The FDIC’s “Guidelines for Environmental Risk Program” states, in part, “The potential adverse effect of environmental contamination on the value of real property and the potential for liability under various environmental laws are important factors in evaluating real estate transactions and making loans secured by real estate.”


While the credit crisis has reshaped the lending industry, one risk has remained constant – environmental risk. Environmental risk is ubiquitous and literally knows no boundaries – it affects commercial and residential properties alike. Is your bank prepared to meet FDIC guidelines for environmental risk and protect your investment?


Banker & Tradesman’s Jan. 25, 2010, issue contained the article, “Modern Warfare,” discussing a dispute over an “environmentally devastated parcel.” TD Bank is cited as having a $10 million mortgage on this undeveloped environmentally devastated property. If the borrower defaults, guess who is going to need to address this environmental risk?


Today, community banks are in a unique position to differentiate themselves from the big banks and increase revenues through safe and sound lending. However, community banks are challenged by the lack of in-house environmental expertise and faced with prohibitive law firm expenses. So how do community banks increase their lending opportunities and avoid environmental risk? 



Commercial Lending 


Lending on any commercial property, or to a business with operational risk (e.g. oil delivery, manufacturers, service contractors), presents the possibility of environmental risk. Forget “Superfund” – environmental risk in Massachusetts comes from a growing list of stringent state regulations. Separately environmental liability will come in the form of third party lawsuits increasingly based in nuisance, trespass and negligence. 



• Lowell’s Grand Manor Condominiums.


In 2009, the DEP declared the Grand Manor Condominiums an “imminent hazard,” due to elevated levels of arsenic, lead cadmium found in the soils. The condominium complex was built over a former city dump, and the DEP named the condominium association and the City of Lowell as the responsible parties. The fact that it was built over a dump was not discovered until the association hired a contractor to fix a drainage system in November 2008. Today the individual owners state that their condos are worthless as they cannot sell them and one condo owner declared, “No bank would give anyone who wanted to buy one a mortgage.” He is right. These people have to pay for the cleanup and cannot sell their properties. What happens to the banks that did give mortgages to each condo owner? In 2009 the town property valuation was $5,891,300. Today’s valuation is $3,123,600. 



SBA Lending


SBA lending appears to have the appeal of “gold” for many borrowers in this economy. However, SBA’s SOP 50 10 5(B) contains eight pages of complicated requirements for environmental due diligence requirements. While complicated, a professional that can navigate SBA’s requirements can save a deal (close a loan) that might seem too challenging at first.



REOs and Foreclosure


Generally, banks are exempt from liability under a regulatory “secured creditor exemption,” and can foreclose on a contaminated property without liability. However, certain rules must be followed to avoid being liable. That being said, what does a bank do with a contaminated property? 



Residential 


In 2005, the Creamer family was forced to vacate their newly purchased single family home 14 hours after they moved in. The reason – an undisclosed heating oil tank that had leaked over several years. The total cost including remediation, attorney’s fees, and demolition of the house amounted to approximately $500,000. The damages exceeded the property value by almost double. This case demonstrates that environmental risk is not governed by loan amounts or property type.


Boston Basement Technologies (a service provider business) was hired by a homeowner to install a waterproofing system. In the process of their operations, Boston Basement broke a heating oil line causing 150 gallons of oil to leak into the basement, where the sump pump pumped the oil outside onto the homeowner’s lawn. Boston Basement’s insurance policy declined the coverage. Is your borrower’s coverage protecting them against environmental risk?

• 

Lead Paint, Mold, Radon. 


Under the “Lead Law,” Massachusetts banks can be strictly and fully liable for all damages, including punitive damages as an owner (through foreclosure) of property with lead-based paint. Does your landlord borrower have lead coverage in their insurance policy? Massachusetts contains numerous commercial apartment complexes and single family homes containing lead. Separately, mold can have a catastrophic impact upon commercial properties. Hilton Hotels experienced a $20 million cleanup related to mold in a Hawaii hotel. Radon is also a pervasive problem for homeowners.



• Phase Ones, Mass. Brownfield Redevelopment Access to Capital and Environmental Insurance.


It is noteworthy that the Phase I reports commonly relied upon for commercial property due diligence are based solely on an opinion, and the scope of work does not cover mold, radon, asbestos, natural resource issues (e.g. endangered species habitat), or wetlands, among other environmental risks. 


The Massachusetts Redevelopment Access to Capital (Brownfield initiative) provides financial and tax incentives, subsidized insurance and other financial benefits to participating borrowers and lenders. Environmental insurance is a viable means to transfer risk involved with lending.
Lending in 2010 requires savvy environmental risk management practices including review of reports, insurance policies and knowledge of state regulations including the benefits of Brownfield legislation.