Magazine article Mortgage Banking

Environmental Reports Suggest Stronger Market Activity

Magazine article Mortgage Banking

Environmental Reports Suggest Stronger Market Activity

Article excerpt

A first-quarter jump in Phase I Environmental Site Assessment (ESA) reports suggests increased commercial real estate activity and more liquidity flowing through the marketplace, industry analysts said.

More than 44,000 Phase I ESAs performed in the United States during the first quarter represent an 11 percent annual increase, according to Environmental Data Resources Inc. (EDR), Milford, Connecticut.

EDR said purchases in "global gateways," investor attention to metropolitan areas, continued unraveling of CRE portfolios in banks and the U.S. Small Business Administration's (SBA's) loan programs provided most Phase I ESA activity in 2010.

Frank Romeo, principal and national client manager at Partner Engineering and Science Inc., El Segundo, California, said increases in Phase I ESAs reflect a return in the commercial mortgage-backed securities market.

"We are doing much more work on conduit loans than we have in the recent past with the re-emergence of CMBS," Romeo said. "The increase can be seen across all segments, but especially in the commercial office and retail sectors, which have been flat for nearly three years."

Romeo said protocol on nearly all projects in CMBS 2.0, a term for re-emergence of CMBS market sales volume, require CMBS lenders to use third-party environmental reports.

"They are going to package these loans together and [have them] scrutinized by the bond buyer at the end of the day," Romeo said. "They need reassurance that everything is sufficient with the property."

Derek Ezovski, president of Outsourced Risk Management Solutions, Hartford, Connecticut, said larger banks are hiring environmental risk managers and a majority of Phase I ESAs reflected refinance activity and foreclosures.

"There is more real estate addressed at this point rather than originations," Ezovski said. "There are more foreclosures just because of sheer volume in the larger banks."

Lenders remain protected from environmental liability through the "secured creditor exemption," but Ezovski said environmental due diligence could become a business risk. Servicers, for example, trying to package and sell properties may want to provide an environmental review for a potential buyer.

"They need a closer look at those, because if the bank is going to purchase the property or take on responsibility of the property, then they are tied closer to the property as a business owner instead of a lender, and environmental risks tend to hit much closer to home in that situation. Now, it can be their problem as an owner," Ezovski said.

Loan investors for Phase I Environmental report activity would likely include Fannie Mae, Freddie Mac, Federal Housing Administration (FHA) and SBA because they enforce some form of environmental due diligence for originations and refinance activity, Ezovski said. SBA loans, for example, include specific requirements, including enforcement of Phase I ESAs on "high-risk" properties and at least a well-defined desktop review on "low-risk" properties.

"Fannie and Freddie have a very definitive environmental policy and, in many cases, because of that there are more Phase I [reports] done," Ezovski said. "They require it. Not just because the bank itself requires it but because [the investors | require it. ... All government entities right now have some form of policy in place that dictates it."

The Federal Deposit Insurance Corporation provides "guidelines" rather than specific requirements for individual institutions to perform Phase I ESAs, Ezovski said, but smaller banks could welcome a requirement for a Phase I because, without it, competition might cause borrowers to refrain from certain banks. …

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