases where it takes some time for energy efficiency upgrades to pay for themselves.
• These agreements also address the problem of split incentives – that is, a situation where a landlord invests capital to 'green' the building without the means of generating a return on the investment because the savings accrue directly to the tenant.  Under the EUAs, the environmental upgrade charge can be levied on the occupier.  In this way, the entity that is saving money in energy costs resulting from energy efficiency upgrades is the same entity that is paying for the upgrades.

Potentially, environmental upgrade agreements could be rolled out more broadly to help other councils make buildings in their municipalities greener and, therefore, more sustainable.

For further information please click here to contact a member of our Sustainability & Climate Change team.