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NYC Greenhouse Gas Emissions Limits Start in 2024: Landlords and Tenants Prepare for the Impact

As recent efforts to curb greenhouse gas emissions have generally stalled at the federal level, certain states and municipalities are attempting to regulate emissions to create a cleaner environment. Commercial and residential buildings are among the primary dischargers of carbon dioxide. In New York City, buildings emit nearly 70% of the state’s greenhouse gases, as reported by the mayor’s office. To curb these emissions, the New York City legislature enacted the Climate Mobilization Act, which is a package of legislation aimed at reducing emissions. Included among the legislation is Local Law 97.

What is Local Law 97?

As part of the NYC Climate Mobilization Act, Local Law 97 is a new law which aims to reduce greenhouse gas emissions from New York City buildings by 40% by 2030 and 80% by 2050, using 2005 emissions as a baseline. This goal will be accomplished through emissions limitations which are scheduled to take effect in 2024, 2030, and 2035. Buildings covered by the new legislation will be required to make energy-efficient improvements to lower overall energy usage. Alternatively, or in connection with the energy-efficient improvements, owners may utilize other compliance measures.

Who will be impacted?

Owners of “covered buildings” (and, consequently, the tenants of “covered buildings”) are impacted. “Covered buildings” are buildings which exceed 25,000 gross square feet, two or more buildings on the same tax lot which collectively exceed 50,000 gross square feet, or two or more buildings held in a condominium form of ownership which are governed by the same board of managers and collectively exceed 50,000 gross square feet.

Buildings that are exempt from this law include industrial buildings primarily used for generation of electricity or steam, buildings of three stories or less which have HVAC (heating, ventilation and air conditioning) or hot water heating systems serving no more than two dwelling units, City-owned buildings, buildings which contain at least one rent-regulated unit or which participate in project-based federal housing programs, housing developments and buildings on land owned by the NYC Housing Authority, houses of worship owned by religious corporations, and buildings owned by a housing development fund company. While these buildings are exempt they are still required to implement “prescriptive energy conservation measures,” which may include, among other things, HVAC leak repairs, pipe insulation, fuel conversions, heating plant upgrades, chiller plant upgrades, and the incorporation of variable frequency drives to high horsepower electric motors.

How are emissions calculated?

A building’s annual emissions limit is calculated by using emissions intensity factors applicable to various categories of building code occupancy groups which include, among others: assembly, business, education, factory and industrial, high hazard, mercantile, residential and storage (N.Y.C. Local Law 97 § 28-320.3.1; N.Y.C. Building Code § 302.1). The building emission intensity factor is multiplied by the building’s square footage to calculate the emissions limit, which is expressed as metric tons of carbon dioxide equivalents per year. If there is more than one occupancy group in a covered building, the annual emissions limit for each group is calculated based on the particular group’s square footage in the building. The sum of all of the annual emissions limits for the building is the building’s annual emissions limit. For an example: A building has a total of 50,000 square feet comprised of 40,000 square feet of business (office) and 10,000 square feet of mercantile stores. The tons of carbon dioxide equivalent per square foot (“TCO2E/SF”) for the business (office) occupancy group is 8.46 and the TCO2E/SF for the mercantile group is 11.81 TCO2E/SF. 8.46 TCO2E/SF x 40,000 square feet = 338,400 TCO2E, and 11.81 TCO2E/SF x 10,000 square feet = 11,810,000 TCO2E, so the building’s total annual emissions limit is 12,148,400 TCO2E. To calculate a building’s annual emissions, the legislation provides factors based on the manner in which a building obtains its energy (i.e., electricity delivered through the grid, natural gas combusted on the premises, fuel oil combusted on the premises, and district steam consumed on the premises) (N.Y.C. Local Law 97 § 28-320.3.1.1.).

Beginning in 2024, covered buildings may not have permitted annual emissions in excess of those allowed pursuant to the Act. More stringent compliance requirements will take effect in the 2030-2034 period. These requirements are expected to cover approximately 75% of the City’s buildings. By January 1, 2023, even more stringent factors will be established for the compliance period beginning in 2035.

How will building owners comply?

Building owners will comply primarily by making energy efficient improvements and encouraging/incentivizing tenants to do the same. Examples of energy efficient improvements include installing energy efficient heating, ventilation, and air conditioning systems, LED lighting, and building controls. In lieu of new installations, existing mechanical equipment may be updated, in order to increase reliability and provide cost savings through lower utility bills and emissions. Switching from fuel oil #2 or #4 to natural gas is also a relatively easy way to lower emissions. Replacing windows that are more than 25 years old is yet another relatively simple, albeit expensive, retrofit. New windows should exceed the requirements of the current code so they will not be required to be replaced in the near future. Energy-efficient windows will lower emissions because the heating and cooling systems will not need to operate as frequently, which also prolongs the life of the heating and cooling systems. More extreme retrofits include tearing out and replacing the façade of the building and installing new insulation throughout the building.

