As more credit unions get into commercial lending, or get deeper into it, they may well find that assessing collateral for their loans gets more complicated and possibly problematic. That can be especially true for environmental issues.
What’s in, under, and around a building can hold surprises, and lenders especially need to be aware of the potential impact to the collateral from soil and water contamination. Walking through the environmental site assessment process is one of the requirements to qualify for innocent landowner liability protections. This is necessary to limit the monetary risk to the lender and/or property owner.
Environmental reports and collateral reviews are part of the skill set offered by Servion Commercial Loan Resources, Inc. which now serves more than 500 clients, including about 470 credit unions.
Here’s more about issues and opportunities around environmental site assessments (ESA) and commercial lending, courtesy of Tony Lillie and Janet Nelson, chief credit officer and collateral solutions manager, respectively, for the commercial lending services arm of The Servion Group in New Brighton, MN.
“A Phase I is like casting a net over the side of the boat. Everything caught in the net is examined in a broad sense. With a Phase II, you found a fish with three eyes and you better check that out.”
What is an Environmental Site Assessment and how does it fit into the commercial loan process?
Tony Lillie and Janet Nelson: There are two types of environmental site assessments (ESAs): Phase I and Phase II. In general, a Phase I ESA is a look at the current and past uses of a specific property by searching the available government databases along with interviewing the property owner. A Phase II ESA is based upon a specific scope of work that is derived from the recommendations of the Phase I.
A Phase I is like casting a net over the side of the boat. Everything caught in the net is examined in a broad sense. With a Phase II, you found a fish with three eyes and you better check that out.
That is important in the commercial lending world when someone borrows or lends on a property. The overall assumption is that the property is saleable and free of contamination. For instance, when a property has been used as a gas station or dry cleaner, bells and whistles should go off and ESAs should be completed because of the higher risk that is typically associated with such properties.
“Commercial lending comes with multiple sources of risk. An ESA doesn’t guarantee there’ll be no issues found later, but it shows you did your due diligence. And at about $2,000 for a Phase I, it’s cheap insurance that can make it much easier.”
Why are they important in assessing lending risk?
TL: One of the requirements to qualify for landowner liability protections is to order an ESA from an Environmental Professional per ASTM E1527-21. This demonstrates that the user of the report has completed all appropriate inquiries into previous ownership history and property use.
This is important because if it is later discovered that there is contamination on the property, then the cost can be extensive for the owner of the property.
Commercial lending comes with multiple sources of risk. An ESA doesn’t guarantee there’ll be no issues found later, but it shows you did your due diligence. And at about $2,000 for a Phase I, it’s cheap insurance that can make it much easier.
Janet Nelson, Collateral Solutions Manager, Servion Commercial Loan Resources
What are the new standards and rules that lenders need to be aware of now?
JN: Environmental professionals follow ASTM International standards when creating ESAs. Recently, ASTM released an updated version of E1527-21 for Phase I ESAs that include several changes that credit unions should be aware of. Two changes we would like to highlight are the report date and user responsibility.
The first change has to do with the date of the report. A Phase I ESA is considered viable for 180 days, with an available 180-day extension. With the previous standards (E1527-13), the language was not as clear so many would defer to the date of the report.
What’s changed is that, instead of using the Phase I report date, the clock starts ticking now from the earliest of one of five things: the interviews, recorded environmental liens search date, government record review, site visit, or the declaration by the environmental professional of the date of the report.
The second item has to do with the user’s responsibility to search for environmental liens and activity and use limitations (AULs). The onus is now more on the user to complete this research. And the definition of a user is now clarified to include anybody using the report which may include the lender, purchaser, tenant of the property, owner or a property manager. After reaching out to several of our trusted environmental professionals, they indicated this is a service they could provide with a cost of around $300 to $400.
The ASTM E1527-21 standards are now under consideration with the U.S. Environmental Protection Agency (EPA). Once the EPA approves, credit unions will need to ensure that they have met the user responsibilities.
How has Servion responded to the challenges presented here?
TL: About a year ago we decided to create a new proprietary internal database that includes every single one of our environmental reports. With this information, we can now provide a more comprehensive environmental picture within a 1-mile radius of the subject property. Its creation was in response to the regulators putting the onus more and more on users to fully disclose anything they know about the property. So now when a credit union tells us they would like to order a Phase I, we are able to use the database to provide copies of prior reports to the environmental professional which will assist in their research.
Tony Lillie, Chief Credit Officer, Servion Commercial Loan Resources
From there, we offer a review service of the ESAs by employing a standard written format so that the reader - our clients and their borrowers – understands the narration and are fully advised of any potential concerns.
What are the big issues you see in these reports?
TL: Well, two big things are hazardous substances and petroleum products. These are what ASTM calls scope issues, items defined in the standards that must be addressed within the report. We also see non-scope items, which include asbestos, mold, PCBs, and lead-based paint. We know when environmentally sensitive products were phased out. For instance, if a property was built between 1952 and 1978, the chances are better than half that lead-based paint was used there. It’s interesting that these are non-scope issues, but there you are.
It’s important to partner with someone who is experienced and can point out the risk associated with environmental issues on a property. For instance, we once had a property for sale that was a large office building sitting on top of a former landfill. Well, landfills create methane gas and other issues. The seller ended up having to put in a sub-slab ventilation system that cost about $300,000. Because the lender did their due diligence by ordering a Phase I ESA, they were able to save their borrower a large chunk of money.
Servion CLR has been supporting member business lenders since 2004, so credit unions can be confident that we have the knowledge and experience to uncover and address any ESA-related issue.
How can my credit union find out more about Servion?
TL/JN: The easiest thing to do is visit our website at myservion.com. People can also find us on LinkedIn, Facebook, and Twitter. You can visit all those social media sites and search for The Servion Group to find us.