Retro-fitting Commercial BuildingsA Financing Perspective

Date: April 2011

Prepared by: Carbon Solutions Group

There is an opportunity to develop a scalable financing solution to fund the retro-fit of large commercial buildings

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Background

• The built environment is a significant emitter of greenhouse gas emissions. The use of residential and commercial buildings is responsible for about 23 percent of Australia’s greenhouse gas emissions1

• The International Panel on Climate Change found that energy efficiency in buildings encompasses the most diverse, largest and cost-effective set of mitigation opportunities available

• A Climateworks Australia study 2 estimated that there is potential to save as much as 23 GWhr per year through energy efficiency retro-fits in commercial buildings by 2020, with an investment requirement of around $13 billion.

• The City of Melbourne1,200 buildings program is estimated to cost $1.3 billion in additional retrofitting construction expenditure (within a range of approximately $0.8 billion to $1.7 billion). 3

The Opportunity

• To develop a scalable financing solution to fund commercial building retro-fits.

Challenges

• Split incentives

• Aggregation and scale

• Large number of stakeholders involved

• Up-front capital costs with average payback

periods of 7 to 10 years

• Concept of using reduction in costs as a revenue

stream

• Lack of awareness Energy efficiency is not sexy

1. Unlocking a Green, Efficient Build Environment, Build Environment meets Parliament Summit, Penny Wong, 16 June 20102. Climateworks, Low Carbon Growth Plan for Australia, March 20103. The retrofitting costs are base building only and do not include tenanted space.

There are a number of key factors driving the retro-fitting of commercial buildings

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• Tangible benefits include lower energy costs1, higher rentals, lower vacancies and enhanced market value

• Intangible benefits include reduced carbon emissions, improved working conditions for employee and increased productivity

• Tenants (particularly government2 and large corporates) increasingly demand green office buildings with government policy to occupy buildings with a minimum 4.5 star NABERS energy rating

• New national legislation to apply from mid 2010 will require mandatory disclosure of energy efficiency ratings for commercial office are sold, leased and subleased (greater than 2000m2 in Net Lettable Area). 3 As a result, office buildings that are more energy efficient will be at a competitive advantage and encourage demand for more efficient buildings.

• “Future proof” the portfolio against rising energy costs, market rejection of “non-green” buildings and tightening regulations on building sustainability performance

1. A one star gain would save energy costs of $2 to $4 a square metre per annum (excluding the impact of a price on carbon).2. Government tenants occupy approximately 33 percent of the Australian office market.3. NABERS administration have indicated that the “current market average” NABERS Energy rating for offices is 2.0 to 2.5 stars

The opportunity to develop a commercial building retro-fit solution is complicated by the differing requirements of the key stakeholders

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NSW GovernmentDepartment of Environment, Climate Change and Water

Victorian GovernmentDepartment of Premier and Cabinet

A scalable solution delivers on one of the critical requirements of all stakeholders

• Project type: Energy and water efficiency

• Property size: minimum 5,000sqm

• Property energy bill: minimum $500,000 p.a.

• Single site project: minimum $500,000

• Building age: minimum 5 years

• Star rating: less than 3.5 NABER’s (energy and water)

• Location: National

Possible property filters

The Solution

Work with fund managers with the potential to retro-fit a number of commercial properties across their portfolio Target retro-fit investments that deliver 30 to 40 percent energy efficiency savings per building

Lighting

Building Management

System

Building Operational

Changes

Mechanical Works

Chiller Replacement

Cum

ulat

ive

Ene

rgy

Sav

ings

$1.5m

40%

Part 1 Part 4Part 2 Part 3 Part 5

Delivering maximum energy efficiency savings

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There are a couple of major financing road-blocks that need to be resolved for the commercial building retro-fit financing opportunity to be realised

1. Term of the loan

2. Subordination of security

Proposed solution

Challenges

• Environmental Upgrade Agreements (“EUA”)

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EUA financing has the potential to overcome key barriers to financing energy efficiency retro-fits in commercial buildings

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Bank

Commercial Property Fund

City Council

Property 1 Property 2

ESCO

Undertake retrofit & provide EPC **

Energy Savings

Guarantee

Debt

Australian Carbon Trust

Debt

SPV

“Special Taxes” levied by City Council

“Special Taxes” levied by City Council

Considerable progress has been made in developing commercial building retro-fit financing structures but challenges remain

There has been significant progress across the commercial property industry, the banking sector and both Federal and State governments to address the commercial building retro-fit opportunity

There are still a number of challenges that need to be addressed in order to develop a scalable, financing business model

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Key Contacts - Carbon Solutions

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Neil HerefordHead of Carbon Solutions GroupInstitutional Banking & Markets

Commonwealth Bank of AustraliaLevel 22, 201 Sussex StreetSydney NSW 2000

Phone: 61 2 9118 4225Mobile: 61 410 445 039Fax: 61 2 9118 4200Email: neil.hereford@cba.com.au