The Act establishes a Property Assessed Clean Energy low interest loan program to assist building owners in financing the capital expenditures through a special assessment on the building’s property tax bill. Alternative compliance measures include Renewable Energy Credits (“RECs”), Greenhouse Gas Offsets, and Distributed Energy Resources (“DERs”). RECs are certificates representing the equivalent of one megawatt-hour of electricity generated from a renewable source. RECs may be purchased by building owners to deduct from the building’s annual emissions. The Act defines Greenhouse Gas Offsets as units equaling one metric ton of carbon dioxide equivalent emissions avoided, reduced, or sequestered by a project. Owners may deduct up to 10% of the annual building emissions for purchased Greenhouse Gas Offsets for the 2024-2029 compliance period. DERs are renewable energy units or systems which are located on the premises (e.g., rooftop solar, wind, or geothermal) or that store energy at the property for use during peak demand periods (e.g., battery storage). The Act provides for a deduction from the annual building emissions equal to the amount of the calculated output of the DERs during the initial compliance period of 2024-2029.

Compliance is monitored by the submission of an annual report certified by a registered design professional of the building’s annual emissions commencing as of May 1, 2025, and on each May 1st thereafter.

What happens if building owners do not comply?

If a building’s annual report shows emissions exceeded the allowable emissions limitation, the building owner is subject to a civil penalty not more than the difference between the actual and permissible emissions multiplied by $268. To illustrate, if the building’s annual emissions were X and the building’s annual emissions limit was Y, the building owner would pay a fine equal to (X-Y) x $268. A building owner’s failure to file the annual emissions report will result in a penalty of up to $0.50 per square foot of the building for each month that the violation remains outstanding.

Depending on the size of the building and the current emissions, some smaller buildings may opt to pay the penalty in lieu of investing in costly retrofits. For example, if one way for a building to comply with the Act is to install a new energy-efficient boiler but the boiler is not adaptable to a particular building (e.g., the boiler is made to service 150 units and the building has only 84 units), then the compliance is not purposeful and the building owner may be better off paying the fine.

What should building owners do now?

Building owners should consult with energy professionals (engineers and/or architects) and perform an energy audit to learn more about their current emissions in the building and calculate the building’s carbon intensity and energy use intensity. The energy audit will provide a baseline which may enable a building owner to understand what may be required to to be in compliance with the Act. It may well be the case that some buildings may already be in compliance with the initial 2024 requirements. On the other hand, some buildings may need to make material improvements in order to comply.

After compiling such data, building owners should consider sharing the results with tenants to create an open dialogue about the importance of operating an efficient building through the design and use of the tenants’ spaces. To the extent applicable in connection with a plan in place, building owners may consider installing sub-meters in each space to effectively monitor each tenant’s energy consumption.

Landlord or Tenant: Who Pays?

Many standard commercial leases contain provisions to the effect that if a landlord is required to make capital improvements to the building pursuant to law or governmental requirements, tenants will reimburse the landlord for their proportional cost hereof. In some cases, the cost is expensed in the year in which the improvement is made; in other cases, the cost is capitalized and paid over time based on the useful life of the improvement. Tenants entering into new leases will most likely object to the concept of contributing towards these costly improvements required by the Act.

Many commercial leases provide for a pass-through of building operating expenses directly to the tenants (usually to the extent some exceed those applicable in the “base year” which is usually the year in which the lease term commences). A typical exception to such pass-through of expenses is expenses which are capital in nature. Notwithstanding, leases often allow landlords to pass along capital expenses which would otherwise not be allowed if same are required by law or which are intended to reduce operating expenses (in the latter case, as long as the amount to be passed along to the tenant is not greater than the resulting operating expense savings). Under such circumstances, landlords and tenants need to be mindful of the issues attending these costs. Landlords will want to pass along these costs, either as expenses in the year in which incurred or as capitalized improvements over time. Tenants will either want to disallow such improvements (arguing that same constitute costs of doing business to be borne in whole by the landlords) or limit the exposure by providing that the costs must be capitalized and amortized over their useful lives as determined in accordance with generally accepted accounting principles (and perhaps, limiting the annual amortizing cost to $x per square foot of the premises). Let the negotiations begin!

Conclusion

Local Law 97 is an ambitious piece of legislation enacted to provide a cleaner environment through the regulation of greenhouse gas emissions. The law gradually phases in stricter restrictions to allow building owners ample time to formulate plans to comply with emissions limits. Building owners must coordinate their plans with their tenants, invest in energy-efficient retrofits (which will save building owners money in the long-term), and utilize alternative compliance measures to satisfy the legislation’s emissions standards.

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Note from the Real Estate Group is a newsletter of Tannenbaum Helpern’s Real Estate, Construction and Environmental practice. It provides the latest perspectives on legal developments and market trends impacting real estate, construction and environmental related transactions and matters. To subscribe for the newsletter, send email to marketing@thsh.com.

09.09.2020  |  PUBLICATION: Note From The Real Estate Group  |  TOPICS: Real Estate, Construction, and Environmental  |  INDUSTRIES: Real Estate

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