Decarbonizing New York state’s million-plus midsize apartments will be difficult under current regulatory and financial structures, a report by the Federal Reserve Bank of New York found last month.

Decarbonization is critical for the state’s emissions-reduction goals, but it is expensive and cumbersome for those businesspeople who are generally short of the money and expertise to carry it out. Moreover, the return on investment — slowing damage to the planet — is societal rather than individual. When the benefits of taking action do not accrue to the decision-maker, the report’s authors point out, there is no impetus to decide to take action.

“Window of Opportunity: New York’s Small Multifamily Buildings, Expiring Equipment and Clean Energy Goals” was published in late October as part of the New York Fed’s Community Development initiative. It looked at a specific segment of the state’s 8.6 million housing units: those in five- to 50-unit buildings.

More than 1.45 million housing units are in this category. Those units are aging; almost 70% of their occupants are low- or middle-income; 1.3 million are heated with fossil fuel equipment that is nearing the end of its service life; and many are owned by small-scale landlords.

The conflict is readily apparent: A perfect target for decarbonization is owned by people who lack the resources and knowledge to carry out the work and inhabited by people who cannot afford to pay for it.

The Problems

New York already has one of the lowest per-capita levels of greenhouse gas emissions of any state, among the fewest vehicles per capita and a dominant industry — finance — that does not spew emissions.

So as state leaders pursue the goals and mandates of the Climate Leadership and Community Protection Act, and New York City leaders implement Local Law 97, a primary goal is decarbonizing buildings, the largest single source of emissions in the state.

But actually decarbonizing all those buildings is a tall order. New York’s population growth has been stagnant or negative in recent years, so the effort must focus heavily on retrofitting its existing, aging housing stock: 80% of the buildings that will exist in 2050 have already been built, the authors predict.

The report is based on a series of interviews and a roundtable discussion with 28 stakeholders in the housing and finance sectors. They flagged numerous problems facing decarbonization of the five- to 50-unit sector of New York’s housing stock:

• • Absent any legal mandates, the decision to electrify ultimately is up to the building owner. Owners of smaller properties often run the operation themselves, without benefit of support teams. They are less likely than large-property owners to know about electrification or have the means to pursue financing for it.
  • Owners have far more pressing concerns, such as basic maintenance, and lack bandwidth to undertake a sweeping new initiative.
  • Owners often cannot self-fund a deep retrofit, which can cost more than $100,000 per unit. Financing is dicey, because electrification may actually increase operating costs. The owner cannot raise the rent on a regulated unit, and if the local market is struggling, the owner may not be able to raise rent on an unregulated unit either.
  • Many five- to 50-unit properties already are financed to maximum leverage, making it hard to secure new debt; also, senior lenders worry about lien priority when new mid-process debt is issued.
  • Government incentives and financing for electrification are not optimized for five- to 50-unit properties; the process to apply for such funding is arduous; and the administrative costs are prohibitive.
  • Owners of nonregulated units fear their property will become regulated if they accept funding.
  • Owners of regulated units fear their property will go through a lengthy and potentially costly rent restructuring when utility bills rise post-electrification.
  • Contractors qualified to do the work are in short supply. Small contractors often consider the five- to 50-unit projects too large to undertake, and large contractors consider the projects too small.
  • Risk allocation is lopsided: Owners have no recourse if, as first-movers, they invest in equipment that becomes technologically obsolete or becomes noncompliant with superseding state regulations soon after installation.
  • Predevelopment processes can be lengthy, expensive and cumbersome, potentially including gathering and analyzing historical data, conducting an energy audit and modeling energy savings projections.
  • There is no standardized solution — every project is essentially done from scratch.
  • There is no one-stop shop where small property owners operating on a thin margin with minimal resources can go for assistance with the many aspects of decarbonizing their buildings.

Suggested Remedies

Many of the problems cited in the report boil down to high cost and complex regulations, stubborn issues common to many endeavors in New York.

The report offers no ready list of solutions, but it does flag potential improvements, including increased funding, streamlined incentive programs, more proofs of concept, easily accessible technical assistance and a better-structured retrofit market.

Stakeholders offered some other suggestions:

• • Combining incentives offered through different agencies would help facilitate a project, but that is often impossible because the agencies do not coordinate with each other, or because the funding streams cannot be combined.
  • A new tax credit, abatement and/or exemption would be impactful, helping ease the financial weight of the work.
  • Utility cost breaks or monetized emission reductions would provide something that lenders could underwrite to.
  • Pairing public health care dollars with energy efficiency funding would monetize the health co-benefits of electrification.
  • Creating a form of secondary debt for electrification would sidestep the difficult prospect of financing such projects through the primary debt on the property.
  • On-bill financing for electrification or efficiency upgrades would be helpful, extending the repayment period and eliminating the need for upfront capital without competing with other debt.
  • A single entity or consortium could seek a single bid for multiple properties and ease the deficit of expertise that many of the owners of those properties have.
  • Larger financial institutions could meet their net-zero commitments by reducing the cost of capital.

The report was emphatic on this last point: “Stakeholders strongly emphasized that no matter how many incentives are offered, subsidies are provided or other funding levers are pulled, until the largest financial institutions begin putting their weight behind electrification, mass scale cannot be achieved.”

Along with their concerns and criticism, the stakeholders provided some positive reviews. They unanimously praised the state’s Climate Friendly Homes Fund, for example. The $250 million state initiative is intended to retrofit at least 10,000 units of multifamily housing in economically disadvantaged communities, and in so doing create a template for wider-scale work, establish best practices, demonstrate the feasibility of electrification and spread awareness of the need to electrify.

Another effort is the Clean Heat for All Challenge, designed to install low-cost, low-power heat-pump technology in New York City Housing Authority buildings. The cost of rewiring the authority’s 2,000-plus buildings for higher-voltage solutions would be staggering.