Through the Green Looking-Glass: A Lender's Guide to New York City's Local Law 97

In just three short months from now, the ground-breaking Local Law 97 will become the law of the land in New York City and change the way commercial real estate finance business is done in the most populous metropolitan area in the United States. New York City is home to over eight million people living and working in approximately one million buildings. In the same way Alice, the protagonist of Lewis Carroll’s 1871 classic novel Through the Looking Glass, pondered life on the other side of the mirror, so too are lenders who finance billions of dollars of commercial real estate each year analyzing how their deals will change under Local Law 97. Indeed, much has been written about the law since it was first passed in 2019 with several other less publicized laws, as part of New York City’s Climate Mobilization Act – from media outlets, real estate brokers, trade and research groups, owners and developers, and of course, law firms (including this one, back in 2020). However, these previous summaries have focused largely on the building owners and operators and how they must comply with the new law and meet the annual reporting deadline beginning in May 2025, or face material fines and possible jail time. Very little has been written to date about the lender perspective and how Local Law 97 might impact the issuance of term sheets, the evolution of underwriting requirements and due diligence processes, and lead to changes in commercial real estate loan documents.

This paper takes the reader on that very journey in three parts. Part I provides an overview of Local Law 97, including its original guiding principles from 2019 and the law’s amendment in December 2022. Part II explores the different Local Law 97 issues lenders should consider as part of originating, syndicating and securitizing commercial real estate deals in New York City, from underwriting, to due diligence to legal documentation. Part III identifies several notable issues related to Local Law 97 which are still unclear at this time and subject to change. These issues include the implementation of renewable energy credits, proposed amendments to the law, ongoing legal and political challenges, the role of Commercial Property Assessed Clean Energy (“CPACE”) financing and the impact of technological advances, such as direct air carbon capture. Each one of these items has the potential to shape how lenders and borrowers structure and negotiate loan transactions to meet their financing needs while providing much needed liquidity to the commercial real estate market through the looking-glass of Local Law 97.