United States: Climate Mobilization Act Creates Opportunity For NY Real Estate

New York City Council recently passed the Climate Mobilization Act, which contains six measures designed to reduce greenhouse gas emissions produced by the city's built environment. The goal of the legislation is to require reductions in emissions from large and medium-sized buildings of 40% by 2030 and 80% by 2050, as compared to the levels of emissions in 2005.

The legislation caps emissions for buildings over 25,000 square feet, and it establishes the Office of Building Energy and Emissions Performance within the Department of Buildings to implement the legislation and guide future policymaking. Another act passed on the same day authorizes a Property Assessed Clean Energy (PACE) program in the City, in which property owners could participate to obtain financing for up to 100% of the cost of their energy and emissions upgrades.  

NYC Local Law 96 (2019): Establishing a PACE Program

By establishing New York's own PACE program, NYC Local Law 96 (2019) provides building owners with a tool to finance improvements and retrofits that will help them comply with the new emissions and energy conservation measures introduced by NYC Local Law 97. Under current state-level legislation, PACE programs generally provide long-term financing in an amount of up to 100% of the cost of the qualifying improvements, and financed projects are often designed so that the projected energy savings equal or exceed the cost of the newly installed equipment or structures.

In New York, the local law is in effect, but certain details of the program will be elaborated as part of the rule-making process. The local law provides that the rules will include eligibility criteria for PACE financings, terms and conditions for repayment, as well as application requirements. Additionally, the rules will specify criteria to certify persons who will conduct energy audits and renewable energy system feasibility studies. 

NYC Local Law 97 (2019): Reducing Greenhouse Gas Emissions

In capping the emissions for buildings larger than 25,000 square feet, the legislation creates a tiered compliance system based on the occupancy group of the building. The highest emitting 20% of buildings in each occupancy group must reduce their emissions for the first compliance date beginning in 2024, and the highest emitting 75% of buildings in all tiers must meet the second compliance date of 2030.

In addition to the emissions standards, the local law establishes energy conservation measures for buildings meeting the definition of "covered building," including buildings larger than 25,000 feet. This includes thirteen prescriptive energy conservation measures which must be implemented by December 31, 2024, such as adjusting temperature set points for heat and hot water, repairing all heating system leaks, maintaining the heading system, insulating all pipes, upgrading lights, weatherizing and air sealing.

The owners of covered buildings will be required to submit reports to demonstrate compliance both with the emissions standards and with the energy conservation measures by May 1, 2025. Penalties for non-compliance with the energy conservation measures will be determined by rule, and the maximum penalty for non-compliance with the emissions standard will be "equal to the difference between the building emissions limit for [the year covered in the report] and the reported building emissions for such year, multiplied by $268." 

Other legislative measures

In addition to NYC Local Laws 96 and 97 (2019) the Climate Mobilization Act includes the following measures:

  • NYC Local Law 98 (2019) provides a process for the design and construction standards, and maintenance and removal protocols for large wind turbines.
  • NYC Local Law 99 (2019) establishes an assessment process for the feasibility of replacing in-city gas fired power plants with battery storage systems.
  • NYC Local Law 93 (2019) requires the office of alternative energy to publish information and maintain links on its website to information on the installation of green roof systems, while NYC Local Law 94 (2019) requires green roofs on city buildings, and NYC Local Law 92 (2019) adjusts the requirements of NYC Local Law 94 (2019) for smaller buildings.
  • NYC Local Law 95 (2019) calls for the adjustment of the energy grading scale in NYC Local Law 33 (2018), to respond to the concerns from building owners that the grading scale does not accurately reflect a building's efficiency.
  • Resolution 66 (2018) calls upon the State Legislature to pass legislation that would increase the real property tax abatement for the installation of a green roof to $15 per square foot.

Overall, the Climate Mobilization Act has been described as both historic and ambitious, because of the scale of the environmental reforms it introduces. While the retrofits and energy conservation measures introduced by the Act might be expensive for certain building owners, commercial PACE transactions provide a useful tool for ensuring compliance while controlling costs.

As we recently discussed, commercial PACE securitizations can be an attractive investment option for funds, because they are often highly rated, and some insurance companies are seeking long-term exposure to these assets. Increasingly, commercial PACE assets are also sold in the "whole-loan" market to funds and institutional investors. New York City's new emissions and energy efficiency requirements could impose significant costs on commercial property owners, but the opportunity to obtain 100% long-term financing for those measures using the new PACE legislation is a built-in solution to paying those high costs. Now that legislation requires building owners to make upgrades, the number of commercial PACE financings and securitizations is likely to increase.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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