Commercial real estate (CRE) lending is a risky business. Environmental contamination is one potential pitfall lenders must consider as part of a balanced and comprehensive risk management strategy.
Although not meant as a complete list, here are five of the stickiest environmental remediation challenges, and some steps you should take to mitigate the risks to your institution:
Lenders should also research whether other potentially troublesome services, such as a car wash or auto repair, had ever been offered at the same location.
Additionally, it is good practice to check on the existence of open environmental litigation involving any current or past owners of the property. Your state Department of Environmental Protection should maintain public files of any active investigations or legal actions.[1]
The costs of a single cleanup can be significant, averaging between $400,000 and $500,000, but running as high as $3 million. The EPA estimates the total bill for a nationwide dry cleaner remediation program would reach $7.6 billion.[2] That’s a lot of starched shirts!
Fortunately, several states, including Alabama, Connecticut, Florida, Kansas, North Carolina, and Texas, have established dry cleaner remediation programs to help offset some of the costs of cleanup. Talk with your environmental consultant to help identify potential funding that may be available.
As a lender, you should be familiar with the most recent Phase I Standard, ASTM 1527-13, which requires an evaluation of any potential vapor encroachment to the subject property. This latest standard is also resulting in reopeners—requiring additional cleanup on sites that had previously been closed.
A comprehensive environmental due diligence scan and historical records search will uncover potential red flags related to adjacent properties. In certain cases, it may make sense to obtain a full Phase I or even take soil and/or groundwater samples to determine the full nature of the risks involved.
As foreboding as these risks seem, lenders and property owners do have a few options at their disposal if potential site contamination is discovered. Full remediation isn’t always the only course of action. The use of deed restrictions and covenants may allow a certain level of contamination to stay in place if the property use is restricted to activities with a low risk of exposure. Although such restrictions are use-limiting and may impact a property’s market value, they can help reduce the cost of cleanup significantly.
Regardless of the environmental issue, a lender’s best friend is a comprehensive and consistent environmental due diligence program. Talk with your qualified environmental risk management consultant for help with establishing a program that fits your specific institutional and market needs.
[1] https://us.businessesforsale.com/us/search/gas-petrol-service-stations-for-sale/articles/buying-a-gas-station-3-environmental-roadblocks-and-how-to-remove-them
[2] http://www.environmental-law.net/key-practice-areas/environmental-due-diligence/dry-cleaners-and-commercial-real-estate/