Much of the time the risk of environmental contamination does not work against the collateral as established by the borrower. However when it does there can many unwanted repercussions:
- Loan defaults from financial obligations with cleanup costs and government fines
- Compromised building and redevelopment plans from property use limitations
- Legal claims from occupants of collateral or adjoining properties
- Irreparable damage to your bank’s reputation, brand and image
- Environmental issues can reduce the value of a property below the loan amount
- If the case of foreclosure, it can delay the bank’s sale of the property while the extent of the contamination is determined and an appropriate remedial action is identified
An environmental assessment helps to ensure that real estate used as collateral has the value the bank expects, since standard appraisals do not factor in environmental risk, and also elicits information on whether the borrower’s ability to make loan payments could be compromised by a large environmental expenditure.
Just recently PES conducted a Phase I Environmental Assessment where an underground storage tank (UST) was not registered with the Virginia Department of Environmental Quality (DEQ). The previous owner of the property never bothered with this notification. The subsequent/current owner and borrower became responsible for properly registering this tank prior to loan clearance. This registration helps protect the bank as the Commonwealth of Virginia has financial programs in place to protect the bank’s collateral from spills and contamination caused by a leaking tank. Banks should not lose perspective that they are largely exempt from exposure due to federal and state lender liability laws, provided they do not take over environmental operations beyond protection of their security interest. It makes sense for the lender to require the borrower to obtain a pollution legal liability insurance policy naming the bank as an additional insured to protect the bank’s interest if liability arises out of unknown conditions (i.e. those not discovered in a Phase I or even a Phase II study).
In addition to setting due diligence thresholds, most banks require the borrower to sign 1) a Hold Harmless Agreement to indemnify from environmental liability for the subject property, and 2) a hazardous Substances Indemnity Agreement to address hazardous materials and spills on the subject property.
If liability protection for the borrower under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) is important, only an EPA AAI or ASTM E1527 compliant Phase I ESA will suffice. To take advantage of any of the three liability defenses to CERCLA – 1) the innocent landowner, 2) the bona fide prospective purchaser or 3) the contiguous property owner – property purchasers or their lenders must have a Phase I (AAI or ASTM standard) ESA prepared by a qualified environmental professional.
Never be reluctant to reach out to PES by phone: 703-938-5050, or email: firstname.lastname@example.org with any questions or thoughts you may have pertaining to environmental concerns or studies needed.