Podcast: Build Reserves Now for Future Compliance With Local Law 97

Co-op and condo boards will face a “reckoning” beginning in 2024, when limits on building carbon emissions kick in under Local Law 97, part of the city's Climate Mobilization Act. That, Brick Underground reports, is the takeaway from a new edition of Talking Manhattan, a podcast hosted by Noah Rosenblatt and John Walkup, co-founders of NYC real estate data site UrbanDigs, which featured guest Orest Tomaselli, president of project review at CondoTek and owner of Strategic Inspections.

Under Local Law 97, buildings 25,000 square feet and larger have to limit their greenhouse gas emissions. The law comes with some teeth: Starting in 2024, buildings that are not in compliance will face a fine of $268 for every metric ton of carbon dioxide above the building's limit.

“This isn’t an apocalyptic conversation,” Tomaselli says on the podcast, “but there are some serious requirements coming for these buildings.”

To prepare for 2024 and a second round of carbon caps in 2030, Tomaselli says, smart co-op and condo boards are undertaking reserve studies — which take into account the remaining life of a building’s components and the cost to replace them. The result of these studies is generally a recommendation to build up a building's reserve fund in order to avoid using special assessments to address capital improvements — a distasteful strategy in many New York City co-ops and condos, where raising common charges or maintenance fees is an unpopular move. Tomaselli says a lot of buildings are going to be dealing with major financial issues as a result, on top of soaring inflation and interest rates.

“It will be a little bit of a reckoning,” he says. It's also something of a Catch-22. “Most buildings have not obtained reserve studies and have no idea what they need in terms of capital,” he says. Without an engineer taking a close look at a building, “you don’t know what it is going to cost to comply.” 

It’s not only boards that have been flying blind — an apartment buyer considering a building with low reserve funds could be in for a shock when the building needs to raise funds to come into compliance. Even with the benefit of a lawyer’s due diligence, it can be tough to gauge the cost of retrofitting. So if you’re buying a co-op or condo in a New York City building 25,000 or larger, questions about how the board is dealing with Local Law 97 and the health of its reserve fund should be a major concern.

Making the issue even more complicated for buyers, Tomaselli adds, is the fact that Fannie Mae and Freddie Mac, the government-backed entities that buy loans from banks, will no longer buy back loans from buildings that have significant deferred maintenance or use assessments to fund major capital improvements. The move is meant to prevent tragedies like the condo collapse in Surfside, Fla. The new guidelines have implications for many lenders who tend to follow Fannie and Freddie’s guidance — as well as for apartment buyers and boards.

Co-op and condo boards have to fund repairs in "a different way" now, Tomaselli says. “They have to have these reserves in place in order for buyers to get lending.” Even more important, they have to have sufficient reserves to pay for the retrofits that will avoid crippling fines under Local Law 97. And those reserve funds cannot be fed by assessments.