Over the past several years, Lenders have been rethinking their approach to environmental due diligence and risk tolerance. Do all loans require or warrant an ASTM International E-1527 Phase I Environmental Site Assessment? As a result of this emerging demand, alternative environmental review products are available to help Lenders screen low to moderate risk properties. These environmental screening tools are typically conducted by an Environmental Professional and used for smaller loans and lower risk properties. With that said, Lenders should develop a clear in-house risk management strategy and policy, and always encourage new buyers/borrowers to meet an E-1527 Phase I ESA and All Appropriate Inquiry (AAI) standard, to maintain an innocent landowner defense. The U.S. Small Business Administration’s Standard Operating Procedure (SOP) 50 10 outlines the Environmental Policies and Procedures for Lenders and Certified Development Companies (CDC) necessary for participation in SBA’s lending programs. This protocol applies to Lenders participating in SBA 7(a) and 504 loan programs. First introduced in 2008, and most recently updated in 2013, SOP 50 10 provides lenders with a rigorous, tiered approach, for environmental investigation which is based on property type and potential risk of contamination. One of the innovative aspects of SBA’s SOP is the recognition that a property’s current or past use should dictate the level of environmental investigation conducted to assess its potential risk. SBA’s tiered approach includes conducting a NAICS code evaluation, completing an environmental questionnaire by a lender (or Environmental Professional) that has conducted a site visit, for loans under $150,000. For loans over $150,000, a Records Search with Risk Assessment (RSRA) is also required for properties that do not trigger an NAICS code match to an environmentally sensitive industry. In accordance with SBA SOP 50 10, the RSRA must be conducted by an Environmental Professional (EP) as defined in the AAI rule (40 CFR 312), and include the following:
- A search of government databases as well as a search of historical use records (e.g., aerial photography, city directories, and/or fire insurance maps)
- A risk assessment by an EP based on the results of the records search as to whether the Subject Property is either “low risk” or “elevated risk” or “high risk” for contamination
If the Environmental Questionnaire reveals it is unlikely that there is a risk of environmental contamination at the Property and that no further investigation is warranted, and the Records Search with Risk Assessment concludes that the Property is a “low risk” for Contamination, the lender must submit the results of the Environmental Investigation to SBA with recommendations and seek SBA’s concurrence. If the RSRA concludes that the Property is an “elevated risk” or “high risk” for contamination, the lender must obtain a Transaction Screen or Phase I Environmental Site Assessment in accordance with ASTM E-1528 or E-1527, respectively. As a result of SBA SOP 50 10, traditional lenders have been adopting and modifying these best practices to meet their interpretation of the FDIC compliance requirements. Although SBA SOP 50 10 defines a clear, tiered, process for evaluating environmental risk, non-SBA lenders and other traditional lenders have developed varying levels of environmental screening” based on property types, loan type (new loan vs refinance), and loan amounts. As a result, savvy lenders have established internal environmental screening tools to evaluate environmental risk at properties, including:
- Desktop Review
- Collateral Review
- Environmental Screen
- Limited Environmental Review
- Mini Phase I ESA
Although these environmental screening tools vary with each lender, and are specific to each lender’s environmental review policies and procedures, it is clear that the following best practices for lender environmental risk evaluations are emerging in the marketplace.
Lender Collateral Environmental Review
The Lender Collateral Environmental Review (LCER) or often referred to as a Lender Desktop Review is used for loans where the borrower provides previous environmental reports. The LCER typically includes: (1) review of an environmental questionnaire, (2) review of specialized knowledge and environmental reports, and (3) an evaluation of the potential risk for the presence of contamination. The purpose of the LCER Review is to evaluate and consider the following:
- Compliance with Lender-specific environmental practices and policies;
- Compliance with All Appropriate Inquiry, ASTM Standards, or other best practices;
- The costs of remediation which could impair the borrower’s ability to repay the loan and/or continue to operate the business;
- The potential impact to the value and marketability of the property;
- Lender liability for environmental clean-up costs and third-party damage claims; and,
- The likelihood of cost recovery by a regulatory agency.
Lender Environmental Screen
The Lender Environmental Screen (LES), or limited environmental review, is used in cases when the borrower provides no previous environmental reports, or the reports are outdated (> 5 years). The LES typically includes: (1) LCER as described above, (2) a site inspection, (2) interviews, (3) a state and federal regulatory database review, (4) historical records and/or municipal records review, and (5) a letter summarizing risk environmental contamination. AKT Peerless understands that in today’s competitive marketplace, sophisticated lenders are utilizing these lower cost expedited risk evaluations to gain an edge over their competition. For certain properties, these lender environmental risk evaluations can be completed in 3 to 5 business days for less than the cost of an AAI/ASTM- compliant Phase I ESA. LCER and LES reviews can be completed between $300 and $900, typically within 3 to 7 business days, and offer a reasonable level of environmental due diligence for lenders, and an alternative to E-1527. For more information about AKT Peerless’ Lender Environmental Due Diligence Services, including reviewing and developing lender environmental policies, or performing Lender Collateral and Environmental Screens, please contact Anthony Kashat or Dan Peltz at 1-800-985-7633 or via email at email@example.com. For additional information please visit our web site at www.aktpeerless.com.