New York City's Climate Mobilization Act (the Act) was signed into law on April 22, 2019 (Earth Day). It will have long-term and wide-ranging fiscal and operational impacts for building owners, buyers, sellers, lenders and tenants.

The Act targets reductions of greenhouse gas emissions from the City's building stock of 40% by 2030 and 80% by 2050. These reductions will be achieved through increasingly stringent building emissions limitations, effective in 2024, 2030 and 2035. In order to achieve the emissions reductions, the Act will require owners of "covered buildings" to implement energy efficiency retrofits to bring down overall energy usage and/or utilize available alternate compliance measures. The Act will impact approximately 50,000 NYC buildings, representing nearly 60% of the City's building area. Early estimates are that $4 billion of capital will be spent to comply with the Act's initial reduction targets.

Five Things Real Estate Professionals Should Know

(1) Buildings Governed by the Act. The Act's building emissions limitations apply to "covered buildings," which are defined as buildings that exceed 25,000 gross sq. ft.; two or more buildings on the same tax lot that together exceed 50,000 gross sq. ft; or two or more buildings held in condominium ownership and governed by the same board of managers and that together exceed 50,000 gross sq. ft.

The Act provides exemptions for industrial facilities used to generate electric power or steam; garden style apartments; City-owned buildings; buildings with rent regulated units or project-based federal housing programs; buildings on land owned by the NYC Housing Authority; houses of worship; and buildings owned by a housing development fund company. Even "exempt" buildings, though, must implement "prescriptive energy conservation measures" and document compliance.

(2) What the Act Requires. Beginning in 2024, the Act prohibits covered buildings from having annual building emissions higher than the emissions limits established for the building pursuant to the Act. By May 1, 2025, and each May 1st thereafter, building owners are required to submit an annual report, certified by a registered design professional, attesting to the building's actual annual greenhouse gas emissions.

To calculate a building's annual emissions limit, the Act provides building emissions intensity factors for 10 categories of building code occupancy groups. The building emissions intensity factor is multiplied by the building's square footage to result in the annual emissions limit.

The initial building emissions intensity factors are intended to capture the most energy intensive 20% of buildings, while the second phase factors for 2030-2034 are expected to require energy efficiency measures for about 75% of the City's buildings.

(3) How Building Owners Comply. Compliance with the building emissions limits will be accomplished primarily through energy efficiency retrofits that directly reduce energy consumption. The Act creates a new Property Assessed Clean Energy (PACE) low interest loan program to assist building owners in financing necessary capital expenditures through a special assessment on the building's property tax bill. Owners with existing debt will need to be aware of lender prohibitions or consents regarding additional debt.

The Act also provides building owners with certain alternative compliance measures, including renewable energy credits, greenhouse gas offsets and distributive energy projects.

Renewable Energy Credits. Renewable energy credits (RECs) are certificates representing the environmental value electricity generated from a renewable source (e.g., solar, wind, hydro). The Act permits a building owner to deduct from its annual building emissions RECs purchased by the building owner. Important restrictions apply to this deduction. Most particularly, only RECs generated from a source located in, or directly deliverable to, the NYC electrical grid are permissible.

Greenhouse Gas Offsets. Greenhouse gas offsets are units representing emissions reduced, avoided, or sequestered by a project, which has been verified by an independent, qualified third party in accordance with the standards and rules of the Department of Buildings. The Act limits the use of offsets to the initial compliance period, and permits a building owner to deduct up to 10% of the annual building emissions for purchased offsets.

Distributed Energy Resources (DERs). DERs are projects that either generate clean energy at a building (e.g., rooftop solar) or that store energy at a property for use during peak demand periods (battery storage). As with offsets, the Act limits the use of DERs to the initial compliance period, but provides a deduction from the annual building emissions in the full amount of the calculated output of the DER.

