Local Law 97 & Implications for Venture Investing in Climate Real Estate
The real estate sector has experienced increased regulatory pressure to lower its carbon footprint over the past decade. Emission related regulations, however, have generally been tracking and reporting centric, versus imposing reduction requirements. New York’s Local Law 97 is changing this. (Buildings make up over two thirds of NYC’s emissions, so lowering associated emissions is critical to reaching broader net zero targets).
What is Local Law 97 (LL97)?
Local Law 97 — introduced in 2019 and finalized in 2022 — is arguably one of the most aggressive state regulations aiming to reduce building emissions in US history. It sets strict carbon emissions limits for buildings in New York over 25,000 square feet, based on building use and size. Real estate owners and operators that exceed emission limits will face financial penalties starting in 2024, and increased penalties in 2030. The fine is $268 per metric ton of carbon dioxide above set limits.
The Real Estate Board of New York estimates that over 3,000 properties will be affected in 2024, with aggregate fines exceeding $200 million. By 2030, affected buildings could exceed 13,000, representing aggregate fines of $900M. A working list of affected buildings can be seen here. (Interestingly, ~59% affected buildings are residential, which may have impacts on apartment and rental prices if owners opt to share the burden of fines with consumers. Passing along a portion of fines may be more complex for some “corporate” owners and occupiers, such as grocery stores, which are highly energy intensive.)
Can Buildings Actually Get Compliant in Time?
The short answer is, it’s unlikely. Real estate owners can introduce less intrusive adjustments (e.g. lighting upgrades), but many buildings require expensive and lengthy retrofits that won’t get completed by 2024. The law has taken account for the impossibility of many buildings operating below their set limits, and accordingly offers a few other ways to “get compliant”.
First, purchase renewable energy certificates (RECs), certificates representing electricity generated via renewable energy.
Second, purchase carbon offsets, certificates representing the funding of projects that lower or remove carbon emissions.
Third, potentially engage in carbon trading, or buying credits from other real estate owners not utilizing their full emission allowances.
Implications for Venture?
Local Law 97, and its implications, are illustrative of a few macro trends regarding venture capital and climate.
First, the success of climate “software” is dependent on physical, or hardware counterparts. There are a plethora of tools for real estate owners and operators to track, analyze, report, and ultimately determine how to minimize emissions. These tools are needed — you can’t improve what you can’t measure. But, what we ultimately need is buildings that are made, and run, with lower emissions and this will require hardware and software working in unison. Venture investors — historically biased towards non-physical products with low upfront research and development costs and high margins — may need to adjust their investment criteria to back the most transformative climate real estate businesses.
Second, venture investors need to broaden and diversify their founder and co-investor networks. To date, many of the best proptech founders previously worked at real estate or property related technology companies. When it comes to the intersection of proptech and climate, the best founders will likely come from outside the tech bubble. VCs need to partner with different types of organization, and especially research minded academic institutions, to find and back new founder profiles.
Third, related to the above, the climate industry needs much more collaboration across different types of funding organizations. There are millions of government dollars available to those working on climate related research and products. While VC’s haven’t historically partnered with government organizations to co-invest, or share deal flow, this new type of collaboration will be required.
Fourth, looping back a bit more specifically to Local Law 97, most buildings owners and operators are going to be reliant on buying carbon offsets to remain compliant and avoid hefty fines. (This reliance on carbon offsets will extend far beyond real estate, and into all industries starting to face stricter emission caps). As such, assessing and rating carbon credits is going to become absolutely imperative. Sylvera is an awesome example of this company profile, but we’re going to see more.
If you’re building or investing in this space, or thinking about any of the above, would love to chat as always — julia@flybridge.com.
