Real Estate Industry News

New York City building owners will face steep fines for not complying with new emissions caps, with the cost of retrofits or penalties trickling down to residents in the form of assessments and increased rents.

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The New York City real estate market is expected to take a hit as the result of ambitious legislation designed to push back against climate change, which includes requiring the owners of residential and commercial buildings to cut energy usage and carbon emissions or face significant fines.

Under one of the six bills passed as part of the Climate Mobilization Act, buildings that are more than 25,000 square feet will be required to make fixes, such as upgrading boilers and installing new windows and insulation, to become more energy efficient, with the goal of cutting greenhouse gas emissions 40% percent by 2030 and 80% by 2050.

Starting in 2024, building owners who don’t comply will be hit with fines totaling the difference between the emissions limit for the year and its actual emissions, multiplied by $268.

Real estate industry leaders, including those involved in discussions leading up to the legislation that was crafted with the goal of it being passed by Earth Day on April 22, worry that the aggressive law will further hurt the already struggling residential market as building owners are faced with making pricey retrofits and encouraging tenants to change their energy use.

“It’s going to have a big impact on buildings in New York City, there’s no doubt about that,” says Daniel Avery, director of legislative affairs for the Building Owners & Managers Association of Greater New York (BOMA), a trade association for commercial real estate professionals in the five boroughs that served on a task force of stakeholders run by the office of Mayor Bill De Blasio to form the basis of the legislation. “What exactly that’s going to look like, people are scrambling to figure out.”

The law will require older co-ops and condos over 25,000 square feet to make significant improvements. Buildings can also comply by buying renewable energy credits, paying for renewable energy that is generated elsewhere.

“The cost for these is usually through assessments,” says Compass broker Martin Eiden. “When selling a condo or co-op, assessments are a huge hurdle to overcome. It is usually solved by having the seller pay the assessment in full at the closing, so the buyer doesn’t have to deal with it. Real estate values are not going to increase because of this so the seller will ultimately receive less money in a sale. Another possibility is some property owners will not be able to afford the assessments and will have to sell.

“In summary, good for the city and planet long term,” Eiden says. “Bad for individual unit owners short term.”

Perhaps the biggest question surrounding the legislation is whether building owners can make the reductions in emissions through retrofits alone.

“I wouldn’t say there are technology fixes to help a building reduce 40% of its carbon footprint,” says Christopher Cayten, a principal at CodeGreen Solutions, a consulting firm that works with real estate owners to help meet sustainability and energy management goals. “There are technology approaches that can help reduce a building’s carbon footprint by 10 to 20%. There is no silver bullet technology that can save that much energy.”

A big part of compliance will come from behavioral and occupant changes, such as tenants turning off lights and air conditioners when they’re not in a room.

“As co-op or condo owners, this is definitely something to discuss together,” Cayten says.

Diana Sweeney, the chief operating officer of EnergyWatch LLC, which provides analytics software for energy management, says she is worried that buildings could comply by switching to electric-powered heating systems, which would have a major impact on the grid, particularly when the Indian Point nuclear power plant goes offline by 2021.

“This could push the New York City electricity peak significantly higher than we’ve ever seen,” Sweeney says. “The grid is not ready for this. It will require infrastructure upgrades, both locally and with regard to transmission coming into the area, as well as additional generation. This could push electricity costs higher for all New Yorkers, including residents, not just the buildings at which this legislation is aimed. … While we applaud the intent of the bill, we can’t help but worry if some of these tenants will find it financially infeasible to remain in New York City.”

The law does come with some financial safeguards. Residential buildings with at least one rent-regulated unit, as well as income-restricted coops, public housing and city-owned buildings, will be exempt from the most stringent requirements of the law, and will be put on an alternative path to compliance that includes following a list of best practices, such as placing caulking and insulation around windows and making upgrades to mechanical systems so that they run more efficiently. Buildings can also take out low-interest loans for the work.

The bill’s proponents say that the city, with its large amount of waterfront real estate, is obligated to invest in changes to curb climate change.

“These are anxious times,” says Mark Chambers, the director of the Mayor’s Office of Sustainability. “The need to dramatically mitigate our emissions is based on risk. So that has to be part of the conversation on how the city can position itself against global warming. The fines are designed to be commensurate with the amount of work that needs to be done.”

Chambers says that the majority of buildings will not be impacted by the first compliance path, which is limited to the city’s “worst offenders.”

Education will also be a big part of the new law and the city has a free program, called the NYC Retrofit Accelerator, that helps building owners make energy efficiency improvements.

John Mandyck, chief executive officer of the Urban Green Council, an action group with a goal of making New York City’s buildings more sustainable, says the group worked to make implementation of the law more feasible, including adding the ability to offset emissions with renewable energy credits and allowing carbon trading between buildings. With carbon trading, buildings that are able to get below the cap can sell the emissions they reduce below the cap to buildings that don’t have the ability to do so.

The law’s timelines are also “far more realistic” now than when the legislation was first introduced, Mandyck says.

“I’m completely sympathetic to the co-op and condo owners,” says Mandyck, who notes that New York City has more than $1 trillion of coastal properties that are at risk of flooding. “The fact is everyone is going to have trouble meeting this. These are the hard choices that are made when we deal with a problem like climate change.”