Despite Looming Fines For Building Emissions, NYC’s Green Financing Program Struggles To Take Off
New York City's real estate industry will soon have to comply with legislation designed to help the city meet its ambitious climate goals. But there’s a problem: Developers and lenders don’t understand the city-run financing program in place to help landlords reduce their buildings’ carbon emissions.
The program called C-PACE, which stands for Commercial Property Assessed Clean Energy, is intended to provide long-term financing to help buildings make improvements to reduce their carbon output and save energy.
A lack of understanding of how C-PACE works is leading to limited buy-in among developers and mortgage lenders alike, experts told Bisnow, while NYC’s back-and-forth revisions to C-PACE guidelines create a barrier to understanding for interested parties.
C-PACE has been around for 15 years, and it is already in 38 states. It was slow to arrive in New York City, which only enacted C-PACE financing legislation in 2019 following the Climate Mobilization Act and Local Law 97. And so far, only two deals have been completed in NYC, leaving many buildings subject to the threat of substantial penalties in 2024 when the CMA comes into effect.
“It's due to familiarity with the program,” said YuhTyng Patka, partner and co-chair of Duval & Stachenfeld’s NYC Climate Mobilization Act Task Force and PACE Financing Practice. “It's just that not enough people know about it yet. The more that they see and hear about it, the more comfortable they will be with it.”
Buildings account for 70% of NYC carbon dioxide emissions, according to NYC government figures. The CMA aims to reduce that by 40% citywide by 2030, and with the implementation of Local Law 97, the city will start penalizing buildings that aren’t reducing their emissions.
One obstacle for the city in achieving its goals is that it hasn’t finalized its C-PACE guidelines yet. The city took more than a year and a half between enacting the financing program in April 2019 and publishing guidelines for using it in December 2021. The city has since revised those guidelines twice, in March and April this year.
Within those revisions, the city has gone back and forth on what types of projects will qualify for C-PACE financing, according to Duval & Stachenfeld. The city's earliest guidelines excluded new construction, meaning only buildings seeking retrofits to bring them up to standard would be eligible. In March 2022, it included new construction — and in April, excluded it again.
“NYCEEC are self-describing the program as still in its quote-unquote pilot phase. They're openly admitting that they're still working out the kinks,” Patka said. “And there's a reason why there's only been two loans that have closed: because after those two loans closed, they're figuring out how to proceed with future loans.”
The result is that only two buildings have sealed C-PACE deals with the program administrator, New York City Energy Efficiency Corp. NYC’s first C-PACE deal, an $89M loan for retrofits at 111 Wall Street, was approved last June. The second deal for a Midtown office building at 730 Third Ave. was worth $28M, The Real Deal reported at the time. That project was partially owned by Nuveen, and the loan was provided by Greenworks Lending, which Nuveen acquired last year.
Jessica Bailey, co-founder and CEO of Nuveen Green Capital, which rebranded from Greenworks Lending, told Bisnow that each revision of the guidelines requires more approval from relevant parties.
“NYC has among the most ambitious climate targets of any municipality in the country,” Bailey said. “As we understand it, they are looking to sync their C-PACE guidelines with their other climate regulations, which requires additional stakeholder discussions.”
A spokesperson for the New York City Mayor’s Office of Climate and Environmental Justice said the office, along with NYCEEC, is finalizing the program documents for the latest version of the guidelines, and it intends to use those to review loan applications. The spokesperson said any real estate owners with questions about how C-PACE works can contact the city.
Inconsistent guidelines and bureaucratic hurdles aren’t the only reasons that NYC’s PACE adoption is faltering, experts said. The program, despite its age, still faces resistance from mortgage lenders across the country, said Thomas O'Connor, partner and co-chair of Duval & Stachenfeld’s Real Estate Finance Group.
“The mortgage lender has to consent to a PACE loan — a loan that's going to get paid in front of them,” O’Connor said. “So they have to get comfortable with it and be OK with the economics of having a loan that has priority over that. And many mortgage lenders are getting comfortable, but many are not yet.”
O’Connor and Patka believe that in NYC, a lack of lender familiarity with the program adds to that resistance, a sentiment shared by Meridian Capital Group Senior Managing Director Morris Betesh.
“We get lots of inbound calls on C-PACE daily. I think there's a lot of flawed marketing of C-PACE,” Bettesh said last month at Bisnow’s annual Tri-State multifamily conference. “We've seen many lenders have trouble understanding it and underwriting it.”
That struggle is leading some to believe that developers may hold out altogether until the last possible moment, Bettesh said.
“I've not seen anyone actually underwrite this oncoming Local Law 97 upgrade stuff,” he said. “I think people wait until it's real to actually underwrite it.”
But given the amount of time and investment that it takes for developers to get their ducks in a row to line up PACE funding in NYC, not to mention figuring out if their projects are actually eligible, some experts believe that developers may give up on financing clean buildings altogether.
“By 2024, you have to reduce your carbon emission if you're a 25K SF building, or more by 2030,” Rosenberg & Estis Managing Member Michael Lefkowitz said at the Bisnow conference.“Versus what I've seen … some of our clients have taken the position that it might just be less expensive to pay the violations than to actually do the upgrades.”
