State of the Planet

News from the Columbia Climate School

Climate Mobilization and a Sustainable New York City

To mitigate climate change, we need to use energy as efficiently as possible and shift from fossil fuels to renewable energy as quickly as possible. Recently, New York’s City Council took a significant step toward reducing the greenhouse gases emitted by the city’s built environment. The goal of the bill is to reduce greenhouse gas emissions from buildings 40% by 2030 and 80% by 2050. While in most parts of the United States transportation is the source of most greenhouse gases, in New York City buildings are our main source of emissions. Last week, by a vote of 45-2 the New York City Council enacted the Climate Mobilization Act, a new law that targets greenhouse gas emissions from large buildings. According to Cecelia Smith-Schoenwalder of U.S. News and World Report, the new law:

“…contains six climate measures that address several topics, including greenhouse gas emissions and the feasibility of replacing all oil and gas burning power plants with renewables and batteries. It would also establish a renewable energy loan program, change the city’s building code to promote construction of wind turbines and require some buildings to cover their roofs with plants or renewable energy like solar panels or small wind turbines…Roughly 70 percent of NYC’s greenhouse gas emissions are attributable to energy usage from its more than 1 million buildings. The legislation would set emission caps that get higher over time for most buildings over 25,000 square feet”.

The bill requires large buildings to install new energy efficient heating and air conditioning systems as well as better insulated windows. It also provides financing for buildings willing to invest in renewable energy. As you might expect, the real estate industry opposed the bill, interestingly not because they are against reducing greenhouse gases from buildings, but due to the focus on large buildings. In a recent piece in the Daily News, reporter Michael Gartland quotes John Banks, president of the Real Estate Board of New York who argued that:

“The bill that passed today… will fall short of achieving the 40 x 30 reduction by only including half of the city’s building stock. The approach taken today will have a negative impact on our ability to attract and retain a broad range of industries, including technology, media, finance, and life sciences.”

Mayor De Blasio has indicated that he will sign the bill, perhaps because some are calling the bill a New York version of a Green New Deal — certainly a talking point for the Mayor in his travels to Presidential primary and caucus states.

The law is a major step forward, but its feasibility will only emerge with time. Estimates of the costs of complying with the law vary and the costs of the building retrofits will be borne by the tenants of the largely commercial real estate targeted. If the local economy is doing well, these costs will be absorbed by business. If the economy is not doing well, it may drive some businesses to less expensive unregulated real estate. It could also impact commercial spaces that are smaller than 25,000 square feet, driving business away from the city’s central business districts in Manhattan, Brooklyn and Long Island City.

Like the proposed national Green New Deal, we should look at this law as an experiment well worth undertaking, but also in need of evaluation and mid-course correction if it is either not meeting its goals or causing unanticipated negative impacts. It is important that we focus on the actual impact of these initiatives rather than the symbolic value of sticking it to big buildings, like Trump Tower, that use a great deal of energy.

I believe that New York City is in another of its transition phases and unlike previous transitions, I hope we manage to be self-conscious about the changes now underway. The original New York City was a commercial trading outpost that sent the raw materials of the New World to the European old world. The Erie Canal opened New York’s harbor to the agricultural bounty of the American heartland. Then we moved from trading to manufacturing. From the late 19th century to the 1960s we were a manufacturing city, making clothing, beverages and even automobiles.

But then something happened that we didn’t notice. Containerized shipping caused our port to become outdated, and our manufacturing base evaporated. Subsidies for suburban sprawl development, crime and racism combined with the declining manufacturing to cause New York’s near bankruptcy in the 1970s. But then the city started to reinvent itself. The service economy and tourism grew at a ferocious rate and the new post-industrial New York began to emerge. Symbolic of that change is the High Line park, once a freight train from the docks to the factories, now a promenade of tourists and locals. The docks are gone, the train was abandoned and the factories closed; but the media companies, galleries, universities, medical facilities, tourists and restaurants arrived and are thriving.

Cities like New York are in a global competition for businesses, residents and visitors. We will win or lose that competition based on the city’s environmental and social sustainability. Environmental quality, mass transit, public space and the built environment will either attract or repulse people and business. The Climate Mobilization Act is a policy innovation to modernize the energy infrastructure of our large commercial spaces. What we learn from this experiment can then be applied to smaller commercial and residential buildings. The city’s energy efficiency and use of renewable energy will ultimately reduce the cost structure of doing business in New York City. The jobs resulting from modernizing our energy system will stimulate the local economy while building important organizational capacity for the operation of our buildings. The new required energy infrastructure will not only need to be installed it will need to be maintained. Someone will have to do that work.

As New York City evolves into a sustainable city, the experience we have in transforming our old energy system to a new one will be valuable, and the transformation itself will make this very old place newer than it looks. Policy experiments like congestion pricing and taking street space and giving it from cars over to bikes, pedestrians and nature, are all part of building an attractive, globally competitive city. Each step needs to be taken with care and rigorously evaluated. Advocates need to be open to the idea that their good ideas might not always turn out as expected. Technology continues to change our economic life. We know that 80% of the American economy is now in the service sector and we know that automation and low-priced communication and information continue to change the way we work and live. Continued technological change will constantly change the physical, cultural, social and economic fabric of life in our cities. We need to assess and understand that change to ensure our cities thrive and serve us.

