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Environmental Risk Management

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Introduction Assist in the entry into commercial

lending David Switzer, BS, JD, LLM Yeoman Group –environmental risk

managers for lenders

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Topics of Discussion A Bit of History Overview - Why lenders care The standard approach A better approach

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A bit of history

Prior to 1980 – dump at will! 1980 CERCLA 1985 – Lenders held liable! 1995 – Lenders exempted (in

Michigan)!

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So Why Do You Care? Need to know the real value of the

property Upon foreclosure, lender does

become liable for site cleanup Need to be able to foreclose or

there is no collateral

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Brownfields Contaminated properties can be

good collateral Just need to know value Can be additional TIF and SBT

funding for the Borrower

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Madison Hts Example Minor soil contamination – affects

fish $400,000 to developer Boon to downtown

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Traditional Approach Phase I ESA Phase II ESA BEA or cleanup ALWAYS GET FUNDS TO

COVER – commitment fee

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Phase I ESA Government database Site visit History Interviews

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Phase II ESA Soil borings Soil and water testing

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BEA Unique to Michigan Must be contaminated property Protects against liability for pre-

existing contamination Due Care is still required Doesn’t revalue the property Whoa! Locks in contamination

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Too Slick! One sample high in lead Grabbed a BEA Resale became a nightmare

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Non-Scope Issues Not covered by Phase I ESA Still devalue property and are

owner liability issues Wetlands Asbestos Lead-based paint Radon Mold

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Wetlands

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Asbestos

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Lead Based Paint

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Radon

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Mold

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Hot topics today Volatilization to indoor air Factor of 100x Easily controlled

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Problems with Standard Approach Phase I too broad, too narrow, too

expensive and takes too long. Phase II can be too expansive and

too expensive BEA not helpful in all situations –

not possible in some

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A Better Approach -Environmental Risk Management

Requires environmental risk manager – not geologist

Non-traditional path to assessment Saves time, money – and

sometimes the loan

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Lack of ERM

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October 2006 Case Local bank held liable once it took

possession. Sued by the Trust to whom it sold the property.

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ERM Objectives Know value of collateral Be able to foreclose Protect bank from liability

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Valuation Appraisers exempt out and treat as clean Methods are numerous

Cost Income capitalization comparisons

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Cost Approach Appraiser will figure cost to

reproduce from scratch minus depreciation.

Env adjustment. Further subtract cleanup or closure cost

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Comparison Approach Appraiser will find comps Env adjustment – gas stations,

brownfields, dry cleaners comps

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Income Capitalization Appraiser will compute the ability

of the property to produce income Env adjustment – subtract fees to

stay in compliance

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A Policy is Required By regulation To guide (and control) lenders Analysis required Policy is part of marketing plan

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Take Charge! Borrowers need assistance Borrowers may have conflict ESAs differ depending upon client Control quality Bank lists are impossible to maintain

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Next Steps Institute a policy Contact an environmental risk

management firm

There’s only one!