Environmental Issues are important. Many property owners/acquirers have limited direct knowledge of the specific environmental issues or influences, if any, affecting the property being financed, unless they’ve owned the property for many years.
Most institutional lenders and many private lenders now routinely mandate an environmental site assessment, or ESA, be prepared. Receipt by the lender of a satisfactory environmental site assessment is often a precondition of funding. In fact this requirement is most often specifically referenced within the LOI (“Letter of Intent”) as a lender requirement.
Understanding your Lender’s Perspective
Why is this of concern to your lender? Quite simply, environmental contamination or negative or adverse environmental influences are a potential financial risk.
In their most benign form, nuisance influences (e.g. perhaps there are noxious odours from an adjoining industrial use) can impact how successfully a particular real estate project will attract either customers, or tenants. This could impact tenant stability, customer attraction, and obviously and inevitably, project cash flow. Consequently, values can be eroded.
On a more serious note, an existing or former gasoline station, particularly those constructed some years ago, raises the possibility of ground water contamination from petroleum spills. Clean up would be costly and disruptive.
Equally serious are the by-products of many industrial uses and several retail type uses, such as Dry-Cleaning establishments. In these more serious cases, identifiable exceedances of permissible levels of contaminants can lead to governmental authorities mandating site remediation.
Remediation Costs are unpredictable
Costs associated with remediation are unpredictable, but generally significant. Remediation can exceed the financial capacity of a typical borrower. In such a circumstance, if a loan default occurs, and a Bank or other lender is compelled to take possession of the property so as to realize against their security (i.e. sell the property in an attempt to recoup their loan funds), regulators will typically look to the lender in possession of the property for possible site remediation costs, particularly if the public is deemed at risk.
Consequently institutional lenders and most sophisticated private lenders are well aware of the potential risks and will insist on a satisfactory 3rd party environmental audits prior to proceeding. This is an important item to understand.
Your Lender’s Hot Button
It is important that you recognize this lender “hot button”. When dealing with your lender, reference any changes or building modifications which may potentially impact the site environmentally. This provides the lender with comfort that you are a sophisticated borrower, fully knowledgeable as to the importance of such matters.
Perhaps there was an old oil tank behind the plant, but since removed. Perhaps there was asbestos pipe wrap in the furnace room, but you have no reason to think that it has been disturbed. Possibly there was lead paint used at one time in your 60 year old warehouse, but again, subsequent modifications have resulted in much of this being removed, or covered. If you don’t know, avoid speculating, however be candid and forthright. These items will be identified by professional environmental engineers/inspectors, so be proactive with your lender.