NYC’s Local Law 97 Update: PACE Yourself
NYC’s Local Law 97 Update: PACE Yourself
The first compliance period under New York City’s Local Law 97 (LL97) begins on January 1, 2024, and a January 2023 REBNY-commissioned study concluded that over 3,700 properties could be out of compliance and face over $200 million per year in penalties, even after significant investment efforts. With a list of covered buildings now available and NYC’s Commercial Property Assessed Clean Energy (C-PACE) lending program open for business to finance qualifying improvements, owners, investors, and lenders alike are well-advised to take the necessary steps to ensure compliance.
As we first reported in a prior client alert, NYC passed the Climate Mobilization Act (CMA) in April 2019 as part of its $14 billion Green New Deal, to reduce greenhouse gas (GHG) emissions by 40% by 2030 and by 80% by 2050, by placing carbon caps on most buildings over 25,000 square feet, with exceptions for city-owned buildings, places of worship, hospitals, and buildings with more than 35% rent-regulated units. The centerpiece of that legislation, LL97, requires those covered buildings to meet energy efficiency standards and GHG emissions limits beginning in 2024. The CMA also created the New York C-PACE program, making long-term, low-cost financing available for energy efficient improvements and renewable energy projects that can be undertaken to bring covered buildings into compliance with LL97. The NYC Accelerator PACE Financing program, as it has become known, was subsequently expanded to be made available for new construction (in addition to retrofit) and to ground lease holders (in addition to fee owners). We also reported on that expansion in another client alert.
Since our last update, the NYC Department of Buildings (DOB) published a final set of rules designed to guide the implementation of the CMA, and the NYC Mayor’s Office of Climate and Environmental Justice, in partnership with the program’s administrator, the NYC Energy Efficiency Corporation (NYCEEC), updated its program documents (the “Program Documents”), including to rescind the guidelines we previously reported on related to new construction and leasehold interests (which will be readdressed in a subsequent update to Program Documents that is not yet publicly available), and to make important clarifications to key provisions in its loan documents.
Following over 300 meetings with various working groups involving more than 100 stakeholders, a DOB advisory board delivered a comprehensive set of recommendations in December 2020. Shortly thereafter, the DOB finalized Rule 103-14 for LL97 (the “Rule”). Notably, the Rule:
Simultaneous with the release of the Rule, the DOB also published its first Covered Buildings List, which details every building that is subject to LL97 compliance as of January 1, 2024.
After a months-long shutdown and overhaul, the mayor’s office and NYCEEC jointly released extensive updates to the NYC Accelerator PACE Financing Program Documents, a comprehensive suite of documents that include guidelines, loan documents, and certifications required for C-PACE loan closings. Notable changes include the following, among other things:
Despite these updates, however, The Real Deal reported on February 24, 2023 that only two C-PACE loans have closed for NYC projects since the program first went live, citing bureaucratic delays and mortgage lender reluctance. C-PACE loan proceeds, which are available for up to 100% of qualified costs of energy efficient improvements and renewable energy projects, are secured by a benefit assessment lien that is subordinate to municipal taxes but senior to all other liens (including mortgages) and is repaid over the useful life of the related improvements through a charge on the property’s tax bill. Typical mortgage loan documents prohibit liens that, among other things, could prime the mortgage (and in growing instances, specifically require lender consent over PACE loans), and in any event the NYC Accelerator PACE Financing Program requires mortgagee consent using the form included as part of its Program Documents or another form approved by NYCEEC.
In fielding such requests, mortgage lenders may want to revisit loan documents to ensure, among other things, that operating expense definitions and related calculations account for these new costs, escrow/reserve requirements are in place to ensure that they are paid, covenants are added that require compliance C-PACE program obligations, and reporting requirements are expanded to require pertinent updates on such compliance. In particular, lenders would be well-served to escrow for C-PACE assessment obligations (akin to reserves commonly established for property taxes and insurance premiums) or to obtain other forms of additional credit support; even though the C-PACE loan cannot be accelerated for nonpayment, their benefit assessment lien runs with the land and would therefore become the obligation of a purchaser following a foreclosure. On the other hand, although additional indebtedness would customarily call for an intercreditor or recognition agreement, C-PACE loan documents do not purport to restrict a mortgage lender’s right to foreclose, and the loan would be automatically transferred to the foreclosing party.
With the DOB’s recent release of a covered buildings list, owners, investors, and lenders now have certainty to begin preparing for the first LL97 compliance period. The initial period begins January 1, 2024 and covers the subsequent 12 months, with professionally certified emissions intensity reports due on May 1 of the following year.
Prior to that time, affected parties should consult with construction and engineering professionals and consider obtaining a professional energy audit to determine the optimal combination of energy upgrades that would ensure compliance for their building(s), with a focus on those that can be implemented in short order, such as installation of solar panels or LED lights and/or a recommissioning of building systems. Long-term stakeholders should also consider developing a more rigorous plan in anticipation of more stringent emissions limits that will apply beginning in 2030. Those preparing plans and schedules should be mindful of oversight and consent rights that may run in favor of investors and/or lenders pursuant to applicable contract documents.
In addition to revisiting construction or capital improvement plans and schedules, stakeholders will have to ensure that sufficient capital sources are available for the added scope of work, which may require line-item reallocation or budget rebalancing. With lender consent, C-PACE loans may help fund shortfalls and reduce upfront outlay and lower the blended cost of capital, but as reported, may be subject to municipal delays as the program evolves and continues to get sorted out. Investors and lenders may also want to revisit contract documents to ensure that appropriate representations, warranties, and covenants are in place related to program compliance, that they have sufficient reporting, inspection, and other oversight rights, and that they are protected with adequate indemnifications for noncompliance, among other things.
Penalties for noncompliance with LL97 can be harsh, with fines starting at $268 per metric ton of a building’s excess carbon footprint, $0.50 per building square foot for reporting failures after a short grace period, and severe fines and criminal penalties for submission of false statements. However, owners that can show good faith and well-documented efforts to comply can avoid such fines. The efforts of all stakeholders will be critical in this regard, as the industry adjusts to these new requirements.
We will continue to monitor ongoing developments related to the CMA and provide updates as you continue to navigate and implement your LL97 plans.
Associates Alberto Herrera and Yigal Adhami assisted in the drafting of this alert.