Newsletter#3 – January 2019: “The elevation of condominiums in the European Union

“Improving energy efficiency is one of the most economically efficient measures to ensure the transition towards a low-carbon economy in addition to being a key item of the Paris Agreement. The energy consumption of buildings accounts for 40% of total energy consumption in Europe and 36% of CO2 emissions.”

In addition to building jobs in the construction sector, these investments could provide Europe with greater energy independence – currently the European Union imports more than 50% of the energy it consumes, and historically to a large extent from its neighbour, Russia.

Financing the elevations

The specialized public agencies partly address the problems of the energy renovations, but without the bank capacity to finance the works, they clash against the banking world.

However, a number of possible elevation works are stillborn due to the lack of funding from the very start (project study), or the financing of the works because of the difficulties of finding suitable bank loans, so that the energy renovation remains in the box of the property manager.

Since 2015, the EIB Group has been the operator of the Investment Plan for Europe, more commonly known as Plan Juncker.

In 2015, the EIB adopted a €400 million programme for the energy renovation works of private dwellings, both individual and collective, financed by third-party finance companies (STFs).

However, in the absence of obtaining the benefit of guarantees from private financial institutions, which are reluctant, these organizations are struggling to finance the works.

The European Fund for Strategic Investments (FEIS) is the central pillar of the investment plan and should play this role. It allows the BEI to invest in more high-added value projects that have higher risks and easier access.

The role of private banks

Private banks need to intervene in this market with specific loans for elevation works, coupled with energy renovations that should be subsidized by the states through BEI European financing.

Indeed, banks are reluctant to lend money to condominiums who want to undertake elevation works, because the loans cannot currently be endorsed by the usual financial bodies that support the banks.

A condominium that wishes to undertake elevation works has no assets on which a banker or his lending organization could take mortgage security.

Usually, a bank cannot take out a mortgage on future lots that are not yet built, even not on a “transitory lot” and cannot settle for a promise of mortgage assignment promise on those lots.

The problem is even more acute as the condominium must incur minimum expenses for the architects and structural design offices as well as lawyers and notaries, and surveyors to prepare the elevation and have it approved by the AG.

Many projects that could have enabled energy renovation are thus blocked due to a lack of funding to cover the start-up costs of the operation.

Nevertheless, banks should be able to gradually provide the owner with the necessary funds, depending on the progress of the work. What remains fundamental is the direct contribution that the condominium must support in terms of initial feasibility studies and, ideally, a part of the cost of the new construction. It is also interesting to consider, as the analyses carried out in the framework of the European Energy Efficient Mortgages Action Plan (EEMAP) attempts to demonstrate, that “energy efficiency has a risk mitigation effect for banks as a result of the impact on a borrower’s ability to service his loan and on the value of the property”.

The collective condominium bank loan, as it operates in France could be the answer to the problem of the financing of the elevation works but banks are reluctant because the approach is substantially different from that usually followed. One of the solutions envisaged in order to solve this problem is the bank financing covered by a security fund, as mentioned above.

The collective loan with individual involvement of the co-owners cannot work because those who have not voted in favor of the works and to whom the majority of votes can impose the elevation works, will not subscribe to the loan because they do not want to go through with the expenses while knowing that they will still enjoy the benefits of a renovation of the building.

Another solution to help banks to move towards a new model would be a different weighting of the cost of capital for loans financing energy efficient mortgages – this is also a proposal addressed in the frame of the Energy Efficient Mortgages Initiatives within the Energy Efficient Mortgage Action Plan, led by the European Mortgage Federation.

Conclusion

The specificity of energy renovation and in particular the elevation of buildings in co-ownership must be emphasized. An association, the European Board of the Elevation, was created to carry out this theme. It aims to be a federation of professionals in the field and to promote elevation among all its players.

European legislation is too diverse and generally ignores the system of elevations and their tax incentive: in France, capital gains from the sale of the roof are tax exempt. In this sense, French legislation could be transposed to the other EU Member States by a European directive. The work carried out in the framework of the European project Abracadabra, as well as other projects for improving the energy efficiency of buildings (the green mortgages of the EeMAP project) make it possible to highlight the efforts that are being undertaken to circumvent these barriers and to diminish these constraints.

The Commission and the Inter-Parliamentary Group on Long Term Investments of the European Parliament and the public banks assisting them should, with regard to the elevation of buildings in co-ownership, refer to the following points:

The European Solutions Wanted

  1. Harmonization of legislations on the decisions in AG of condominium elevation with the French model that works well.
  2. Incentives to the reforms of the derogatory administrative regulation on urban plans for the elevations like in France.
  3. Incentive for a tax exemption on the capital gains from the sale of roofs by condominiums to finance energy renovation works through the sale of the new built lots.
  4. Access of the elevation works to the status of improvement works to allow access to reduced taxation.
  5. European direct aid to elevation audits and to condominium works by the FEDER funds.
  6. Creation of a European surety bonding system for private banks that finance the elevations with energy renovation of the building by a European Guarantee Fund under the auspices of the EIB. Capital cost relief for the commercial banks that finance these projects.