New Environmental Concerns: Commercial Real Estate Lenders Nationwide Need to Be Aware of New Due-Diligence Requirements Critical to Protecting Their Interests Prior to Closing. Contamination Caused by Illicit Meth Labs and Other Property Uses Are Creating Lingering Liability
Ezovski, Derek, Mortgage Banking
If it seems like the ink on your environmental risk-management policy barely has time to dry before new developments make it obsolete, you're not imagining things. An increasing focus on environmental issues, coupled with a better understanding of the way contamination impacts human health and property values, has recently put environmental due diligence squarely in the spotlight. [??] The bad news is that it's time to update your environmental policy once again. But the good news is that today, when it comes to cost-effective, comprehensive environmental due-diligence tools, lenders have more choices than ever before. [??] So get that red pen ready: You'll want to factor the following into future commercial real estate due-diligence decisions to keep risk to a minimum.
All appropriate inquiries
On Nov. 1, 2006, the Environmental Protection Agency (EPA) codified the steps that purchasers of commercial real estate must take to qualify for liability protection under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The codification came in the form of a federal regulation entitled Standards and Practices for All Appropriate Inquiries, known as the AAI rule (visit www.edrnet.com/aai for more information).
By raising the bar in terms of who can conduct an environmental site assessment (ESA), what data must be researched, how long the assessment is valid and more, the AAI rule marks a significant departure from the previously accepted protocol, West Conshohocken, Pennsylvania-based ASTM International's E 1527-00 Phase I standard. Given the rule's implications on a borrower's exposure to CERCLA liability, every lender should take note.
"We recommend that all lending institutions understand the new AAI requirements and, based on their business profile, determine when to require AAI for their client base," says Daniel Grogan, an environmental professional in the Atlanta office of Alpharetta, Georgia-based MACTEC Engineering and Consulting. Grogan says that most, if not all, of the large lending institutions he works with have updated their environmental policies to consider AAI.
Alan Agadoni, a senior vice president in the Marietta, Georgia, office of Boston-based ATC Associates Inc., agrees. "Most lenders we work with have adopted ASTM 1527-05 [AAI's acceptable alternative]; however, we occasionally get requests for ASTM 1527-00 [the old standard] and modified transaction screens." Agadoni adds, however, that his company recommends clients comply with the new rule by following ASTM E 1527-05.
Of course, not all real estate deals are conducted with CERCLA liability in mind. Furthermore, with an AAI-compliant Phase I environmental site assessment carrying a price tag of at least $3,000 (depending on property type and location), not all transactions can support such an assessment.
A more practical approach for lenders is to decide whether to require AAI on a case-by-case basis. While more conservative lenders require adherence to AAI on every transaction, reasoning that if the borrower is protected the lender is as well, others base their decision on business considerations and risk-tolerance levels. Environmental consultants and attorneys can offer invaluable advice to lenders that take this approach.
Larry Schnapf, environmental attorney with Schnapf Environmental Law Center, New York, points out that AAI is not a requirement for banks to obtain a secured creditor exemption under CERCLA, but, like Agadoni, he recommends that lenders follow the rule anyway.
"If a lender is going to take actions that could cause it to lose immunity from liability--for example, if it forecloses on contaminated property and does not take steps to sell it in a commercially reasonable manner--then the lender would be like any property owner and would want to ensure that he or she complies with AAI. Bankers wishing to remain conservative should exercise caution, so that if they lose their secured creditor defense, they have another to fall back on," he says. …