1. Retro-fitting Commercial Buildings A Financing Perspective Date: April 2011 Prepared by: Carbon Solutions Group

2. There is an opportunity to develop a scalable financing solution to fund the retro-fit of large commercial buildings 2 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 emissions 1 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 2010 2.Climateworks, Low Carbon Growth Plan for Australia, March 2010 3.The retrofitting costs are base building only and do not include tenanted space.

3. There are a number of key factors driving the retro-fitting of commercial buildings 3 Tangible benefits include lower energy costs 1, higher rentals, lower vacancies and enhanced market value Intangible benefits include reduced carbon emissions, improved working conditions for employee and increased productivity Tenants (particularly government 2 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 2000m 2 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

4. The opportunity to develop a commercial building retro-fit solution is complicated by the differing requirements of the key stakeholders 4 NSW Government Department of Environment, Climate Change and Water Victorian Government Department of Premier and Cabinet

5. 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 Cumulative Energy Savings $1.5m 40% Part 1Part 4Part 2Part 3Part 5 Delivering maximum energy efficiency savings 5

6. 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”) 6

7. EUA financing has the potential to overcome key barriers to financing energy efficiency retro-fits in commercial buildings 7 7 Bank Commercial Property Fund City Council Property 1Property 2 ESCO Undertake retrofit & provide EPC ** Energy Savings Guarantee Debt Australian Carbon Trust Debt SPV “Special Taxes” levied by City Council

8. 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 8

9. Key Contacts - Carbon Solutions 9 Neil Hereford Head of Carbon Solutions Group Institutional Banking & Markets Commonwealth Bank of Australia Level 22, 201 Sussex Street Sydney NSW 2000 Phone: 61 2 9118 4225 Mobile: 61 410 445 039 Fax: 61 2 9118 4200 Email: neil.hereford@cba.com.au