Jan. 1, 2024, not only marks the start of the new year, but also the start of the first compliance period for building owners under Local Law 97 (LL97), New York City's (NYC) trailblazing law that imposes limits on greenhouse gas emissions. LL97 is one of the most ambitious citywide initiatives for reducing carbon emissions in the nation, targeting NYC's largest polluters, commercial and residential buildings that exceed 25,000 square feet, by setting increasingly stringent caps on the amount of emissions over the course of five-year intervals, beginning this year. Approximately 50,000 buildings are expected to be subject to the law. A property owner of a building that exceeds its applicable emissions cap will be required to pay fines for noncompliance — a dynamic that has forced, and will continue to force, property owners across NYC to consider if, and to what extent, they should retrofit buildings with energy-efficient materials to reduce the likelihood of paying hefty fines.

Subject to limited exceptions, property owners are required to submit annual building emissions reports to the NYC Department of Buildings (DOB) starting on May 1, 2025. Since the NYC Council first passed LL97 in 2019, two sets of rules have been enacted to provide direction to property owners that must comply with the law, the first of which came into effect in December 2022 and the second of which was published in December 2023. The latest December 2023 rules can be found here. This latter set of rules relaxes the previously promulgated standards and allows certain building owners to defer compliance for one year. While building owners technically need to submit their first reports by May 1, 2025, the latest rules permit property owners to receive an extension to comply with the 2024 emissions limit until 2026 so long as they demonstrate “good faith efforts” in decarbonizing their buildings.

One method for demonstrating “good faith efforts” includes submitting a “decarbonization plan” (certified by a registered design professional and includes an energy audit that is no more than four years old) by May 1, 2025, that demonstrates how the building will achieve on-site emissions reductions by 2026; provides evidence by May 1, 2028, that DOB has approved an application for the work necessary to meet the 2030 emissions limits; and includes long-term plans to reach carbon neutrality by 2050. As previously reported in our  September 2023 client alert, approximately 90% of buildings are expected to be in compliance with the 2024 – 2029 emissions limits. The decarbonization plan requirement arguably assists building owners in preparing for the more stringent 2030 emissions limits.

Submitting a “decarbonization plan” is not the only way for building owners to demonstrate “good faith efforts.” Another option is to provide evidence that a complete application has been approved by DOB for the work necessary to comply with the first reporting limit, a timeline for completing the project and the corresponding emissions reductions estimated to result. If such work does not require an application with DOB, however, a signed contract with the service provider performing such work and proof of payment can be submitted instead. Note that future rulemaking will lay out a different definition for “good faith efforts” for subsequent compliance periods.

In addition to the “good faith efforts” exemption period, subject to certain conditions, the final rule allows building owners to purchase Renewable Energy Credits (RECs) to meet their emissions reductions targets. RECs are a market-based initiative and are issued when one megawatt-hour of electricity is generated from a renewable energy source, such as from solar panels or wind turbines, and delivered to the electricity grid. RECs are tradable, tracked commodities that represent the “renewable” elements of the clean energy source. If a building owner submits a decarbonization plan, however, the owner cannot also purchase RECs to offset emissions that exceed the limits imposed by the first five-year reporting cycle. Thus, building owners cannot rely solely on RECs to offset greenhouse gas emissions and must still decide whether to retrofit properties to reduce emissions or else face penalties.

The final LL97 rules have faced criticism from all sides. Some building owners have argued that the cost to retrofit properties to comply with the law, even with the “good faith efforts” exemption period and ability to purchase RECs, is too costly (a consistent position taken since LL97 was first passed). On the other hand, some environmental groups have argued that the final law is too lenient as the “good faith efforts” period detracts from the urgency that climate change demands.

Despite the potential to delay compliance as a result of the final rules, it remains imperative for key players in the real estate industry — operators, developers, investors, lenders and tenants — to consider the impact LL97 will have on all types of commercial real estate transactions involving property located in NYC, ranging from the need to perform additional physical and legal due diligence to the negotiation of LL97-specific provisions in deal documents.

The Kramer Levin  environmental land use and  real estate teams are well versed in the complexities of LL97 and equipped to counsel clients through the evolving legal landscape of climate change regulations impacting the building sector. Please reach out to these Kramer Levin practice areas for advice on how to navigate this significant local law and mitigate potential penalties.

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