Policing Environmental Policies
With regulatory changes in mind, keep an eye on lenders’ environmental guidelines
By Derek Ezovski, managing director, property-due-diligence group, Environmental Data Resources
Adisciplined due-diligence
process helps protect a lender’s
bottom line. And today, having
a strong due-diligence program is more
important than ever.
Scrutinizing deals for potential risk
in a shaky economy — particularly when
an increase in bad debts is common —
makes good business sense for brokers.
Here’s why.
Keeping pace
When it comes to financing commercial
real estate, environmental contamination
is one risk that can impair — or even kill —
a deal. Contaminated property securing
a loan transaction can expose a lending
institution to direct liability for cleanup
costs, as well as to probable litigation.
It also can cause buyers to default if
they’re forced to divert cash flow to pay
for remediation, and, in the case of foreclosure, it can leave the bank with property that may be difficult to sell.
Further, environmental issues can
damage a bank’s and a broker’s reputation,
brand and image.
For these reasons, most commercial lenders have adopted a formal
environmental policy to help protect
themselves from unnecessary exposure.
Others have revised theirs recently because
of major regulatory shifts. Recent changes
include the first federal guidelines for environmental due diligence, released in November 2006 — the U.S. Environmental
Protection Agency’s (EPA) All Appropriate Inquiry (AAI) rule — and new environmental policies issued by regulators such
as the Federal Deposit Insurance Corp.
Depending on their practices and risk
tolerance, lenders may need get out the red
pen once again. Today’s cautious market
environment, along with the recent release of the U.S. Small Business Administration’s (SBA) updated environmental
policy, is further changing the way lenders
approach environmental due diligence.
The SBA’s new environmental protocol,
for instance, is creating even more caution
among lenders. Under this new protocol,
for example, a qualified environmental
professional must conduct an AAI- and
American Society for Testing and Materials (ASTM) E 1527-05-compliant Phase I
environmental site assessment for properties associated with past or current high-risk operations, regardless of loan amount.
This policy revision represents a shift from
former SBA protocol in which loan size
was the leading determinant of whether a
Phase I was required.
With these regulatory changes, environmental concerns and the current
economic climate, standards for environmental due diligence in commercial real
etc. These descriptions may include tools’
strengths and weaknesses, their typical
costs, and the types of properties and loan
amounts subject to each particular tool;
■ Clear decision thresholds for underwriters. The goal is to understand environmental risk and then to factor it into the
overall credit analysis;
“Updating their environmental policies is
particularly important for lenders that make SBA
7(a) and 504 loans. The administration’s new
environmental policy is different from — and
more stringent than — its previous protocol.”
estate lending are more stringent now
than they have been in recent years. As
such, brokers would be wise to work with
lenders that have updated their environmental policies.
Revisiting updates
Updating their environmental policies is
particularly important for lenders that
make SBA 7(a) and 504 loans. The administration’s new environmental policy is
different from — and more stringent than —
its previous protocol. It also includes a new
level of due diligence: the records search
with risk assessment.
Lenders with which you work should be
ensuring that their policy aligns with all
applicable laws and regulations — for example, if protection from federal cleanup
liability under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) is a concern, only
an AAI/ASTM E 1527-05-compliant Phase
I environmental site assessment will suffice. They also should ensure that certain
key elements necessary for a sound envi-ronmental-risk-management program are
included in their update.
Further, every environmental policy
must have:
■ Support from credit and senior management, which must be willing to enforce
the policy;
■ A definition of the document’s purpose,
including the types of properties subject to
the policy and who, if anyone, has the right
to waive it;
■ An explanation of which due-diligence
tools should be used in a given situation.
All commercial properties should receive
some level of scrutiny, but not every transaction requires a Phase I environmental
site assessment. Lenders’ policies should
include a description of the various en-vironmental-due-diligence tools, such as
Phase I environmental site assessments,
transaction-screen assessments, records
search with risk assessments, environmental
database reports, site visits, questionnaires,
■ A definition of how often properties
must be monitored over the life of the
loan; and
■ An updating schedule. To ensure that
the policy remains current, lenders must
review it regularly.
Lenders also may create an approved
vendor list. They should keep in mind that
if protection from federal cleanup liability
under CERCLA is a concern, an environmental consultant who meets the qualifications defined in the EPA’s AAI rule
must prepare and supervise the Phase I
assessment. SBA lenders also must keep
in mind that according to the agency’s
new policy, a qualified environmental
professional must prepare the transaction-screen assessments.
To ensure that its policy aligns with
the company’s objectives, the lender may
choose to have it reviewed by an environmental professional or attorney.
■ ■ ■
Current economic conditions and changes
in regulators’ environmental policies are
causing lenders to beef up their environ-mental-due-diligence practices. Lenders
that haven’t updated their environmental
policies recently should consider a review.
And to ensure successful transactions for
their clients, brokers should work with lenders that have completed such updates.
Derek Ezovski is managing director of the property-due-diligence group at
Environmental Data Resources. Before joining
EDR, Ezovski worked for
FleetBoston Financial and
helped create the environmental policy for the
bank’s small-business-services division. Reach
Ezovski at (800) 352-0050 or at dezovski@
edrnet.com. To learn more about EDR, visit
www.edrnet.com.
