05 May 2010

ABCs of Environmental Aspects of Lending

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Commercial Loan Origination
When the lender takes a mortgage on real property, the lender, as a secured creditor, is not liable for cleanup of environmental contamination on the property (unless the lender starts to exercise control over the property management). However, the environmental status of the property is a critical factor in its value as collateral. Appraisers rarely address the impact of environmental issues. Property that is contaminated is of less value, and sometimes radically less value, than property that is clean.

At loan origination, some level of environmental due diligence is necessary to evaluate the value of and the risk associated with the collateral property. Given time and money restraints, this evaluation is often less than a Phase I environmental site assessment. However, a Phase I is recommended for industrial properties, for higher risk properties such as malls that include a dry cleaners, and for loans of higher amounts.

Foreclosure
Upon foreclosure, the lender becomes the property owner and will be strictly liable for funding the cleanup of any pre-existing soil and groundwater contamination – unless the lender acts to protect itself in a timely manner. Prior to foreclosure, the lender should always perform a Phase I environmental site assessment. The Phase I itself may provide the desired protection or the Phase I may indicate the need for further action. Note that time constraints can be onerous during the foreclosure process.

Residential Mortgages
Lenders rarely evaluate residential properties prior to loan origination but need to be careful upon foreclosure. If tenants will remain in the buildings, the lender must consider its obligation as landlord with respect to lead-based paint and asbestos in particular. Fines can be heavy.

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