New York City Department of Finance Adopts Final Rule Expanding CPACE Program

Stroock & Stroock & Lavan LLP

The New York City Department of Finance (“DOF”) recently published notice of its adoption of a final rule (the “Rule”) effectuating two significant expansions of the City’s nascent Commercial Property Assessed Clean Energy (“CPACE”) finance program.

The CPACE program was enacted by the City Council as part of the sweeping Climate Mobilization Act of 2019 (the “CMA”). CPACE provides low-interest, long-term, non-accelerating loans to help finance building energy efficiency measures and renewable energy projects. Demand for these energy efficiency projects is expected to skyrocket in the coming years, as building owners implement measures to meet the CMA’s strict greenhouse gas emissions limits. These unique loans are billed as part of the City property tax bill, and have many advantages for borrowers when compared to traditional financing. For additional background, our previous client alerts related to the CMA and the CPACE program can be found here.

As originally enacted, eligibility for CPACE financing was limited to energy efficiency measures made to existing buildings. Further, only property owners were eligible to obtain a CPACE loan. In April 2021, the City Council enacted Local Law 21 of 2021 in response to industry feedback on the CPACE program. Local Law 21 amended the CPACE legislation to include financing for energy efficiency measures in new construction, and to expand CPACE eligibility to the holders of ground leases. In order to give effect to these legislative expansions of CPACE, the New York City Department of Finance (“DOF”) was required to undertake rulemaking to amend its rules for the program.

The adopted final Rule from DOF (available online here), amends the definition of Energy Efficiency Improvement to include “any improvement to real property, whether as a component of the new construction of a building or as the renovation or retrofitting of [a] an existing building to reduce energy consumption . . . .” The Rule further replaces references to “property owner” with references to the “owners of real property,” and adds a definition of “real property” as “any property, an interest in which is or is eligible to be recorded with the city register or the office of the Richmond county clerk by the possessor.” A memorandum of lease is an example of an interest that is eligible to be so recorded.

Where the CPACE applicant is the holder of a leasehold interest, the Rule requires the consent of the fee owner of the property. In the preamble to the Rule, DOF notes that “[s]uch consent will be contained in a separate agreement in which the fee owner and PACE borrower will resolve each party’s responsibility.” This consent by, and agreement with, the fee owner is necessary because the CPACE loan payments are billed on the City property tax bill for the property, and a loan default establishes a lien on the property, akin to a tax default. The CPACE loan is also non-accelerating, meaning that future sales or transfers of the fee interest in the property would be subject to a continuing obligation to repay the CPACE loan.

The Rule becomes effective on November 7, 2021. Developers contemplating new construction projects should be considering the extent to which energy efficiency measures or renewable energy projects related to the construction may be financed through CPACE, allowing for longer-term, lower-interest rate financing for a significant portion of new construction costs. Similarly, owners of recordable leasehold interests should consider engaging with their landlords to discuss CPACE financing for contemplated energy efficiency improvements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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