On April 10, 2019, the New York City Council adopted Intro No. 1253 – the largest effort in a series of bills known as the Climate Mobilization Act. Intro No. 1253 enacts new regulations to reduce the city’s current largest source of carbon emissions – the operation of buildings.
Jared Brey, in his April 25, 2019 article in U.S. News and World Report, “How an Evolving Movement Pushed NYC to Address the Climate Crisis,” states that “[i]n the city, around 70% of carbon emissions are produced by buildings, and around half of all building emissions are produced by just 2% of structures larger than 25,000 square feet that are covered by the bill.”
The level of development, population density and relative economic power of a city such as New York have made this bill particularly interesting to other jurisdictions around the globe which may be considering their own similar legislation. In his article, Brey cites David Miller, a former mayor of Toronto and the North American regional director for C40, a group of cities coordinating strategies to meet the goals of the Paris Agreement:
“I think what New York has done is globally significant … It’s really a huge step forward, using the city’s powers and influence to directly address a huge source of greenhouse gas emissions without waiting for the national government or the international community to act.”
Several other jurisdictions have already begun to approach this issue, generally either by passing bills or creating task forces to further investigate how to meet stated emissions reduction goals. In 2018, Governor Jerry Brown of California signed an executive order with a stated goal of net-zero carbon emissions within the state by the year 2045. The California State Assembly subsequently passed a bill creating a task force to investigate the potential to reduce the emission of greenhouse gasses by both commercial and residential buildings by 2030, although their plan is not due until January 1, 2021. The city of San Jose has implemented new building standards for all new residential buildings to be net-carbon neutral by 2020, and all new commercial buildings must be so by 2030.
In 2018, Washington D.C. passed an omnibus bill that tackles, among other issues, minimum standards for building energy performance for buildings as small as 10,000 square feet. A special task force is currently establishing the relevant Building Energy Performance Standards for different categories of buildings. The State of Washington is currently considering a series of bills that would establish new performance standards for commercial buildings and incentivize the use of clean energy. Similarly, a proposed bill in the Massachusetts state legislature (H2836) has a stated goal of establishing complete use of renewable energy sources by the year 2045.
Intro No. 1253 distinguishes itself from the various efforts of the other jurisdictions by introducing hard deadlines and penalties for non-compliance to achieve its stated goal of reducing carbon emissions by 40% by the year 2030, and by 80% by the year 2050 (relative to the base year of 2005). The bill’s requirements include, in part, retrofitting existing buildings, monitoring ongoing energy consumption and implementing new monitoring programs and standards over specified periods of time. The up-front and ongoing expense of compliance for owners of large commercial properties remains to be seen. Staffing, insurance, financing and ongoing or proposed renovations to existing properties are all certain to be affected. The net effect on the costs and feasibility of future construction and development also remains an open question.
While it may be too early to develop a concrete understanding of the net financial impact of the legislation on large commercial properties (as in, the initial and ongoing expenses of compliance versus potential benefit to building operating costs and revenue), the Real Estate Board of New York (REBNY) has taken a position of clear concern. REBNY opposed the bill in a statement by its president, John H. Banks, which provided, in part, that while “REBNY fully supports the City’s goal” the bill exempts more than half of the city’s built environment from its carbon emissions limits. REBNY’s statement also points out that buildings which are currently operating under the specified emissions limits may continue to increase their emissions until they hit the cap. In addition, REBNY notes that “[h]ouses of worship, buildings with at least one rent-regulated unit, income-restricted coops, public housing and city-owned buildings are all exempt from the carbon emission limits.”
Compliance issues and expenses resulting from Intro No. 1253 will be considerable due to the complexities of owning, operating, leasing and financing commercial properties. To date, no new legislation with the sweeping effects of Intro No. 1253 has become law, particularly with respect to retrofitting existing buildings, but the trend is clear. As it continues, we can expect to see divergent groups within the real estate industry each bringing their own unique set of challenges and considerations to the table, including property owners, lenders, commercial tenants, building engineers and architects, to name a few.
Although REBNY’s statement is clear, what, if any, substantive action they or other groups within the industry (particularly within New York) may take in response to the bill remains to be seen. One thing, however, is for certain – the conversation is just starting. As laws like Intro No. 1253 and others may begin to take effect, lender underwriting and decisions regarding property value in acquisitions are likely to be affected. The new laws are certain to become a factor in future real estate financing term sheets, particularly as to valuation or the availability of capital for a particular project due to its level of compliance and the costs to bring it to full compliance. Penalties for failure to comply will also be a consideration and expense affecting future real estate operations.
One day, carbon emissions standards in buildings may become as familiar to those of us in the industry as any other environmental standard, covenant or condition affecting a typical transaction. Until that day, it may be best to channel one’s inner Boy Scout and “Be Prepared” by tracking current or pending legislation, reviewing industry publications and reaching out to trusted professionals for further guidance as needed.
