ESG

NYC is About to a Get a Lot Greener – Priming the PACE Pump

Feb 14, 2020 | By JOSEPH CIOFFI

New York City’s Climate Mobilization Act (CMA), touted as the city’s Green New Deal, is set to have a significant impact on the famous skyline. Property owners should now begin to familiarize themselves with the requirements and choose their optimal funding solutions. In many cases, the solution will be commercial Property Assessed Clean Energy (C-PACE) financing, which allows energy-saving capital improvements made to commercial properties to be financed through a special long-term tax assessment. Even if you are not in NYC, familiarity with the CMA is useful – similar laws and development finance tools may be coming to your town, if they are not already there.

The CMA, which passed in April 2019, impacts large residential and commercial properties in several ways, including by setting greenhouse gas emissions standards that are meant to track the Paris Climate Agreement, requiring solar and green roofs with new construction or major roof renovations, and establishing a PACE program to help owners finance these projects.

Below is an overview of the key aspects of the law.

Carbon Emissions

The carbon emission standards under Local Law 97 will apply to buildings larger than 25,000 square feet of floor area, including condos and co-ops. Local Law 97 will have carve-outs and other limitations for certain buildings, such as houses of worship and buildings that contain a rent control or rent stabilized unit.

Milestones

Buildings that must comply need to reduce their emissions (relative to 2005 emissions) 40% by 2030 and 80% by 2050. There will be two immediate periods of analysis—from 2024-2029 and 2030-2035. In each time period, the city will use a regulated formula, which takes into consideration the square footage and the kind of occupancy of the building, to calculate an “emissions intensity limit”—what that building would be permitted to emit in that time period. That will be compared to a regulated formula of the “greenhouse gas coefficient of energy consumption,” which looks at what electricity and fossil fuels were actually used by the building. Certain offsets and credits will be taken into consideration when making these calculations. Building owners will also be required to submit annual reports (certified by a registered design professional).

Penalties

Civil penalties will be calculated based on how much a building exceeds the legal limit, which is multiplied times $268. There will also be fines for failing to file annual reports and significant penalties for making materially false statements.

Sustainable Roofs

The CMA also aims to expand the use of New York City rooftops to reduce carbon emissions and employ clean energy by encouraging the use of solar roofs and “green” roofs, which use rooftop vegetation to absorb rainwater and provide insulation and cooling to the building. Effective November 15, 2019, for new construction and any buildings with major roof reconstruction on the horizon, the new sustainable roofs law under Local Law 92/94 will have to be taken into consideration.

Milestones

For new buildings and any existing buildings where the entire roof is being replaced (new roof deck or assembly), the roof must be a sustainable roof, which means either a solar photovoltaic roof (generating at least 4kW), a green roof system (roof area designed to grow vegetation) or a combination of both. Where an existing building is enlarged vertically or horizontally, this law will apply as well.

However, standard replacements to roof membranes will not trigger the law. Projects that receive the Department of Building’s approval prior to November 15, 2019 are exempt. In addition, some areas of roofs may be exempt because of existing structures or where sustainable roofs are not feasible. The sustainable roofs law is meant to complement the existing “cool roof” law already in place.

Financing Compliance through PACE

To address the cost of compliance with the CMA, the city has created a Property Assessed Clean Energy (PACE) loan program (Local Law 96 (2019)) to help multifamily buildings, commercial buildings, tax-exempt non-profits, religious facilities, health care facilities, and industrial properties to finance the necessary retrofits. PACE financing can be used for renewable energy systems and energy efficiency improvements, related energy audits and renewable energy system feasibility studies, as well as the verification of the installation of such systems and improvements. PACE loans are repaid through the property tax bill and must be subordinate to other city liens borne from taxes and assessments, sewer rents, sewer surcharges, water rents and other city charges. PACE terms generally match the average useful life of the energy-saving infrastructure installed, which means costs are frequently spread over more than 20 years.

Looking Ahead

The New York Energy Efficiency Corporation, which is managing New York City’s PACE program, will qualify specialty lenders, approve eligible improvements and verify cost-effectiveness calculations. Companies like Counterpointe SRE have been active in the C-PACE financing space nationally and are already helping NYC property owners explore C-PACE financing ahead of the program’s official launch, which is anticipated in the second quarter of 2020.

“Commercial PACE financing has been a powerful financing alternative for property owners and developers in other markets for years,” noted C.J. De Santis, head of Government Relations for CounterpointeSRE. “Even before the penalties and carbon trading rules emanating from the CMA in New York City are defined, there is a very practical interest being taken in PACE because it’s a great source of capital for anyone working toward energy savings,” he explained.

The PACE administrator is expected to announce more details about the process going forward and, for now, is directing participants towards New York State program materials as a good interim reference.

While it may be daunting to retrofit existing buildings or adjust plans in place for future buildings, the tools for compliance are already available, making it just a bit easier to be green.

Nicole Serratore, an Attorney, in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.