For lenders, environmental questionnaires serve a critical role in assessing potential environmental risks associated with a commercial property. They offer a “first look” at a site’s environmental condition, helping lenders determine whether further due diligence, such as a Phase I Environmental Site Assessment (ESA), is necessary.

At ORMS, we view the environmental questionnaire as the first line of defense against potential environmental risk in commercial properties. If used appropriately, the questionnaire can uncover areas of risk and uncertainty that may require additional exploration before the deal gets done.

In this article, we’ll explain what environmental questionnaires are, why they’re important for commercial lenders, and their critical role in managing risk.

What Is An Environmental Questionnaire?

An environmental questionnaire is a tool used to assess potential environmental risks associated with a property. It typically covers several important areas of risk, including

site history, potential contamination sources, proximity to hazards, and the presence of hazardous materials like asbestos or lead in the physical structure.

Why Are Environmental Questionnaires Useful For Lenders?

Environmental questionnaires are particularly helpful for lenders as a quick, initial way to identify and manage potential environmental risks early in the lending process. This tool helps lenders make informed decisions, reduce liability, and protect the value of their collateral.

Key Components of an Environmental Questionnaire

Here are five key areas that a typical environmental questionnaire should cover:

1. Property Identification and General Information: Up front, the questionnaire should ask basic information about the property, including location, size, and type. It should also request background data on the property’s current and historical use, as well as a listing of all current and past property owners and operators.
2. Environmental History and Compliance: The questionnaire should ask about any environmental permits required or obtained for the property, as well as records of regulatory inspections, violations, or citations of non-compliance. It should also request disclosure of any hazardous materials and waste that had been stored or handled on the property, including the presence, age, and condition of underground storage tanks (USTs).
3. Site Conditions and Observations: Regardless of whether the borrower or current property owner is completing the questionnaire, it should offer an honest assessment of any visible evidence of potential contamination. This may include such signs as stains, odors, leaks, or even dead vegetation. The questionnaire should also identify any adjacent or nearby properties that may present elevated levels of risk, such as dry cleaners, gas stations, or auto repair facilities.
4. Environmental Incidents and Contamination: The questionnaire must document any past spills, chemical releases, or other environmental issues on the property, along with any prior or ongoing remediation. If the property was ever subject to any environmental litigation, these incidents should also be disclosed.
5. Presence of Asbestos, Lead, and Mold: If the building structure contains asbestos-containing materials, lead-based paint, or mold, these must be disclosed in the questionnaire, along with any plans for remediation of these issues.

In the addition to the above, it’s a good idea to request information on natural resources and protected species in the area, along with whether the current owners hold environmental liability insurance on the property. Any reports of community concerns or complaints from local stakeholders should also be disclosed.

If answered honestly and completely, the environmental questionnaire helps lenders to assess potential risk factors, including contamination and regulatory compliance, and identify areas requiring additional research and due diligence.

Environmental Questionnaires Are Part Of A Comprehensive Due Diligence Program

The environmental questionnaire should be viewed as just the first step in the environmental due diligence process. Its findings can help determine if further assessments, like a Phase I ESA, are necessary.

For commercial lenders, employing a thorough environmental due diligence program is essential for safeguarding assets and making sound lending decisions. As the proverbial “canary in the coal mine,” a well-constructed environmental questionnaire can help mitigate potential risks, save costs on unnecessary assessments, and streamline decision-making. The questionnaire also provides borrowers with certain benefits, including increased transparency and clearer expectations, while helping to uncover potential areas of risk that would otherwise remain buried during the purchase transaction.

When you’re ready to draft your environmental questionnaire, we recommend speaking with an environmental risk management expert like ORMS. We can help you develop the questionnaire to meet your unique market and portfolio needs, while ensuring it fits within your larger risk management program and processes.