These properties face credit risk under Local Law 97: Moody’s

Report lays out how fines could affect cash flow

New York /
May.May 07, 2021 07:00 AM
32 Avenue of the Americas, Two Metrotech and 60 Hudson Street. (Rudin Management, Brookfield Properties, 60 Hudson, City of New York)

32 Avenue of the Americas, Two MetroTech and 60 Hudson Street (Rudin Management, Brookfield Properties, 60 Hudson, City of New York)

In 2024, the owner of the former AT&T Long Distance Building at 32 Sixth Avenue could face $2.8 million in fines. The owner of the former Western Union Building at 60 Hudson Street could be on the hook for nearly $4.6 million in fines that same year.

The two properties have origins in telegraph services and now house major telecommunications and data service companies. They also back large loans that could become a bit riskier due to New York City’s new building emission caps.

A report by Moody’s found that 80 percent of commercial properties underlying commercial mortgage-backed securities in New York City would face fines under Local Law 97 that would “impair property cash flows” without retrofits or other forms of remediation.

Under the 2019 measure, buildings larger than 25,000 square feet must meet new greenhouse gas emission caps starting in 2024 and even stricter limits by 2030. According to the credit rating business, the law’s first deadline will “spur little material credit risk” that would rise “moderately” through 2030.

John Gilbert, COO at Rudin Management, which owns 32 Avenue of the Americas, said 93 percent of energy use in the building can be attributed to tenants, the majority of which are telecommunications companies.

“I control elevators and lobby lighting and that is basically it,” he said. “I can’t tell a major telecommunications company that they can shut down their servers for several hours.”

He said Local Law 97 unfairly penalizes property owners over something they can’t control.

The report lists Rudin’s building and 60 Hudson, owned by the Stahl Organization, among the top six greenhouse gas contributors that back $1 billion in outstanding loans. Those properties’ loans are valued at $450 million and $280 million, respectively. The other properties are Related Companies and Vornado Realty Trust’s 85 10th Avenue, Leser Group’s 111 Livingston Street, Brookfield’s Two MetroTech Center and RFR Holding’s 380 Lafayette Street.

The six loans pose “potential heightened risk to CMBS deals,” according to the report, and would account for 36 percent of total fines in 2024 attributed to CMBS properties in the city. According to the report, these properties could face fines representing between 4.6 and 13 percent of their 2019 net operating income if they do not take action to comply with LL97.

The broader landscape of city properties is a bit less grim. Of the 767 city properties backed by CMBS loans with available carbon emissions data, only 64 would face potential fines greater than 2 percent of their 2019 net operating income. That number jumps to 335 in 2030.

Gilbert said properties with critical infrastructure should not be treated the same as office buildings under the law.

“The modern economy runs on broadband, and these buildings should be exempt from these regulations based on their use and critical infrastructure,” he said.

A spokesperson for Brookfield said Two MetroTech Center would be “unreasonably penalized starting in 2030 for housing two significant and important data centers.”

“We are completing a number of capital projects to limit the building’s energy usage to the extent possible, and we are working with tenants to explore other ways to do the same,” the spokesperson said in a statement.

Owners of buildings with data centers, 24-hour operations, facilities critical to human health and with high-density occupancy can apply for adjustments to their emission caps. To do so, the owners must show that meeting 2024 limits is impossible because emissions in 2018 exceeded the caps set for 2024 by more than 40 percent. If approved, the building’s limits will temporarily be adjusted to 70 percent of its 2018 level. Owners have until July to apply for this adjustment.

Property owners had fought for the inclusion of another workaround to the law in the state budget. The measure, which would have allowed owners to buy renewable energy credits generated outside the city to offset their emissions, was ultimately left out.





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