Smart bankers pride themselves on the quality of their real estate
and business loan portfolio. But suddenly a lot of smart bankers
have begun to realize that stricter enforcement of environmental
laws is affecting loan decisions.
A lot of commercial loan business is lost these days because of
unnecessary fears of a potentially expensive cleanup program.
Some lenders, rather than investigating and making a true
business decision on a loan application, reject the idea if there
appears to be any activity where city, state or federal regulators
could step in to require an environmental cleanup.
A third-party environmental audit or assessment of the property
in question, as well as a good assessment of the proposed business,
could show that any damage to the environment, and a subsequent
cleanup in the event of foreclosure, would not be expensive enough
to warrant rejection of the business.
In these times of stricter enforcement, real estate lenders find
their expertise does not lie in the legal or environmental business.
For this reason, they are not sure if a potential loan is sound and
a loan application may be rejected based on emotion or fear rather
than business facts.
A good third-party environmental assessment should uncover any
potentially damaging areas and show what must be done to meet all
legal requirements. This assessment also could include a cost
estimate so the value of the loan and its income could be weighed
against any potential cost of cleanup.
Such an assessment also could be used after the fact for a
lender to show good faith on foreclosed property. While this could
not negate any legal liability to pay the cleanup costs, it would
show good faith, or due diligence, that the lender attempted to
follow rules and regulations and meet all his responsibilities.
Such a good-faith showing could help the lender avoid any fine or
penalty associated with a mandated cleanup.
In severe cases where landowners have been proven to totally
neglect their responsibilities, the Environmental Protection Agency
has been known to levy fines and penalties up to three times the
cost of cleanup.
With an environmental assessment in hand, the property owner or
lender should know exactly what the liability is and what was
necessary to correct any detected fault. By discovering this and
voluntarily starting a cleanup program, the owner or lender could
avoid penalties and fines, in this case, the cost of an assessment
would be much less expensive than any fine or penalty.
Going beyond rejecting loans because of ignorance of
environmental regulations, many lenders are in a similar quandary
when it comes to foreclosing on a nonperforming loan.
Several times in the recent past, commercial institutions have
foreclosed on relatively small loans, taken ownership of property
and only then learned of an expensive environmental cleanup. …