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Sep 25, 2006

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].
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