What is Building Upgrade Finance?
Building Upgrade Finance (formerly referred to as Environmental Upgrade Finance) is a mechanism which helps building owners to access loans to improve the energy, water and environmental efficiency of existing commercial buildings.
Under the Building Upgrade Finance mechanism, a local council can voluntarily enter into a building upgrade agreement with a building owner and a financier. Under a building upgrade agreement the building owner agrees to undertake upgrade works in respect of their building. The financier agrees to advance money to the building owner for the purpose of funding the upgrade works, and the council agrees to levy a building upgrade charge against the land on which the building is situated. This charge is paid by the building owner to recoup the money advanced by the financier for the upgrade works, and is passed on to the financier by the council once received from the building owner.
The loan is tied to a property rather than a property owner and loan repayments are collected via a local government charge that is levied on the property and passed on to the financier.
As a result of the arrangement, the loan is effectively tied to the property rather than the property owner, with loan repayments collected via the building upgrade charge. In the event of the transfer of ownership of the property, the charge can remain with the property if the purchaser so agrees.
The strength of the mechanism lies within the building upgrade charge. The charge effectively secures the loan, being ranked senior to mortgages, taxes and other charges in the event of default. This provides heightened security to the financier, allowing them to offer finance to the building owner at more attractive terms.
Under many commercial leases, tenants pay local government charges. Building Upgrade Finance provides an avenue for building owners and tenants to share the costs and benefits of building upgrades, provided certain conditions are met to ensure that tenants do not incur any financial detriment.
Similar mechanisms have been established in Victoria and New South Wales, primarily for commercial (non-residential) buildings.