R&E December 2023 Newsletter

by | Dec 13, 2023 | Newsletters

Local Law 97: Compliance Details, Financing Options and More

As part of Brick Underground’s new Boards & Buildings section, R&E Members Adam R. Sanders and Michael T. Carr wrote a comprehensive 3-part series addressing compliance details as well as financing options related to Local Law 97.

By Adam R. Sanders and Michael T. Carr | also published in Brick Underground| December 2023

Local Law 97 kicks off this January. Is your building on track? (Part I: Overview) – Oct. 2023

  • Local Law 97 is set to transform sustainability in New York City starting on January 1st, 2024. It mandates that buildings over 25,000 square feet reduce their carbon emissions by 40 percent by 2030 and 80 percent by 2050
  • The penalties for failing to meet emissions limits are substantial, designed to exceed the cost of implementing green measures

New York City stands on the cusp of a transformative era in sustainability. As many co-op and condo boards are already aware, Local Law 97 (“LL 97”), which will go into effect on January 1st, 2024, is at the heart of this change.

“This is an aggressive plan to cut harmful emissions in New York City by requiring, with some rare exceptions, that buildings over 25,000 square feet reduce their carbon emissions by 40 percent by 2030 and 80 percent by 2050,” says Adam R. Sanders of New York City real estate law firm Rosenberg & Estis.

Shifting guidelines amid ongoing public hearings

There are many evolving nuances to the guidelines as the NYC Department of Buildings (“DOB”) continues to hold public hearings this month and possibly through the end of 2023.

“While we are not expecting any substantive changes to be proposed during these hearings, the central points of discussion will likely be the newer portions of the guidelines, such as the ‘good faith efforts’ and mitigation factors,” Sanders says.

“We do know that the affected covered buildings must comply beginning January 1st, 2024 or complete ‘prescriptive energy conservation measures’ by December 31st, 2024,” he says, noting some buildings qualify for a later compliance date. More specifically, under Article 321 of LL 97, buildings that contain affordable or rent-regulated units may follow such alternative compliance pathways to ease their burden until the end of 2024. Buildings that qualify are those that have more than 35 percent of units rent-regulated, Housing Development Fund Corporation (HDFC) Cooperatives, and buildings that have HUD project-based assistance.

A list of prescriptive measures is set forth in the regulations, found here. They include, among other measures, new windows, replacing and repairing HVAC systems, integrating solar energy, adding proper insulation, and weatherizing and air sealing buildings.

All buildings (regardless of whether they must begin coming into compliance on January 1st, 2024 or later) must comply with the 2030-2034 standards by 2030.

The high cost of non-compliance

The penalties of non-compliance are substantial.

“They aren’t just a slap on the wrist. The DOB designed the penalties to exceed the cost of going green,” says Michael T. Carr, a real estate attorney at Rosenberg & Estis. Exceeding the emissions limit will cost a building $268 per ton over the limit. For example, a 50,000-square-foot multifamily residential building emitting 400 metric tons of carbon would be 72.5 metric tons over its limit for 2024-2029. Thus, it would be fined $19,430. There are also fines associated with the failure to file an annual compliance report and for stating false information on such report.

Compliance is therefore a smart financial move.

“We’re advising our boards and our building owners to audit their buildings or portfolios now, if they haven’t already, in order to understand the compliance period that applies to their property and the measures they need to take to comply with Local Law 97 and avoid or reduce potential penalties,” Carr says. “Now is the time consult with in-house engineers, superintendents and outside professionals to determine your exposure and establish a mitigation roadmap to compliance.”

Either way, buildings that don’t meet carbon emissions requirements will have to pay the cost of complying or pay penalties, Carr says.

“The time is now to proactively start examining alternate financing options,” Sanders advises.

Financing options to help NYC buildings comply with Local Law 97 emissions limits (Part II) – Dec. 2023

  • Building owners can get long-term, fixed-rate financing through the PACE program
  • Electrification projects in low-income areas may qualify for 1.5 percent fixed-rate loans
  • Utility companies offer financial incentives to market-rate and affordable housing owners

The party’s over. On January 1st, 2024, New York City condo and co-op board members will wake up to a sobering reality: the beginning of the compliance period for Local Law 97’s strict energy emissions levels.

Even more pressing than forming a compliance plan is coming up with a way to pay for it.

“Given the potential financial impact of Local Law 97, building owners, co-ops, and condominiums should promptly implement a compliance plan, if they have not already done so, to address how to pay for the needed capital improvements,” says Adam R. Sanders of New York City real estate law firm Rosenberg & Estis.

Below are several programs that can help your building pay for Local Law 97 upgrades.

Property Assessed Clean Energy (PACE)

The Property Assessed Clean Energy (PACE) financing program assists building owners with long-term, fixed-rate financing, with rates currently around 5-6 percent. This can be used for capital improvements that reduce utility costs, energy consumption, and greenhouse gas emissions.

It’s different from traditional financing in that it stays with the building, not the specific owner, says Michael T. Carr, a real estate attorney at Rosenberg & Estis.

“PACE financing is solely tied to real property, and the loan is repaid by the borrower through a charge intended to be included on a property tax bill for the property,” Carr says. This means the loan is transferred when the property changes ownership.

While the loans are publicly recorded in land records, they do not create a lien on the property and are not subject to a mortgage recording tax, which results in significant savings, he explains.

