Change Is in the Air
Keep up-to-date with new environmental due-diligence requirements
environmental due-diligence prac-
tices continue to evolve, and there
were several significant changes that
shaped the industry in 2011. These
likely will continue to have an impact
on how lenders operate this year.
Commercial mortgage brokers should
look closely into changes in due-diligence
requirements that pertain to Small Business Administration (SBA) and Freddie
Mac loans, as well as changing standards
from ASTM International, formerly known
as the American Society for Testing and
Materials. This information will help brokers guide their clients in purchase and
financing decisions.
Freddie Mac changes
This past May, Freddie Mac made
changes to its environmental due-diligence standards for multifamily properties. These changes were intended
primarily to improve quality and consistency in the completion of Freddie’s
scope of work.
One new rule necessitates that environmental consultants address
whether a state superlien law exists in
the state in which the subject property
is located. These laws allow states to
place liens on properties that are superior to all current or future liens on
the same property in response to environmental impacts. Lenders will be
concerned about this because, if the
property is contaminated and foreclosed on, the state would be the first
to receive funds for remediation, rendering the mortgage worthless. Brokers
should be aware of these issues when
seeking financing.
Freddie Mac also has addressed is-
sues associated with asbestos-con-
taining materials (ACM) and operations
and maintenance (O&M) programs.
In particular, Freddie Mac will not ac-
cept opinions that ACM is not present
based solely on the construction date,
because asbestos continues to be used
in certain building materials. Addition-
ally, it requires a higher level of care
when collecting samples for laboratory
analysis to provide meaningful results
as to whether ACM is present. Special
consideration is paid to friable materi-
als and materials in poor condition be-
cause these pose the greatest health
risk. An O&M program may be recom-
mended in lieu of sampling, provided
that the correct number of units is ob-
served and that suspect ACM is undam-
aged and non-friable or non-hazardous
in its current form, condition or location.
Because most consultants may not be
willing to say that a property is free of
asbestos, brokers should advise lend-
ers to expect a recommendation for an
O&M plan for most properties — unless
the suspect ACM is damaged or in a haz-
ardous state, in which case sampling
would be required.
“Any missed
steps or
overlooked
policies could
result in delays
or additional
costs for
multifamily
deals.”
radon concentrations and mold. For example, at a six-building property where
five buildings were constructed in 1986
and one building was constructed in
1975, the older building has a higher
risk for asbestos and lead paint, but all
buildings still must be assessed. These
are common — and common-sense —
practices that environmental consultants should already be adhering to but
now are spelled out by Freddie’s policy.
Additional changes impacting the
typical due-diligence practices of
consultants include a clarification of
requirements related to polychlori-nated biphenyls in nonutility-owned
transformers and whether equipment
should be removed or can be managed
with an O&M program. There also were
changes introduced to the multifamily
environmental assessment form.
Understanding Freddie Mac’s evolving
environmental scope of work is critical
to both commercial mortgage brokers
and lenders’ environmental consultants because any missed steps or overlooked policies could result in delays or
additional costs for multifamily deals.
SBA changes
SBA lending continues to be an attrac-
tive vehicle for financing in today’s
market. The SBA also has specific envi-
ronmental due-diligence requirements
that have changed in the past year. In
October 2011, the SBA updated their re-
quirements for lender and development-
company loans in standard operating
procedure (SOP) 50 10 5(D). Here are
some of the most significant changes.
ASTM standards
Most lender-specific environmental due
diligence for SBA, Fannie Mae, Freddie
Mac, U.S. Department of Housing and
Urban Development (HUD), and other
programs is based on one primary
standard. This is used for the Phase
I ESA scope of work and comes from
the ASTM E1527-05 Standard Practice
for Environmental Site Assessments. It
was last updated in 2005.
Jay Grenfell is the national client manager at Partner Engineering and Science
Inc., and he has 14 years of experience in
the environmental-consulting industry.
Grenfell’s disciplines include environmental due diligence, regulatory compliance
evaluations, chemical inventorying, environmental health and safety, and asbes-tos-risk management. He is knowledgeable
about a variety of reporting standards and
client-specific requirements. His clients
include many of the nation’s largest lenders, real estate investors and corporations.
Reach him at jgrenfell@partneresi.com.
