New York Local 97 Law Eases Pressure on Landlords Showing Good Faith

Commercial tenants, landlords, and investors are navigating a new environment of increasingly aggressive environmental regulations.

Because the urgency to address climate change is pushing governments to target the commercial real estate industry as a significant contributor of global greenhouse gasses. New legislation places emphasis on sustainability and green practices, under a total-war approach. The alternative to achieving carbon-neutrality is severe fines that will continue throughout the decade.

The issue with this is that the cost (and pressure) of these upgrades have been put on to property owners. You know, the office landlords being forced to hand back the keys because of rampant vacancies and climbing debt, those property owners.

But have no fear, New York City is committed to ensuring that it reaches its goal of carbon neutrality under its Local 97 Law. And in order to make it work, the government is promising commercial landlords a little bit of leeway to phase in green technology at a more realistic pace. So, let’s discuss the city’s most recent "Good Faith" approach to carbon neutrality and what it means for tenants.

New York's Local Law 97

Local Law 97 was introduced to hold the owners of New York City's buildings, which are the main contributors to greenhouse gas emissions, responsible for reducing citywide emissions by 40% from the 2005 baseline by 2030, and 80% by 2050.

Passed in April of 2019, it placed carbon emission limits on commercial buildings larger than 25,000 square feet. Now, properties that exceed the limits are set to face fines of $268 per metric ton over the limit starting in 2024 with stricter standards plotted to begin in 2030. 

And of course, this will inordinately affect a subtype of buildings that was already struggling, B and C Class offices. These properties are typically older, requiring costly upgrades to remain competitive in a slower leasing market, and often have a more considerable path ahead to reach carbon-neutrality. So, this may be the final straw that breaks the camel’s back for already-devalued NYC properties.

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Carbon-Neutral Upgrades are Expensive

Commercial property owners as a whole were not really in a position to take on the cost of multi-million-dollar green retrofits (or the financial consequences of not doing so).

Therefore, many have questioned whether the Local 97 Law is not based on a realistic model. Because in the wake of the WFH revolution, office demand is at record lows. It’s harder than ever for commercial landlords to find long-term tenants. Pressure mounted from high interest rates and inflation has already caused some of the country’s largest landlords to default on their loans. So, it’s safe to say that many CRE owners can’t afford millions of dollars in fines right now. 

The costs required to transform a building to reach carbon neutrality supersede the multi-million-dollar price mark. Because it demands a whole new level of technological integration. And as a result, some landlords are pointing out that paying fines may be less expensive than updating to meet code.

Attorneys Pardalis and Nohavicka, predict that “This could translate into significant additional construction costs totaling in excess of over a million dollars in costs for multi-million-dollar commercial buildings, including the owners securing indoor air quality sensors, HVAC air cooling systems, installing dual fuel and natural gas and renewable energy conversion systems, low flow water fixtures, high efficiency boilers and heat controls and automated building and energy management systems and software.“

Construction is a massive job with a lot of expenses on top of potential legal fees to remedy any issues with Local 97. It’s also complicated when tenants’ budgets come into play. Because they are wary of taking on extra costs associated with sustainable upgrades through pass-throughs.

For many, compliance with these regulations has become a crucial aspect of lease negotiations, further driving the demand for environmentally conscious properties. Learn more about How to Protect Your Budget from Green Restrictions.

But in the meantime, the city has listened to some complaints and has planned to ease restrictions on property owners taking steps towards carbon neutrality.

Good Faith Relief for NYC Landlords

Later this summer, New York City is expected to release updated regulations concerning its controversial building emission cap legislation. While fines for noncompliance may not be immediate, the government will exert considerable pressure on property owners to enhance the energy efficiency of their buildings

But the city claims that it remains steadfast in its commitment to carbon-neutrality, and because of this it’s willing to work with landlords to reach compliance.

According to New York Department of Buildings' Gina Bocra, “If you carefully read that law, it says a penalty of up to $260 per ton, and it also has a very interesting section about how an owner can work with departments to mitigate penalties; meaning you come to the department and you show us you've made a good faith effort to comply with the law."

A good faith approach doesn’t mean that every landlord gets a break. New York Department of Buildings' Gina Bocra said that property owners will need to prove that they are taking steps. But in the meantime, this is a positive note for landlords feeling a lack of support from government bodies.

This will make phasing in green regulations more accessible for a larger pool of tenants and landlords, providing an opportunity for property owners to mitigate penalties by making sincere attempts to comply with the law. Rather than solely imposing fines for noncompliance, the emphasis on good faith efforts acknowledges that transitioning to carbon-neutrality can be a complex and challenging process.

In turn, the demand for carbon-neutral spaces will be prolonged as it gradually becomes the norm against the backdrop of a decline of the alternative, aged-out properties.

What Tenants Should Know About Local 97 

Because the increasing pressure to retrofit existing properties fines is set to begin with extreme fines later this year on property owners that don’t meet code, tenants need to become aware of their landlord’s compliance.

And when you’re drafting a new lease, you must think about how to protect yourself. But, with an almost innumerable number factors to consider, it can feel like an impossible feat. Especially since a lot of these regulations feel so new. There’s a lot of uncharted territory here for who is footing the bill or environmental upgrades. With no fixed set of expectations, a good True Tenant Representative™ is all the more important.

Now a building’s carbon-neutral or LEED status is a top driver of whether it is a suitable site. Learn how to integrate this critical factor into finding your best office space for the best price.