Community Decarbonization Fund

The NY Green Bank has launched a $250 million Community Decarbonization Fund (CDF). The CDF supports local clean energy and building electrification projects primarily located in low-income, disadvantaged census tracts that reduce greenhouse gas emissions by providing low-cost capital to qualified Community Development Financial Institutions lenders.

The loans range from $2 million to $25 million or 20 percent of an eligible borrower’s total capitalization, whichever is less, and come in the form of a 12-year loan at a fixed rate of 1.5 percent.

Inflation Reduction Act

The Inflation Reduction Act (IRA) provides $8.8 billion in funding to reduce energy consumption in multifamily buildings.

Building owners with residents considered low or moderate-income can receive rebates for the purchase and installation of clean energy upgrades, with a total cap of $14,000 per dwelling unit.

“Notably, it is not only building owners who are eligible to receive rebates through this program,” Sanders points out, “but also individual unit owners making upgrades to their own dwellings. Furthermore, building owners making energy-efficient improvements to their properties may qualify for tax deductions.”

Utility company incentives

Con Edison, National Grid, and other utility companies provide financial incentives to reduce carbon emissions for market-rate and affordable housing multifamily building owners.

For market-rate properties, the Multifamily Energy Efficient Program (MFEEP) provides payments for owners looking to install energy-efficient equipment in their buildings. MFEEP eligibility is restricted to buildings utilized for residential purposes and excludes new construction projects. Note, however, that the incentives are taxable by the IRS.

Similarly, the Affordable Multifamily Energy Efficiency Program (AMEEP) offers eligible building owners financial incentive payments for installing energy efficient equipment to projects in which at least 25 percent of the units occupied by households earning less than 80 percent AMI.

Navigating funding obstacles faced by condo and co-op buildings complying with Local Law 97 (Part III) – Dec. 2023

Maneuvering through the financial maze of Local Law 97 compliance, co-op and condo buildings encounter an unexpected twist: their ownership structure limits funding to a few paths. These include hiking maintenance or common charges, imposing special assessments, dipping into their cash reserves, or taking out loans.

“Unfortunately, no method is perfect, and each alternative has a unique set of challenges,” says Adam R. Sanders of New York City real estate law firm Rosenberg & Estis.

Energy-efficient upgrades are also very costly. Whether a condo or co-op board elects to allocate the debt through a special assessment or include in maintenance or common charges, they can have a significant impact on a building’s financial position, Sanders says.

A special assessment to make the necessary upgrades may require large payments over a short period of time, while maintenance/common charge increases become a permanent burden on unit owners and shareholders.

Worst-case scenarios

“There is the possibility that large assessments or monthly increases could deter prospective buyers from buying into a building,” says Michael T. Carr, a real estate attorney at Rosenberg & Estis.

Another potential pitfall, he says, is if unit owners or shareholders cannot afford to make such a significant payment each month.

“Co-op and condo boards need to plan for these worst-case scenarios,” Carr says. “One possible solution is for a board to identify a preferred lender who is willing to pre-qualify a building and to offer home equity lines of credit (HELOC) to shareholders or unit owners who prefer to finance their obligations.”

Special borrowing challenges for condo buildings

Some boards may want to consider borrowing to finance energy improvements. It is common for co-ops to borrow money because a cooperative corporation owns its property, which can be offered as collateral.

Borrowing by condo buildings is far less common and may not be an option for all condos.

Because condos do not own the building, they cannot collateralize real property, and the only collateral for the loan is monthly common charges, the board’s bank accounts, and reserve funds. Section 339-jj of the New York Condominium Act permits the board of managers to borrow money, but only to the extent that the condominium’s declaration or by-laws allow for such borrowing.

There are other complications. “Many governing condominium documents require the approval of unit owners for borrowing above a certain threshold, and acquiring the necessary majority or supermajority of unit owners is no easy feat,” Sanders says. Unit owners may be opposed to a board’s loan because there is no tax deduction for the interest payable on the loan—a cost fully incurred by unit owners, he points out.

Exploring additional financing options

New condominium buildings with some sponsor-controlled units may agree to allocate the funds from the sale of any sponsor-controlled units toward the payment of the upgrades.

“Alternatively, sponsors with unsold units may qualify for PACE financing and may shift the payment structure to the property tax bill,” Sanders says. “While the cost will still be borne by residents through their common charges, it may be less burdensome given the benefits of PACE financing.” Co-ops are also eligible to receive PACE funding.

The New York City Energy Efficiency Corporation also offers the Multifamily Express Green (MEG) loan, specifically for condominiums and cooperatives implementing energy upgrades. MEG loans start at a minimum of $200,000 and can finance up to 90 percent of the project costs. Interest rates are set at 7 percent, and the term is the length of the construction period, plus a 10-year amortization period.

But buildings that already have loans may not be able to take on more debt, Carr points out.

“For condominiums or cooperatives with existing loans, the terms of those loans may outright prohibit additional or secondary debt. Secondary debt may be permissible, but only through the same lender,” he says. Careful review of both loan documents and underlying governing documents is critical to successful planning and implementation of Local Law 97 projects.

Rosenberg & Estis, P.C. is closely tracking all developments surrounding Local Law 97. Real estate attorneys Adam R. Sanders and Michael T. Carr are poised to answer any questions you have about the preparation of buildings for Local Law 97 compliance, as well as financing options.