Environmental contamination is often a deal killer for lenders when they are looking to lend on a property. No lender wants to find themselves in the unfortunate position of having to foreclose on a property where environmental issues may prevent the salability of the site. Issues can be identified in a variety of different assessments:
• Screening Tools: Desktop assessments that involve an environmental professional’s review of pertinent regulatory and historical documentation pertaining the subject and its surrounding area.
• Phase I: Assessments that involve a physical examination of the subject property as well as an extensive review of a wide variety of documentation pertaining to the current and historic land use of the subject and its surrounding area.
• Phase II: Involves sampling of the subsurface media at the subject (soil, groundwater, soil-vapor, etc.) to determine chemical concentration levels, if present.
• Environmental Report Reviews: Environmental professional’s review of previously performed environmental assessment(s) at the subject site.
Concerns of collateral value being impacted, marketability being inhibited, and possible environmental liability for the borrower are all viable issues for lenders. In certain instances, the costs of cleanup may be greater than the value of the asset – let alone the value of the loan. However, despite the obvious risks and enhanced need for concern, not all contaminated sites fall in the same lending risk profile.
Obtaining a solid understanding of the nature and extent of the environmental impact will help determine the amount of risk inherent in the property. Input from an experienced environmental professional is recommended to help make the determination. Listed below are insights into scenarios where lending may be much safer than otherwise assumed:
The chemicals of concern (COCs) are present but at concentrations below regulatory environmental screening levels. In many instances contamination exists, but at concentrations which (a) fall well within acceptable levels as established by state and or federal regulatory bodies, (b) do not represent a threat to collateral value, and (c) do not represent a threat to human health or the environment.
Contamination exists, but an applicable regulatory body has closed its investigation at the subject site and issued a No Further Action (NFA) letter or functional equivalent.
It’s not uncommon for regulatory bodies to allow residual contamination to stay in place as part of a closure or No Further Action assessment. This typically happens when the source of the contamination has been removed or remediated and there is no foreseeable threat to human health or the environment.
It’s important to note that the property may be subject to future land-use restrictions as a condition to regulatory closure. More often than not, these restrictions do not create a barrier to funding; however, understanding the borrower’s intended land use is important in these scenarios. You’ll want to identify up front what the borrower’s intended land use will be, as it may be inhibited by these restrictions.
If contamination is caused by an offsite source, it is not an ongoing concern, and does not represent a threat to human health or the environment at the subject site. These scenarios can be difficult for lenders to evaluate. However, if these conditions are well established by an environmental consultant, then the lender should be in a well-informed position to make a risk-based decision based on the following factors:
• The borrower is not responsible for the release and the related cleanup. As such, the borrower will not incur a financial hardship due to environmental issues inhibiting their ability to perform on the loan.
• The threat of a regulatory body requiring action by the borrower is mitigated. This is due to the fact that the borrower is not the responsible party, the source of the release is offsite (that’s where remediation generally takes place), and there is no threat to human health or the environment on the subject.
The lateral and vertical extent of the contamination plume is well defined, limited to the subject site, AND the cost and time to remedy has been thoroughly documented. While this scenario may cause panic to many lenders, there are well established practices to creating a safe lending avenue. The most common route is to require a capital reserve account to be set aside upfront by the borrower prior to funding. Lenders will typically require the amount set aside to be in excess of the estimated costs of remediation for additional protection. The funds can then be dispersed by the lender to subsidize the clean up accordingly. While some may think the borrower will be reluctant to pursue this course of action, the reality is that it all depends on the deal dynamics, and the benefit of the loan to the borrower. In short, fifty to one hundred thousand dollars in capital-reserve clean-up costs may be a small price to pay when a multi-million dollar loan is at stake.
When contamination is identified at the subject site, the extent of its impact will always be unique. Prior to lending, it’s critical to have a solid understanding of the subsurface media impacted, the source and type of the release, and the magnitude of the impact. You may be surprised to find that these details have already been established by a regulator, your current assessment, or a prior investigation on the subject site.
The next time you find yourself in a position where environmental issues have created a concern, ask your consultant if any of the conditions identified at the subject site align with the list of scenarios above. You may find that that risks to lending are not as alarming as originally anticipated.