Free money for decarbonization

Forgivable loans courtesy of Community Preservation Corporation (CPC) & DHCR

Local Law 97 (LL97), NYC’s landmark environmental law, was passed in 2019 to curb CO₂ emissions from buildings in the city. The law stands alongside other measures like the ban of fossil fuel use in new buildings as part of a cogent strategy to be more climate smart in NYC. The push towards carbon neutrality in NYC is one of Mayor Adams’s three core strategies to make NYC the City of Yes. Because decarbonization is such a priority in NYC, building owners need to be aware of the impacts the policy may have on them.

LL97 threatens fines if multifamily buildings >25,000 square feet do not reduce their carbon emissions starting in 2024 (with a series of escalation that are meant to culminate in a 40% reduction in CO₂ emissions by 2030). About 20% of buildings in NYC were non-compliant when the law was announced back in 2019. Now, only a few years later, that figure is down to 11%, so the mere threat of fines has halved the count of buildings overproducing emissions. Still, a whopping 70% of CO₂ emissions in NYC come from the “built environment,” or commercial property. The push behind LL97 is to transition building systems into newer technologies that both cost less and are better for the environment.

Cost savings in the future don’t always justify the initial capital expenditures required to secure the savings, and owners sometimes feel stuck. Below is a new program that can be leveraged to play offense against these requirements. Whether Local Law 97 compliance is the goal (“I’m just here so I don’t get fined”), or the plan is to shave down surplus expenses on portfolios assets, the ideas below can benefit many. For those owners whose properties are less than 25,000 square feet, I’m looking at you. There’s never been a better time to clean up expenses on rent regulated buildings whose revenues are capped by law.

Climate Friendly Homes Fund (CFHF) by the CPC and DHCR

The Community Preservation Corp (CPC) is a multifamily lender in NY that focuses on providing loans in lower-income census tracts, or to sponsors who historically would not have been approved for loans. It is especially keen to lend money to sponsors whose projects have affordability components. The CPC is part of the 3-way partnership that is expected to purchase the rent stabilized portion of the Signature Bank loan package that is up for sale. The CPC is offering forgivable loans (read: grants, read: free money) for HVAC overhauls / retrofits on NY multifamily properties.

The $250MM Climate Friendly Homes Fund (CFHF)  is intended to cover the costs of converting CO₂ emitting HVAC systems into cleaner, sustainable solutions for approximately 10,000 apartments within NY state (it’s a NY only fund). Buildings are eligible if they either have specific affordability covenants, or if they are in low-income census tracts (as defined by either HUD or NYSERDA). Properties must also have between 5 and 50 units (inclusive) to be eligible. CPC claims it can offer approximately $25,000 per unit in funding for de-carbonization projects (though sources estimate ~$20,000 / unit).

50 units x 20,000 = $1M = a lot of free money

If the property is worth $130K / unit, or approximately $6.50M, then the CPC forgivable loan could cover close to 15% of the purchase price. Let’s say the property was going to be bought with modest leverage of 50%. Well, instead of putting up $3.25M in cash, the purchaser might be able to secure the property with only $2.25M in equity, and $1.0M in CPC financing.  Depending on how much leverage is used to finance the purchase, the interest rate, and the net income on the property, going with CPC could, in theory, double an investor’s cash-on-cash. See example math below.

Some hypothetical math of what $20,000 of grant money could do per unit on a 50 unit property. Note that the CPC does not allow the use of its funds to be treated as an acquisition loan might be. Still, the basic math above is intended to show how big a difference $20K can make.

Right now, the CPC alleges that “Program funds are intended for mid-cycle retrofits and cannot be combined with construction debt financing of broader rehabilitation scopes (…) CFHF is meant to be stand-alone funding for electrification and decarbonization scopes of work.”

That means that the CPC funding cannot act as a stand-in acquisition loan, as my analysis above presumes. Yet, it still means a heck of a lot of savings on any construction budget and it’s possible that CPC softens its requirements if the demand or compliance measures for its program yield too few applicants.

The HVAC repairs that CPC is willing to fund include all the below:

• Electrical service upgrades

• HVAC systems replacement with high-efficiency heat pumps

• Domestic hot water replacement with high efficiency heat pumps

• Additional energy conservation measures to optimize new system performance

• Systems commissioning

So what should investors do? CPC is giving away free money. This is not something to miss!

• Investors should apply for CPC funding on existing properties. Given that the stated policy for CFHF is that it should not be co-mingled with other funding sources, it’s best to tread gingerly, at least at first. Avoid treating funding as general-purpose construction financing.

• The cap of 50-units per buildings is loose. In block-through apartment communities, for example, if each edifice is less than 50 units, the property can qualify, even if it is 200+ units in total. These are the properties that stand to be hit by fines by Local Law 97. Investors need to get CPC approval on all their properties.

• Risky: Buy properties all-cash and use CPC funding to cover the HVAC / mechanical renovations. Attempt to refinance after the property is in service.

It will be interesting to see how the program prevents non-authorized use of funds and how much flexibility it offers buyers of properties who are looking to take advantage of programs as newer owners, and pair the program with traditional financing (maybe via CPC). If the state and or city government is smart, it will subsidize some of the cost of insurance coverage to doubly incentivize the decarbonization of properties.

Are you sold on this as yet? This is a good product. If I was eligible for the funding, I would jump on it.

Disclaimer: I get 0 fees for this plug, but you could get up to $1,000,0000

Source: Climate Friendly Homes Fund (CFHF) by the CPC