PACE Loans Ease Compliance with the Climate Mobilization Act
Owners of buildings over 25,000 gross square feet should be focused now on compliance with NYC’s Climate Mobilization Act (Local Law 97) that sets increasingly stringent limits on carbon emissions in 2024 and 2030 (and then every 5 years until carbon emissions are reduced by 80% in 2050). Owners should be wary of steep fines for non-compliance.
Local Law 96 establishes long-term, low-interest Property-Assessed Clean Energy financing (“PACE” loans) to fund upgrades to building energy efficiency and green energy, and to ease compliance with strict carbon emissions limits. PACE loans are repaid in installments through a separate charge on a building’s property tax bill.
PACE loans are attractive to owners because (i) they can fund up to 100% of the cost of energy retrofits so owners don’t have to increase rents or deplete reserves, and (ii) they can be repaid over a period of up to 20 years (tied to the useful life of the improvements). Thus for co-ops and condos, for example, the cost of the upgrades is fairly spread among the individual residential owners over an extended time.
Prerequisites to obtaining a PACE loan include obtaining consent from the existing mortgagee (because PACE loans take priority over a mortgage). Holders of mortgages that have been assigned to FNMA, which has its own “green energy” loan programs, and mortgages packaged into CMBS programs, are unlikely to approve PACE loans. In addition, the loan must have a 1:1 return on energy savings [“SIR”] over its lifetime, so a PACE lender will conduct an energy audit to determine the maximum size of the loan. It also comes as no surprise that any unpaid civil penalties, taxes, or other debt to the City that is delinquent must be resolved first.
Maximum PACE loan amounts may be limited by numerous factors including property value, projected savings, project cost, and existing indebtedness secured by the property. Since the loans are ongoing liens against the property (like taxes), the equity in the property may be more important than the creditworthiness of the borrower in determining loan size. In addition, the loan application process can be more complicated than conventional financing and loans are issued on a case-by-case basis, so there is no guaranty that funding will be available to all buildings.
The first PACE loan closed in June 2021 and a preliminary list of 20-or-so private lenders pre-approved to provide PACE loans was published in September and available on the program’s website.
As the roll-out of the new PACE loan program can be complex, owners may wish to seek out guidance from their trusted professionals.