Phase I Environmental Reports for Foreclosures

Given today’s economy, foreclosure transactions are becoming the transaction type of 2009. How is pre-foreclosure environmental due diligence different from new loan due diligence? First, we must consider the difference to our client’s exposure to environmental risk.

In lending on real estate, the lender is generally more concerned with the quality of the collateral rather than with the management of any environmental liabilities associated with the property. As the bank has no direct ties to the tenants/occupants of the property, tenant health issues are a distant concern.

In a foreclosure transaction, the lender will generally take title of the property, and despite the potential protections for the Secured Creditor Exemption, potentially expose the bank to environmental liabilities associated with the property. The once distant concerns are now the direct responsibility of the bank. As such, it would be in the lender’s best interest to be more cautious with any environmental concerns, especially when grey areas arise. In a new loan, when the Phase I Environmental Site Assessment identifies a marginal issue, the lender can occasionally write off potential environmental risks knowing tha that the problem is not theirs. But once the lender assumes title of the property, these risks and expenses often fall on the lender and/or the eventual buyer of the asset.

In addition to the ASTM E1527 standards, pre-foreclosure Phase I ESAs may include non-ASTM scope issues such as asbestos, lead, radon, mold, and vapor intrusion as a lender taking title is very concerned with the property being used safely by occupancy.

In the world of SBA, the consultant and lenders should follow scope requirements dictated by SBA SOP 50-51. Note these rules are set to change with an updated version of SOP 50-51 scheduled for 2009, and the new version will be much more prescriptive.

Finally, site access is always a potential problem on foreclosure transactions. Oftentimes, site contacts for a property are the borrowers who defaulted on the loan. Therefore, it doesn’t come as much of a surprise when the site contacts are uncooperative.

Though, at times, a difficult and challenging task, the Phase I ESA assessor must ensure that the appropriate measures are taken to protect the interest of the client as the potential for liability for the lender is much greater.