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.

I. Publication of Final DOB Rule for LL97 Reporting and Compliance Procedures

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:

1. Explains how to report emissions for condos and multiple buildings that share tax lots and/or energy service. Condos require a single report that covers all units. Buildings that share a tax lot may submit aggregated reports unless separately metered, in which case separate reports must be filed.
2. Clarifies compliance requirements as they relate to new construction, change in ownership, or ongoing demolition. Buildings that are newly constructed or conveyed must begin reporting in the first full calendar year following issuance of a temporary certificate of occupancy (in the case of new construction) or transfer of title (in the case of a conveyance). Buildings permitted for demolition are not required to report so long as an architect certifies that building systems are compromised and occupancy is not permitted prior to January 1 of the following year.
3. Establishes emissions intensity limits based on EPA Energy Star Portfolio Manager (ESPM) property type for the upcoming and subsequent reporting periods. Each ESPM property type is assigned an emissions factor based on permitted emissions per square foot, measured in tonnes of carbon dioxide equivalent (tCO2e), a measure of cumulative GHG emissions. Mixed use buildings are required to report based on the gross square footage attributable to each occupancy group within the building, as determined by the registered architect preparing the report. Beginning in 2050, an emissions factor of 0.00 will apply to all ESPM property types.
4. Provides a formula for calculating emissions to determine compliance with intensity limits. Each GHG is assigned a coefficient for energy consumption, with an alternative calculation based on time of use available for electricity. Total building emissions are then calculated based upon energy consumed for each energy or fuel source multiplied by the GHG coefficient assigned to each applicable source consumed during the reporting period.
5. Limits deductions that can be taken with Renewable Energy Credits (RECs). After emissions are calculated using the formula described above, deductions can be taken for RECs before a determination is made as to a building’s compliance. However, the Rule provides that those credits may only be used to offset emissions generated by electricity usage and limits the use of RECs to not more than 30% of a building’s excess annual emissions (based on the emissions limits calculated as set forth above). In its report, the DOB advisory board concluded that these changes are supported by the language and intent of LL97 and are consistent with the use of RECs within the energy industry. 

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.

II. Release of NYC Accelerator PACE Financing Program Document Updates

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:

1. Specificity on when “construction completion” occurred. For purposes of assessing whether a project is retroactively eligible for C-PACE financing, completion must have occurred no earlier than May 19, 2019, or three years prior to execution of the C-PACE documents, whichever is later.
2. Expansion of loan transfer provisions. C-PACE lenders are now permitted to issue participation interests, pledge their interest in the loan, securitize the loan, and assign the loan to a “Qualified Transferee,” all as-of-right. Lenders are also required to provide notice to the NYCEEC in connection with all transfers, and, in some cases, are required to obtain NYCEEC consent. Lender affiliates are outright prohibited from incurring or assuming any portion of the debt.
3. Reallocation of rights and obligations for the collection and remittance of C-PACE funds. In addition to its role of program “Administrator,” NYCEEC now also serves the separate and distinct role of “Paying Agent.” As Administrator, NYCEEC is responsible for, among other things, notifying the city of each payment to be placed on the tax bill for each property benefitting from a C-PACE loan. As Paying Agent, NYCEEC must open and maintain a collection account for remittance by the city of such payments when received from property owners and for disbursing such amounts to C-PACE lenders on the applicable payment date.
4. Expansion of C-PACE lender certification requirements. C-PACE lenders are now required to make several material certifications to NYCEEC regarding program compliance in connection with each loan made by it. By way of example, lenders are required to certify to project and borrower eligibility, expected and actual completion and technical compliance, and accuracy and completeness of reports, certifications, and other deliverables provided by such lender to NYCEEC

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.

III. Bringing Covered Buildings into Compliance

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.