The Green New Deal places environmental sustainability on the national agenda for the first time in too many years. New York’s city and state governments are doing far more than talking about climate change and environmental sustainability — they are doing something about it. Today we celebrate the 49th Earth Day, next year will mark a half-century of remembering the importance of our planet. Many good people have spent many years working to protect the planet. Today, that work is more important than ever.

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Robert Fischman
5 years ago

Thank you, Steve, for bringing attention to this important package of legislation being adopted by New York City. I agree on many points that you have raised here, but would argue that the real estate industry is not entirely against this.

Over the past decade, I have heard from many owners of NYC real estate that have wanted to improve the energy efficiency of their buildings. They understand that these improvements will reduce their operating expenses and increase their property values. These property owners have heard that PACE – or Property Assessed Clean Energy financing was available elsewhere in New York State and nationally, and have reached out to me in my
capacity administering the program across our state to ask if and when it would be available in the city. PACE financing makes capital available to undertake deep energy retrofits and to install renewable energy systems, improvements that can often have long paybacks. PACE is distinct from other kinds of financing in that it is tied to the property rather than the owner through a voluntary charge added to the property’s tax bill and therefore stays with the property upon sale. In New York State, PACE loan terms are limited only by the life of the improvements. That longer amortization period enables savings from these upgrades to outweigh the financing costs, meaning that they can be immediately profitable.

Unlike other measures in the Climate Mobilization Act, the City Council did in fact pass the local law enabling PACE by a unanimous 47-0 vote. If I may, to correct Ms. Smith-Schoenwalder, this act establishes a sustainable energy loan program for the purposes of providing building owners with funding for the installation of energy efficiency improvements, as well as for renewable energy systems. In a dense, vertical city like New York where building energy use is the largest contributor to emissions, energy efficiency may prove to be the predominant course taken by real estate owners, although you may expect to see an uptick in renewables installed in many outer borough buildings.

Financing is made available without taxpayer dollars through an array of private sector lenders who, like NYC property owners, are excited to see this public benefit coming here. Forward thinking contractors are also seeing this as a resource to create clean energy jobs.

In all, this is a big win for New York and for our planet on this Earth Day.

Robert Fischman
Managing Director
Commercial Programs & Sustainability Strategies
Energize NY

Chungha Cha
Reply to  Robert Fischman
5 years ago

Great comments!! As an ex-New Yorker, its great to see leaders showcasing how cities need to aim for 80×50 and, in many other cities, going toward 100% carbon neutrality. Proptech and smart, sustainable cities should be studied more by the real estate community to gain helpful insights as to global trends and use cases of how to go “greener & smarter” without over-investing to maintain attractive investment IRRs.

Eric A. Sauter
Eric A. Sauter
5 years ago

My sense is that the law will be litigated and potentially concluded to be an unenforceable penalty due to the impossibility of most CRE owners to comply with both the law and the terms of their mortgage loans.

Most mortgages against CRE require the borrower to comply with all applicable laws during the term of the loan. But most mortgages against CRE also prohibit Borrowers from taking out secondary financing during the loan term, including PACE loans (which are provided “super-lien” status under law, making them anathema to mortgage lenders). In other words, taking out a PACE loan on top of its senior mortgage loan will default and accelerate a borrower’s senior mortgage. Therefore, an owner of CRE subject to a mortgage must have excess cash flow capable of funding compliance with the law; otherwise, the owner cannot comply without defaulting on its senior debt.

Even if an owner can manage to bear the cost of compliance out of excess cash flow from its property, it may very well trigger cash management by its lender due to a drop in its “debt service coverage ratio” due to the additional expenses incurred for compliance. Typically, this will include a “cash trap” by the lender of all excess cash flow, which is intended to be additional security for the debt until the borrower is out of cash management. But if cash is trapped, it can no longer be used to comply with the law. It’s a Catch-22: you’re forced to violate your mortgage or the law.

The end-around would be for mortgage lenders to reserve for the cost of compliance with the new law; but the underwriting required for a loan to be made with such a reserve would completely depend on the borrower’s existing debt and the property’s performance. Most mortgage loans are not revolving lines of credit, so owners won’t be able to seek additional advances of debt from their lenders without substantial modification to their loans. The mortgage bond industry tends to prohibit loans subject to future advances from their securitization pools, so owners with fixed rate term loans would find it impossible to modify their loans.

I’m curious to hear thoughts of anyone in the CRE lending field how they anticipate the new law to be received.

LAURA ADCOCK
LAURA ADCOCK
5 years ago

Is this a joke, I am actually laughing, wind turbines on top of buildings?! What will structural engineers say? Giant batteries! Giant batteries are really green! Right ! Where are they putting all this stuff? Ha Ha Ha. Why are certain buildings exempt, shouldn’t they all be treated equally!