The commercial corner: Environmental issues with commercial dealsMike Boggianodue diligence, environmental concerns, commercial lending
The Mortgage Press is pleased to present "The Commercial
Corner," a monthly column by Mike Boggiano of Silver Hill Financial
LLC, dedicated to answering your questions about the commercial
mortgage marketplace. If you have a question that you would like
answered in a future installment of "The Commercial Corner," please
e-mail
[email protected].
Commercial deals can provide a welcome supplemental stream of
income for brokers who diversify into this profitable area of the
mortgage business. While the most innovative commercial programs
focus on the borrower's financial strength, in general, there is
still more emphasis on the property in the commercial world than
the residential arena. For example, a borrower may be able to
qualify for a commercial loan based on a debt-to-income
underwriting approach, but the property must still yield an
appropriate real estate valuation. Even if your commercial
experience is limited to lower-risk multi-family properties where
environmental concerns are rare, it's still a good idea to get
educated about the potential issues associated with commercial
deals, particularly for properties in the industrial and warehouse
categories.
Q: Do I need to be concerned about environmental issues
for multi-family commercial deals?
A: Not typically. As mentioned before, commercial property
types, such as industrial and warehouse, are more commonly subject
to potential environmental concerns. Additional commercial property
types that would almost always require a more in-depth
environmental report include auto-service properties, funeral
homes, recreational vehicle parks, parking garages, car washes, dry
cleaners and others.
Q: What type of evaluation is required with a commercial
property?
A: Some commercial lenders, particularly those with
streamlined small-balance programs, may allow an environmental
transaction screen (as opposed to the Phase 1 Environmental
Assessment) on lower-risk property types. An environmental screen
reviews transactional records of the property - information found
in databases, county records, etc. This review is easy to obtain,
does not involve sampling, is more cost-efficient for the borrower
and takes less time out of the approval process. With no issues
present, an environmental insurance policy is ordered. Multi-family
properties are a good example of a category that is generally at a
very low risk for any environmental issues.
The more in-depth and expensive Phase 1 Environmental Assessment is
required by most commercial lenders and pertinent for any property
that raises concerns with respect to hazardous waste or other
public health issues. Also known as a due diligence study, the
Phase 1 Environmental Assessment is conducted to protect a would-be
property owner from assuming unknown environmental risks. A
professional performs the assessment by reviewing available
records, conducting historical research, performing the site
inspection and interviewing with tenants, owners or public
officials regarding potential environmental liabilities. The
storage, handling or disposal of hazardous material or waste is
assessed, as well as nearby properties whose activities may have an
environmental impact on the subject property. The report identifies
any potential problems, along with recommendations for further
action.
These environmental evaluations are important not only for the
borrower, but also for the lender. In accordance with the Environmental Protection Agency's
lender liability rule, lenders must always engage in all
appropriate inquiries as part of due diligence. The rule, passed in
1993, provides that a lender or financial institution cannot be
held liable for environmental cleanup on a property unless it did
not engage in due diligence. Therefore, in cases where a
transaction screen comes back with environmental concerns, a Phase
1 Environmental Assessment would need to be conducted as part of
the lender's compliance with the liability rule.
Q: What are some examples of cases where a transaction
screen uncovers reason to pursue a Phase 1 Environmental
Assessment?
A: The most common examples in small commercial deals (up
to $1.5 million) include cases where a facility previously handled
hazardous waste, environmental violations were passed from one
tenant to another, a petroleum tank was used or pulled, adjacent
properties were contaminated, industrial manufacturing processes
were engaged in on a property or the property was built prior to
the 1980s.
Q: What else do I need to know about environmental
issues with commercial deals?
A: When guiding borrowers through the loan process,
brokers can provide assurance that environmental evaluations are
necessary to protect them from assuming potential environmental
risks that might otherwise be unknown. This is particularly true of
properties that were built prior to 1986, when there were no
environmental regulations for commercial properties. Under the
common law of joint and several liability in this country, the
current property owner, in many cases, is 100 percent liable for
the cost to fix any environmental problems, even if the current
owner is not (or is only partially) responsible for the problem.
Therefore, what happened on a property before regulation must be
taken into account, especially if the site was used as a
dry-cleaning, manufacturing or other type of facility that commonly
involved the handling or disposal of hazardous waste. Environmental
evaluations are in place to protect the borrower, as cleanups are
often quite costly.
Being educated about environmental issues helps you in your role
as a trusted advisor to clients. You many not have encountered
deals with these concerns, but it's wise to have a basic
understanding of the topic as you grow your business to include
more commercial transactions. Brokers need not be intimidated by
environmental issues, as a good lender will alert you up front to
potential concerns and guide you through the process.
Mike Boggiano is senior vice president, national sales
manager for Silver
Hill Financial LLC. He may be reached by phone at (877) 676-1562 or
e-mail
[email protected].
