26 Feb Carbon Emissions and Climate Mobilization Act
The Climate Mobilization Act constitutes a strong shift in the regulation of commercial real estate in New York City—and all stakeholders including building owners, investors, sellers and purchasers, tenants, and lenders will need to consider how to quantify and allocate the costs of compliance (or non-compliance).
The new Presidential administration has set off a renewed emphasis on sustainability and climate change. While owners and other stakeholders involved in New York City real estate have been grappling with many of these issues for a while—for example because of events such as Superstorm Sandy and the requirements of an earlier statute, Local Law 87 (which was passed in 2009 and requires that periodic energy audits be performed for buildings over 50,000 square feet), they are now addressing compliance with the Climate Mobilization Act, 2019 (or Local Laws 92, 94, 95, 96, 97, and 147 enacted in 2019)—one of the most ambitious local efforts in the country. Simply, the CMA’s goal is to reduce 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).
The regulatory burden of the CMA falls on building owners and landlords initially—and 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, 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 Climate Mobilization Act
The CMA establishes greenhouse gas emission targets for Covered Buildings that become increasingly stringent over time. 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.
Pursuant to the Climate Mobilization Act:
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.
In 2025, owners of Covered Buildings will need to establish compliance by submitting a report establishing such compliance (and prepared by a certified design professional) to the newly created Office of Building Energy and Emissions Performance.
Fortunately, for many of the owners of Covered Buildings (and their investors and lenders), most of the data that must be submitted to establish compliance can be found in the benchmark energy reports already required to be submitted by building owners as a result of Local Law 87. These audits (coupled with inspections) take into account actual energy usage from utilities and test the efficiency of the systems in the building in question to determine what upgrades (if any) could be made to decrease usage. For a summary of the process as in effect in New York City.
Approximately 20 percent of Covered Buildings in NYC currently fall short of the “target emissions” and will need to comply with the more stringent requirements by 2024, and approximately 75 percent of Covered Buildings in NYC currently fall short of the 2030 thresholds established by the CMA (as was determined during deliberations and fact-finding regarding the CMA). The body charged with determining the 2030 emission limits has been nominated—with their determination due in 2023. The list of members may be found here.
Impact on Real Estate Transactions and Various Real Estate Stakeholders
As mentioned above, multiple stakeholders and various real estate transactions and relationships are impacted.
Tenants (and Landlords) in Covered Buildings Should Take a Particular Interest
Current and prospective tenants will want to consider the impact of the Act. Tenants under existing leases may well be responsible for complying with the CMA (by being required to make the necessary improvements) and/or paying for the costs incurred by their landlords in making such improvements (possibly even in purchasing or storing “greener” electricity). Provisions regarding operating expenses, the tenant’s obligation to pay for capital expenditures incurred by their landlords (often addressed in operating expense provisions), electricity and HVAC or supplemental HVAC, hours of use, compliance with laws including environmental laws and rights of access are likely to come into play. Conceivably, landlords may become more focused on the actual installations made or desired by tenants and their use of HVAC (or installation and use of supplemental HVAC units) which may be more (or less) energy efficient. Work Letters in the context of new leases will need to address these items as well.
Regarding operating expenses and capital expenditures incurred by owners, note that many leases are negotiated on this point—with some leases excluding capital expenditures from operating expense definitions but clarifying that certain capital expenditures are to be included nonetheless (to some extent) if, for example, such capital expenditures are required for the building to comply with legal requirements (if so, enacted when?). Discussions on these points may include a discussion of “when” the capital expenditure was or will be incurred, including the amortized cost of such expenses (amortized on what basis and over what period?) rather than the cost incurred “when incurred,” whether the capital expenditure will result in reducing operating expenses (and if so when actual savings are realized and therefore when such costs should be passed along), to name a few.
Sellers and Purchasers of Covered Buildings Should Take a Particular Interest
Purchasers and sellers will also need to incorporate the concepts of the CMA—outlined above—into purchase and sale agreements and during the course of conducting diligence. For example, Sellers may be asked to provide information regarding (or make representations or undertake continuing covenants, perhaps even to set aside reserves, with respect to) emissions and compliance with the CMA (including with respect to installations and/or reporting). Leases will have to be reviewed with an eye towards the issues mentioned above, as part of a purchaser’s diligence.
If costs are to be incurred to comply with the CMA, those will have to be addressed in contracts of sale. Additional covenants may be added to address surviving obligations (or the particular state of facts in question).
Lenders Making Loans to Covered Building Borrowers Should Take a Particular Interest, as they may be asked to consent to C-PACE Financing and, at a Minimum, will need to Address the CMA in Underwriting and Loan Documentation.
The Climate Mobilization Act impacts multiple stakeholders in New York City’s real estate marketplace—and many transaction documents, involving all manner of real estate transactions, will need to address the CMA (and many need to address C-PACE financings). New York City may be ahead of curve on these issues—when compared to the rest of the country—but we can also expect that, with global warming and sea levels rising, this will not be the last effort we see in this area. Indeed, the CMA may only be the first of many such legislative efforts nationwide.