Carbon taxes arrive at tough moment for commercial market

Landlords ponder green improvements, and how to finance them

Carbon Taxes Arrive as Office Owners are Suffering
From left: Boston Properties chair Owen Thomas and SL Green chair Marc Holliday (Getty, SL Green, Boston Properties)

For office landlords dealing with rising vacancies, slumping rents and increased interest rates, green initiatives that require costly building improvements are coming at a bad time.

Starting next year in New York City, Local Law 97 will fine owners of large buildings $268 per ton of carbon dioxide emitted beyond their allowance. An analysis by the Wall Street Journal of 128 properties backed by mortgage-backed bonds or owned by the country’s three largest publicly traded landlords found their fines could exceed a cumulative $50 million in the first five years of enforcement.

Environmental groups and other champions of the emissions cap would say that amounts to only $78,125 per building per year, a veritable rounding error for large commercial properties.

The fines, though, would not be evenly distributed. And if those 128 buildings don’t get under the limit, their fines would more than quadruple in 2030 to 2034, the Journal calculated.

SL Green’s projected tax liability could be up to $6.6 million in the city by 2030. Boston Properties is staring down a liability of up to $2.3 million in the city, though it may also get dinged in Boston and Washington, D.C.

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On a broader basis, the Real Estate Board of New York has said fines across the city could exceed $900 million annually by 2030. However, buildings are getting under their caps faster than projected by the city, a different analysis found.

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Local Law 97 and similar ones elsewhere are laying out a complicated equation for landlords, even those who want to make their buildings more green to attract tenants, reduce operating costs and comply with emissions laws.

Refinancing is difficult, given elevated interest rates and reduced building valuations in the work-from-home era. Some owners will have a difficult decision to make about their properties.

New York isn’t the only place where landlords are making tough choices. Boston, Denver and St. Louis are among the major cities that will have emissions measures on the books by the end of the decade.

Holden Walter-Warner