Scotsman Guide - September 2011 Commercial Edition

Educate Yourself
on Environmental
Due Diligence
There are six key elements brokers should
understand about analyzing a property

The precarious commercial real estate market that has persisted for the past several years has brought increased attention to the myriad risks that can turn deals sour. Many institutions closed deals without performing enough due diligence when times were good, and they now find themselves stuck with properties that have serious issues.

Because lenders that take ownership
of impaired assets — particularly those
with environmental contamination
or building deficiencies — can open
themselves up to third-party liability
and regulatory enforcement action,
they’re now realizing the importance of
scrutinizing deals to make sure they’re
sound. And although many rely on the
expertise of environmental profession-
als and building experts to assess po-
tential risk, there is a growing trend
among lenders to train their staff about
these issues as well. The more they
know about due diligence, the bet-
ter they are at reading and interpret-
ing reports — and the better they are
at avoiding risks that will impact the
bottom line.

this knowledge can help their clients secure funding, while also showing their worth to lending partners.

1. how to identify a high-quality due-diligence report: When lenders hire a consultant to conduct a Phase I environmental site assessment (ESA), property-condition assessment or other due-diligence investigation, they put a great deal of trust in that third party. The economic downturn has forced many consultants out of business, however, increasing competition among the remaining companies and sometimes diminishing the quality of the reports. For example, a lender may be able to commission a Phase I ESA for as little as $700 today, but just a few years ago, that same investigation would have cost at least $1,300. For just $700, it would be difficult to perform a Phase I that meets all the requirements of the current due-diligence standard and still turn a profit, which means quality invariably suffers. Understanding what a quality report looks like helps lenders determine if they are getting what they paid for.

2. how much money a borrower needs

By Lauren Rosencranz
Manager of community content
and social learning
EDR

to make necessary improvements to a property: There are many opportunities to purchase properties at deep discounts today. Not all commercial real estate investments are equal, however. Often, distressed properties have not been updated or maintained for several years. This translates to greater capital investments from the prospective buyer to bring the property back to a level where it can compete.

3. when a recognized environmental condition (rec) is a deal breaker: RECs can vary in severity from a small spill that does not require cleanup to a huge issue that could spur action from environmental regulators. A clean Phase I ESA is hard to come by on properties in urban areas, but an REC on a property shouldn’t necessarily kill a deal. Understanding how to read and analyze a Phase I ESA, especially the REC determinations, can help your clients and lender partners make better investment decisions.

4. what the sBa’s updated environmental policy requires: In the past two years, the U.S. Small Business Administration (SBA) has updated

Low interest rates* ranging from 4.25% to 6.55% ARM (adjustable rate mortgages) (fixed rates* are also available) Qualified property types include – Office, retail and industrial (including condominium) – Mixed use, franchises, restaurants and day care centers – Self storage, laundromat and dry cleaners, spas and barber shops – Health club, funeral home, movie theater and banquet halls – Automotive related: dealers, repair, oil change, brake centers – Grocery stores, convenience stores and markets No lender origination fees or points for qualified borrowers/properties Brokers protected Loan amounts from $300,000 to $4,000,000 (Purchase) Refi to $6,000,000 (SBA 504) Owner occupied and investment real estate considered Conventional and SBA options available up to 90% LTV Nationwide lending program: urban, suburban or cities of 50,000+ No balloon payments and terms range from 20 to 30 years No lock-outs from prepayment Quick closings & flexible underwriting Construction and rehab available owner occupied purchase and refinance 660 minimum FICO purchase and 720 for any Construction Centennial Bank Lending Programs SBA 504 AND CONVENTIONAL FHA/HUD MULTI FAMILY/ASSISTED LIVING LOANS UP TO 83.3% LTV TERMS TO 35-40 YEARS FIXED RATES* LOW 4’s