Environmental Risk for Lending Opportunities

Best practices to understand and manage risk

By BoeFly Member Gary Reynolds, Principal of Partner Engineering and Science

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An important risk all real estate lenders must consider is Environmental Risk. One way to manage risk is to have an Environmental Site Assessment (ESA) performed on the property. A phase 1 ESA provides a current and historical record search, as well as a site visit and inspection by a trained and certified Environmental Professional. The Environmental Professionals job is to provide you with a report of the property site that informs you that either the site is clean, or there are Recognized Environmental Conditions (REC’s) that exist.

Some identifiable risks would include, but are not limited to:

Leaking underground fuel or gas tanks that can contaminate soil and groundwater
Contamination from nearby industrial sites, accidental toxic spills or leaks
EPA and State top priority clean-up properties

In this tight credit environment, savvy business borrowers are increasingly taking the lead to identify the risks associated with their financing needs. Understanding the need for proper environmental due diligence at the onset can provide comfort and confidence for the borrower, knowing that he is not purchasing someone else’s contamination.

When engaging an Environmental Professional (EP) to perform an assessment you should consider the following:

Use a firm that provides a clear and concise professional opinion and doesn’t leave it up to you to interpret data
If an SBA loan, ask the EP if they used the required SBA language in their conclusion
- If your financing is a loan through the SBA your EP must sign the SBA Reliance Letter (many lenders have called me saying they had a Phase I done by a firm but after the fact they wouldn’t sign the Reliance Letter – causing the lender to have to go out and engage another firm to perform the work again – and pay twice!)
Use a firm that has a minimum of $1,000,000.00 in liability protection (required on all SBA loans)
Only the AAI Phase 1 report has Federal Liability Protection under the CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) - innocent landowner defense. This provides protection from clean-up liability for pre-existing contamination if the owner conducted an AAI compliant phase 1 prior to the purchase, and no evidence of contamination was revealed.

View a sample third party Reliance Letter sent from the Environmental Professional to the SBA and the Lender