What are the implications of the Green Deal for Commercial Property?

December 21, 2012

By: Philip Hargreaves, Executive Chairman and CEO of Inteb

The Green Deal is an initiative that will have significant impacts on the commercial property sector from the end of Q1 2013, as a far-reaching energy efficiency drive. Fundamentally, it is a financing mechanism for energy efficiency improvements in both private and public sectors and domestic and non-domestic properties. It operates on the basis of a Green Deal Advisor carrying out a full property inspection, to write a Green Deal Advice Report (GDAR), recommending measures (from over 50) which can be fitted within the property and satisfy the Golden Rule.

The Golden Rule stipulates that the cost of the recommended measures must be lower than (at least a “0” NPV) the annual saving resulting from their installation. If the property owner accepts the recommendations and signs a Green Deal Plan or contract with a Green Deal Provider, a Green Deal Installer then carries out the work, with the cost charged back on the property’s electricity bill over a number of years (up to 25). The units of energy used should fall, but behavioural change and proper energy management can augment the reduction and bring still more benefits all round.

Non-domestic Green Deal processes are inherently tricky, due to complexities of tenure and ownership. However, landlords must best consider their Green Deal strategies and negotiate the maze as Green Deal cannot be ignored. By 2016, a landlord cannot refuse a tenant’s request for Green Deal improvements – creating huge potential implications for properties owned within investment portfolios, as well as for individual owner occupiers. Additionally, in 2018, it will become illegal for landlords to rent properties with an EPC rating lower than an “E”.

There is a significant risk for landlords based around length of tenure. Landlords must avoid owning unoccupied property for which they are left footing the Green Deal charge. There is also an issue relating to multi-let properties, where general consents from all parties are required.

In the short term, Green Deal is likely to be of most interest to the SME owner-occupier companies that wish to give staff more energy-efficient and comfortable working environments, using the Green Deal’s useful financing mechanism. However, many other property owners are already assessing how to improve energy efficiencies in lower-rated EPC rated properties and focusing on building lifecycle planning for budgeting purposes as well as evaluating other financing options outside Green Deal.

Multi-let scenarios are problematic. Green Deal consent is required from the bill payer, but in a multi-let property, who is that? If some tenants refuse energy efficiency measures, what happens? A landlord cannot fix energy efficient systems in some areas of the building and not others.

On the plus side, Green Deal benefits will be enjoyed by both tenants and landlords, with tenants receiving enhanced comfort, without a higher service charge, thanks to the Golden Rule. Better working conditions should lead to longer tenures and increased values for landlords, without them having to pay for the improvements, although the correlation between sustainable buildings and value enhancement is still to be widely accepted, nothwithstanding reputational impacts.

To be a Green Deal winner, a commercial property owner needs proper advice and a strategy for the property portfolio as a whole. Accessing the services of in-the-know Green Deal Assessors working at the highest level is vital. Owners should seek to be ahead of the game and receive reputational capital out of the Green Deal process. Clear views on financing options should be sought, as Green Deal may be only part of the solution and a co-ordinated approach, bringing all parties, including managing agents and contractors, to the table is essential.

As the tenant is effectively paying for quality-driven Green Deal installations through their electricity bill, their future rent reviews should be favourable, which is why early engagement is essential, to establish future protocols.

The EPC is the key to Green Deal and its authenticity is paramount if the Green Deal Advice Report (GDAR), which forms the basis of the Green Deal Plan – the contractual relationship between the Green Deal Provider and the occupier/bill payer – is to be accurate. It is crucial that existing energy assessors and Green Deal Assessors are competent and Green Deal training should be first class. Many current EPCs are sub-standard and this will clearly have implications on properties at the lower “F” and “G” ratings level going forward.

While the Green Deal infrastructure is not yet in place for a mass roll out and we have only a soft launch at present, Green Deal is here to stay. Property owners must prepare robust Green Deal strategies for their portfolios, access top-level advice and engage with an informed Green Deal Provider who can construct a plan incorporating training, stakeholder involvement and financial options.