Local Law 97 Is a Capital Event: Underwriting Carbon Penalties, Retrofits, and C-PACE in 2026

In cities with building emissions mandates, carbon isn’t an ESG concept—it’s a line item. New York City’s Local Law 97 (LL97) established emissions limits for large buildings, with financial penalties for exceeding limits. One widely cited figure is $268 per ton of CO₂e over the limit tied to 2024 energy usage and emissions.

That means LL97 is not merely a compliance obligation. It is a capital event—because it changes operating costs, capex needs, tenant negotiations, refinancing outcomes, and exit pricing.

The 2026 underwriting shift is straightforward: buyers and lenders increasingly ask, “What is the emissions position, what is the retrofit plan, and what happens if the plan slips?” Buildings without answers face pricing discounts, wider spreads, and more conservative proceeds.

Here’s how sophisticated stacks respond.

1) Convert carbon penalties into a financeable capex plan.Owners must translate compliance into projects: electrification, envelope, controls, heat pumps, distribution upgrades. The plan must be staged around tenant disruption and payback.

2) Use retrofit finance that matches the asset.C-PACE financing has been expanding as a tool for energy upgrades and recapitalizations. Industry reporting indicates securitization volumes have been meaningful in recent periods. For 2026, the deeper point is fit: long-tenor capital for long-life building improvements.

3) Align leases and operating strategy.LL97 pushes owners to rethink who pays, who controls, and who benefits. Green lease provisions, submetering, and operating protocols become part of the credit story.

4) Make the “disclosure package” lender-ready.In 2026, many lenders treat energy and emissions as risk variables—especially for long holds. A clean package includes baseline, targets, measures, timing, contingency, and governance.

The EIG lens is that LL97-style regimes don’t just create retrofit spending—they reorganize the market around “upgradeable” buildings. The winners are owners who finance upgrades like a redevelopment: tight scopes, credible vendors, risk buffers, and capital sources chosen for certainty.

LL97 isn’t a fine. It’s a framework that turns building performance into financial performance.