Net Zero and Condominiums: Emerging US Policies and Practices

On December 8, 2021, US President Joe Biden signed Executive Order 14057, announcing that the federal government would lead the nation to net zero greenhouse gas emissions by 2050. He also re-committed the US to the Paris Agreement and signed the Inflation Reduction Act of 2022, which included a historic commitment of $391 billion to address climate change.  Support for net zero polices was strong in several states and numerous cities even before Biden reversed the climate denialism of the previous presidential administration. The states of California, Colorado, New York and others have enacted laws that are intended to reduce greenhouse gas emissions from multiple sources, including vehicles, industry, agriculture, power generation, and buildings, which account for 30% of global energy consumption.

If regulations regarding building-related emissions were to apply only to new construction, progress toward net zero would be seriously impaired. This is why it is generally understood that existing commercial and residential buildings must be retro-fitted in a variety of ways that will involve substantial expense. And that in turn raises questions regarding who will be held responsible for carrying out and paying for those retro-fits.

Those questions are of particular interest to the nation’s condominium associations, many of which are now facing, or may soon encounter, laws that are intended to reduce the carbon footprint of multi-unit residential structures.

There are about 360,000 common interest communities in the US, housing over 20% of the nation’s population.  Between 125,000 and 143,000 of these communities are condominiums that are managed by owners through their condominium association private governments. In the state of Florida alone, there are about 28,000 condominium associations including a total of 1.6 million housing units.

The age of most condominium buildings poses special problems for building maintenance, repair, and retrofit.  In Florida, site of the Champlain Towers South building collapse, almost 60% of the condominium units are in buildings that are over 30 years old, housing 2 million people.  There is little available data on the state of condo association finances, but everything we have points to the fact that many, if not most, condo associations already have too little in their reserve accounts to pay for inevitable repairs and replacements of major building components. Lack of funds for such repairs sometimes lead condominiums down the path of forced buyouts by investors who acquire all the units, dissolve the association, and turn the condominium into an apartment building. And these “deconversions” have happened for the most part as a result of repairs that could have been anticipated.  Condominium unit owners are even less prepared to pay for the unanticipated expense of retrofitting their buildings to comply with new building standards related to building safety, adaptation to environmental conditions (fire, sea level rise, flooding) or net zero policy benchmarks.

However, ready or not, it seems clear that the future is here. Net zero policies are already beginning to impact US condominium associations, and it is essential that their volunteer directors learn what may soon be required of them and how to pay for it.

The emerging policies are of four types.  In order of their intrusiveness into association affairs and decision-making, they include persuasion and encouragement of voluntary compliance; removing private barriers to compliance; mandatory benchmarking and annual reporting; and mandatory progress toward net zero.

The least intrusive approach is persuasion and encouragement of voluntary compliance, where government sets aspirational goals for emissions reduction and encourages condominium associations to voluntarily comply with them. This involves explaining the moral and economic gains they will receive, such as offering a better environment to future generations and saving on energy bills, and using government buildings to set an example for private construction. Federal and state policy pronouncements are replete with such language, which can be backed with tax credits or lending incentives such as the “Green Bonds” issued by the Federal National Mortgage Association (“Fannie Mae”).

Removing private barriers to compliance intrudes a bit into association affairs.  It involves passing laws, usually at the state level, that render unenforceable certain provisions in association governing documents that prevent compliance with environmental policy goals. These are situations where there is a conflict between private law and public law, and public law prevails. The precedent for this is the Federal Communications Commission overriding association bans on satellite dishes. This approach has now expanded into environmental policy. In western states where water is scarce, laws have been passed that override association documents requiring lawns or water-intensive landscaping and prohibiting “hardscaping” with concrete or stone or planting of drought-tolerant landscaping.  There are also “right to dry” laws preventing association officers and managers from interpreting their documents as banning clotheslines for drying clothes.  Some states are overruling association prohibitions on solar panels or installation of electric vehicle charging stations. There are also examples of government overriding association requirements to use building materials, such as wood roof shingles, that have become hazardous due to increased risk of wildfire occasioned by global warming.

A number of cities are now moving toward requiring condominiums to engage in benchmarking, annual reporting, and publicizing of energy consumption and savings. This typically involves the association hiring a consultant to determine the building’s total energy consumption and how to improve it.  The City of Chicago was a leader in this regard with a 2013 law that covered all large buildings, including condominiums.  Chicago required annual reporting of energy usage to begin in 2015, and other cities have similar laws now, including New York, Philadelphia, San Francisco, Washington, D.C., and Austin, Texas.

The most aggressive net zero laws impacting condominiums would mandate not just reporting, but mandatory progress toward net zero.  The Climate Mobilization Act, passed in 2019 by the New York City Council, does just that. It contains eleven different laws that begin with mandatory benchmarking for energy use and an energy efficiency score. Both on-site consumption and off-site consumption are included, meaning that the outside source of the building’s energy—electricity, gas, or steam—are included in the score. The Act applies to all buildings over 25,000 square feet in floor area, which includes a majority of NYC condominiums and housing cooperatives, as well as rental apartment buildings. The most significant provision is Local Law 97, which provides that buildings must reduce emissions by 40% by 2030 and 80% by 2050, and some buildings that are using excessive energy must get below allowable limits by 31 December 2024. The first annual reports from association-paid design professionals are due 1 May 2025 and every year thereafter.  This Act will be enforced through potentially-costly fines for non-compliance and even criminal penalties for false reporting.

It goes without saying that complying with this set of laws will be costly for condominium associations. New heating and cooling systems, installing a green roof, replacing windows and doors, installing new insulation, and other energy-saving measures are all going to present challenges to associations, especially if they are already facing charges for deferred maintenance. The Climate Mobilization Act does include a loan program, called PACE, that provides a long-term, fixed-rate loan covering up to the entire cost of energy improvements, and requiring no up-front cash contribution from the building owners. Unfortunately, at the present time these loans are not available to condominium associations after the units are sold by the developer.  The private banks that are making the loans want them to be secured by mortgages on the buildings in question, but after condominium units are sold by the developer to home-buyers, condominium associations do not have title to their building.  The building is at that point owned by the unit owners as tenants in common, so the association cannot mortgage it as security for a loan. An alternative approach would be for the association to pledge their assessment collection power as security for the loan, which is a common practice in other loans made to condominium associations. If this option can be negotiated with banks that are participating in the PACE loan programs, it would presumably open the loan program to condominiums.

There is a well-established principle of US politics called “policy diffusion” that describes a common process by which state and municipal policies that are adopted in one jurisdiction are then adopted in others. The brief summary of existing laws presented above shows that less-intrusive policies have already diffused around the nation. Given the scope of national and international commitments to net zero, and the large contribution of buildings to overall carbon emissions, it seems inevitable that state and local governments will expand their regulation of condominiums in this regard. That suggests that the most intrusive policy framework—mandatory progress toward net zero—may well be imposed on many condominiums around the nation.  That would increase the demands on what are already scarce resources, and elevate concerns about finding ways for condominium associations to access the funds needed to comply.  These might include grants, low-interest loans, or federal loan insurance programs that take the risk out of the transaction for the lending institutions. These and other approaches need to be explored if net zero policies are to be applied to condominiums, which seems likely.