(4) Opportunities for Adjustments. The Act provides limited opportunities for temporary "adjustments" to a building's emissions limitation. Adjustments may be granted where there are legal (e.g., landmarks designation) or physical (e.g., space constraints) barriers to implementing necessary retrofits, or where the implementation of retrofits would prevent the owner from earning a reasonable financial return. The applicant for such an adjustment, though, must show that it has complied with the Act to the maximum extent practicable, by, for example, making a good faith effort to purchase RECs or offsets, and availing itself of all available incentive programs and financing opportunities.

A limited adjustment may also be granted for the initial compliance period, to an existing building with actual building emissions in 2018 that are more than 40% above the building's 2024 emissions limitation. The adjustment requires, among other things, that the building owner show that the building emissions limit is the result of special circumstances related to the use of the building, and submit a plan and schedule to bring the building into compliance by 2030.

(5) Non-Compliance Is Not a Viable Option. Penalties for non-compliance with the emissions limitations are significant. Building owners whose buildings exceed the emissions limitations will be subject to a civil penalty of not more than $268 times the difference between the actual and permissible emissions. Fines can be enhanced or reduced based on aggravating or mitigating factors.

Failure to file the required annual emissions report is subject to a penalty of up to $.50 per square foot, for each month that the violation is not corrected, and knowingly false statements in a report or other submission to the Department is a misdemeanor and subject to a fine of up to $500,000 and/or imprisonment.

Five Things To Do Now

(1) Benchmark. Owners of covered buildings should understanding their building's historic energy use, in the context of the City's energy consumption calculation scheme, and project future energy demands based on anticipated changes in use or occupancy. Owners also should undertake initial calculations of the building emissions limitations that will apply to their buildings in 2024 and 2030. This information is critical to developing a compliance strategy that may include retrofits, purchases of RECs or offsets, or DERs, or applications for adjustments.

(2) Identify Retrofit Opportunities. Building owners should undertake a thorough assessment of the building's energy consumption and begin to identify which energy efficiency measures can be easily adopted, at little cost, and with quick return on investment.

(3) Plan for Adjustment Applications. Applications for any of the Act's permitted adjustments must be submitted to the Department no later than July 1, 2021. To be considered for an adjustment, a building owner must make affirmative showings to the Department which may include establishing the infeasibility of compliance, efforts to comply with the Act to the maximum extent practicable, efforts to utilize alternate means of compliance and all available incentive programs, and a detailed compliance plan and timeline.

(4) Engage With Tenants. Owners of covered buildings should be undertaking a careful review of existing leases to determine the extent to which capital costs related to necessary energy efficiency retrofits may be passed through to building tenants. Owners should also be revising lease forms for new tenants to incorporate green lease principles, which more closely align the energy efficiency goals of the landlord and tenant, and provide incentives to motivate tenant energy efficiency.

(5) Revise Diligence Plans and Transaction Documents. Buyers and lenders should be revising their standard due diligence items. The prospect of potentially significant future capital expenditures for energy efficiency retrofits, along with potential fines and penalties for poor performing buildings should drive prospective buyers and lenders to include an in-depth assessment of the building's current and future energy usage. Purchase and sale agreements, and loan agreements will also need to reflect CMA compliance obligations and expectations both in terms of representations and covenants as well as in pricing.

Looking Ahead

As the City prepares to implement the Act, the activities of two new entities created by the Act will warrant continued attention from real estate professionals. The Office of Building Energy and Emissions Performance (BEEP) within the Department of Buildings, and the Climate Mobilization Act Advisory Board, both of which were created by the Act, will play critical roles in the promulgation of new rules and regulations, the development of future emissions limitation levels, and the potential creation of a building emissions trading program. With reports from the Advisory Board due to the Mayor and the City Council by January 2023, the next three years promise to be eventful for the real estate community.

Raymond Pomeroy is special counsel at Stroock & Stroock & Lavan. Brian Diamond is co-chair of the real estate group and a member of the firm's executive committee.