Pillsbury - Gravel2Gavel Construction & Real Estate Law

[co-authors: Natalie S. Starkman, Nika Bederman]

In a previous post, we described how the New York City Climate Mobilization Act, 2019 (the CMA, or Local Laws 92, 94, 95, 96, 97, and 147 enacted in 2019) was passed with the goal of reducing New York City’s carbon emissions by 40 percent by 2030 and by 80 percent by 2050 (as against a 2005 baseline as provided for in item 3 of Local Law 97). It is the most ambitious building emissions law to be enacted by any city in the world. The CMA impacts “Covered Buildings” (described below) and, besides contemplating the retrofitting of Covered Buildings to achieve energy efficiency and establishing a monitoring program for Covered Buildings, the CMA contemplates compliance by means of the purchase of carbon offset credits or renewable energy. (Note the new NYC Accelerator program, launched in 2012 by the Mayor’s Office of Sustainability, provides guidance regarding energy-efficient upgrades to properties and emission reductions.)

Pursuant to the CMA:

  • Beginning in 2024, Covered Buildings will have to meet the first emission targets, which are calculated by multiplying the gross floor area of each Covered Building by the occupancy classification as set forth in Local Law 97; and
  • In 2025, owners of Covered Buildings will need to establish compliance by submitting a report establishing such compliance (prepared by a certified design professional) to the newly created Office of Building Energy and Emissions Performance.

Buildings that have emissions exceeding the “target emissions” by 40 percent or more can apply for an adjustment with the New York City Department of Buildings (DOB) no later than June 30, 2021, but such adjustments are only given for cause and where special circumstances can be established. Adjustments are also not indefinite in duration. Rather, they are designed to allow enough time to permit compliance by the next set of targets, due in 2030. The members of the Local Law 97 Advisory Board, charged with recommending the 2030 emission limits, have been nominated—with their determination of the 2030 emission limits due in 2023.

Failure to meet these targets will result in a fine of $268 per ton of carbon emitted by a Covered Building per year over the allowed limit specified initially by Local Law 97 (see § 28-320.3.2), and later by regulation which is to be promulgated, with a cap on the fine to be paid of $5 million per year per Covered Building.

The regulatory burden of the CMA initially falls on building owners and landlords.

Covered Buildings are defined as:

  • a single building larger than 25,000 gross square feet,
  • two or more buildings on a single tax lot that exceed 50,000 gross square feet, or
  • two or more buildings governed as a condominium that exceed 50,000 gross square feet.

The law exempts the following buildings even if they meet either the 25,000 or 50,000 gross square feet thresholds:

  • power stations;
  • buildings which are less than three stories and have and have units which maintain their own HVAC and hot water systems;
  • city-owned cultural buildings;
  • buildings owned by New York City Housing Authority;
  • buildings that contain more than 35 percent regulated units (as amended by Int 1947-2020, which was enacted in November of 2020);
  • houses of worship;
  • properties owned by a housing development funds company organized pursuant to the New York Private Housing Finance Law; and
  • buildings that participate in project-based federal housing programs from the definition of covered buildings.

Recent developments are summarized below:

Deadline for Adjustment Applications Looms
As noted above, the CMA provides that Covered Buildings which were in existence on the effective date of the law (April 18, 2019) may apply for an adjustment (to be granted by the New York City Department of Buildings (DOB)) to their “target emissions” provided that they:

  1. establish that emissions in 2018 exceeded the caps set for 2024 by more than 40 percent; and
  2. apply for such adjustment by no later than either (a) June 30, 2021 for buildings with high emissions intensities, or (b) July 21, 2021 for nonprofit hospitals and health care facilities.

Likely applicants in the former category include owners of buildings which house data centers and other 24-hour operations. Factors such as financial hardship and practical constraints (e.g., lack of access to building systems) will be considered but, ultimately, failure to comply will result in fines.

Purchase of Renewable Energy Credits (RECs)
New York City building owners were disappointed in April when the New York State 2022 budget passed without a provision that would have included an additional pathway for complying with Local Law 97.

Currently, the law offers owners the option of purchasing Tier 4 RECs that are generated by renewable energy projects located in NYC or that sync to the New York City grid. However, those RECs are not widely available yet, as a practical matter. The proposed workaround—which was not incorporated—would have allowed owners to buy Tier 2 RECs which are derived from legacy renewable energy projects located outside of the city to offset their emissions. Environmental groups and many in the energy efficiency business count argue that such a provision would have flooded the market with low-priced energy credits and defeated the purpose of the law.

This leaves Covered Buildings with having to rely on the following, as alternatives to retrofitting (to the extent possible) and paying fines:

  • purchasing RECs generated in or connected to the NYC grid (to the extent such exist);
  • deducting up to 10 percent of the annual emissions limit by purchasing greenhouse gas offsets (with details for such a program to be determined by the DOB); and
  • carbon trading, involving the sale of RECs by buildings that surpass the efficiency goal to buildings that do not. Under the law, the City is required to study and recommend such a program by December 31, 2021.

DOB launches new website, NYC Sustainable Building
DOB has launched a website to assist the boards of cooperative and condominium apartments with compliance—specifically by providing information (in the form of an interactive map) regarding which buildings may be “covered” by the law and their “ratings”—along with providing assistance and resources regarding retrofits and paying for same.

Effects on the CMBS Market
A recent report by Moody’s found that up to 80 percent of New York City-based “CMBS” mortgage loans (loans pooled and resold as commercial mortgage-backed securities) could face fines under Local Law 97 unless remediation is performed—although it notes that many of the potential fines will be small when compared to property revenues and coverage ratios—and that “just 10 properties would account for 59% of fines in 2024 and for 23% in 2030.” Per the Real Deal, the properties that house data service and telecommunications companies will be particularly impacted (and are among the top greenhouse gas contributors in New York City).

We will continue to provide periodic updates and expect that, as we get closer to 2024, there will be increasing activity and developments in this area.

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