Five Things Every Commercial Lender Should Know About Environmental Liabilities

Accepting a property with known or potential environmental issues as collateral creates special challenges for the commercial lender. This could include properties with old tanks and old spills or leaks - even those that may long ago been have been cleaned up and closed by State agencies.
Although more challenging, such properties can be addressed in a reasonable time frame, while minimizing the potential liabilities for the Lender.

Five key points the commercial Lender must keep in mind are :

1 - Old Issues - Even "Closed" Issues Can Effect The Value Of The Asset.

For the Lender, the key risk to be managed is the potential that contamination on a property can have a material impact on the property value, and/or make the property less marketable in the event the Lender comes to own the property due to foreclosure. Old issues can directly affect the future use of a property. When old contamination issues are "closed" by agencies, it is common that restrictions are put in place that limit the future use of the property, or that require further cleanup if any redevelopment of the site is planned. This can reduce the value of the property to prospective Buyers.

2 - If The Lender Ends Up Owning A Tank, They Own The Liabilities.

In most States, laws protect Lenders from being financially responsible to investigate and cleanup contamination on a property they acquired through foreclosure. The exception is for tanks that remain on the property. The responsibility for investigations and cleanup of leaking tanks falls to the "owner" of the tank, which is typically the property owner. If a Lender comes to own tanks on a property due to foreclosure, the Lender may be responsible to remove the tanks, and if leaking tanks are discovered, the Lender may be directly responsible for the remediation Therefore, Lenders need to pay particular attention to tanks left on a property, especially if tanks have been abandoned in-place.

3 - Plan Ahead For  You And Your Borrower  To Obtain Liability Protections.

If you or your Borrower require liability relief letters, such as a no further action or no association letter, you will need to factor in the time required for these issues to be addressed. It is important to remember that agencies will issue these letter only if contamination is actually documented on the property, not simply based on the possibility that contamination could be present. Therefore, in some cases a site investigation needs to be conducted. As an example, a typical scenario might be:2 weeks - Phase 1 Environmental Site Assessment
3-5 weeks - Phase 2 Investigation
1 week - Prepare and submit request to agency
4 weeks - Agency review and issuance of letter
Therefore it is not unusual for it to take 10-12 weeks to go through the process.

4 - "Closed" Or "No Further Action" Does Not Mean "Clean"

When agencies issue a closure letter, no further action letter, or similar, they will often allow some contamination to remain on the property. The agency has simply concluded that the remaining contamination does not pose a significant risk to human health or the environment - under the existing conditions. These determinations are always "as-is, where-is" determinations. This does not mean that the agency has determined the site to be clean or that future uses or redevelopment of the property will not require further investigation and cleanup.

5 - Unfortunately New Issues Can Be Discovered.

One of the most challenging situations is when new contamination issues are uncovered, especially coming from neighboring properties. Leaking tanks and other sources of contamination are newly discovered each year, which can create additional issues which may need to be resolved between the Lender, the Borrower and the State agency. In addition, over time cleanup standards can change and new information on risks from contamination can "reopen" some closed issues. One example is the current interest in "soil vapor encroachment"; many leaking tank sites that were closed prior to 2010 were not evaluated to determine if contaminants are migrating though soils and into nearby buildings. Although these sites may be closed, they can be reopened to address soil vapors. Therefore, evaluations of soil vapor intrusion have become increasingly common, especially since 2013.
By understanding the process, the Lender can play an important role in transforming these formerly contaminated properties into usable and marketable properties, increasing their value and the value of nearby properties. And at the same time, manage the Lender's future liabilities.


For more information go to:
Phase 1 Environmental Site Assessment Buyer's Guide
Regulatory Briefing - Landowner Liability Protections and All Appropriate Inquiry