New York City Boards Face Financial Challenges as LL97 Carbon Caps Tighten

With the first deadline for Local Law 97 looming in 2025 — and the prospect of hefty fines for buildings that don’t curb their carbon emissions to prescribed levels — many boards are scrambling to undertake energy retrofits. Paying for them can be a steep challenge, but with smart planning and budgeting, forward-thinking boards are rising to the occasion. “Every board dreads having to spend a fortune on upgrades,” says Gustavo Rusconi, the vice president and director of management at Argo Real Estate. “But when you’ve got aging equipment, it’s an investment that pays off in the long run.”

First Things First

Case in point: a high-end 48-unit co-op in the West Village that was facing more than $1 million in fines due to an old heating and cooling system. “The building was in pretty bad shape carbon-emissions-wise,” he says, adding that the gas chiller was the primary culprit: “It was the most pressing problem because it needed a lot of ongoing maintenance to operate, so we went with that project first as opposed to other energy-saving measures.”

The reserves were healthy but not enough to pay for replacing the chiller with a newer, more efficient model. “It was going to be a $1 million project, so the board decided to do a mortgage refinance and moved quickly enough to take advantage of interest rates before they skyrocketed,” Rusconi explains. “That paid for the entire project, and that one upgrade will eliminate the co-op’s fines for 2024. It gave the most return on investment because the building basically evened out in terms of the project cost and avoiding the fines.” 

Secondary Benefits

Thanks to the refi, the board didn’t have to impose a maintenance increase; equally important, the co-op’s reserves won’t be tapped out. “The shareholders could have absorbed an increase, but the combination of no maintenance increase and healthy reserves means the co-op has very solid finances, which is good for resales,” Rusconi says. 

For clients that aren’t on such enviable financial footing, Rusconi pivots to a different strategy. “We have several buildings that are facing major fines and major capital projects,” he explains. “In those cases, we’re trying to get a line of credit and only draw down on the amount that’s needed instead of doing a mortgage refinance. That will minimize the debt service.”

Thinking Ahead

Because LL97 carbon caps will get progressively more stringent in 2030 and beyond — indeed, by 2050, larger buildings will have to reduce their carbon emissions by a staggering 80% — boards need to have a long-term plan in place for funding future upgrades. “You need to make sure that every year, you’re putting money in the reserve fund, knowing that five years down the road, you’ll need to replace the boiler or put in a new roof,” says Rusconi, who recommends creating a line item in the yearly operating budget and allocating a portion of maintenance to the reserves, as well as imposing flip taxes, sublet fees and alteration fees. “The bottom line is to know what your needs are and when so that you can anticipate costs,” he says. “That way they won’t catch you by surprise.”