Introduction
Commercial real estate lending is used to finance properties of varying operations and value. A critical piece of the underwriting process, environmental due diligence is used to evaluate the environmental risk associated with a property or tract of land. As all situations are not uniform, there are several levels of environmental due diligence that can be applied depending on the current and previous property use, nature of the loan, and loan amount. In this blog, we’ll discuss some screening tools for small balance loans and outline where Desktop Reports can be applied to save time and money in the underwriting process.
The Importance of Due Diligence for Small Balance Loans
In commercial real estate, small balance loans are typically defined as transactions of less than $5 million. Property types in this range can include multi-family, mixed-use, office, small-scale retail, self-storage, and mobile home communities. A more cost and time-intensive Transaction Screen or Phase I Environmental Site Assessment report may not be needed to complete an appropriate risk assessment on small balance loans with innocuous site uses. However, it is suggested that environmental due diligence always be completed as a screening tool for both the lender and borrower to evaluate environmental risk.
Every transaction involves a spectrum of risk resulting in resources and knowledge being applied to make informed decisions. In Commercial Real Estate Lending, proper due diligence helps the lender (and borrower) understand the environmental risk associated with a specific property. The question can then be asked; Is the risk acceptable, given all the information provided and the nature of the transaction?
When is Environmental Due Diligence Suggested
The due diligence mindset is important to maintain for all commercial properties. It is suggested that some form of environmental due diligence always be used in the following lending situations:
- A new real estate purchase
- The refinance an existing loan
- Accepting new collateral
- When required by public agencies before releasing grant funding
- When requested by existing property owners
Benefits of Environmental Due Diligence for Small Balance Loans
Even when not required by policy, there are many benefits to completing environmental due diligence for small balance loans. These are cases where a higher-scope Transaction Screen or Phase I Environmental Site Assessment may not be appropriate or required for a property with low-risk operations. While a Desktop Report (LCS EAQuick suite of services) does not include a site inspection by the consultant, these screening tools will assist in the lending process by providing:
- A preliminary screening on small balance loans with innocuous current and known historical site operations
- Risk mitigation to avoid hidden environmental liabilities
- Better decision making
- Compliance with regulatory guidance
When are Desktop Reports Commonly Used
Small-balance loans with innocuous current and historical site operations are the best candidates for Desktop Reports. Owner/operator questionnaires are typically required as part of the screening process, and if information is provided by the current property owner/operator(s) which indicates on-site operations of potential environmental concern, a broader-scope Transaction Screen or Phase I Environmental Site Assessment would be recommended.
United States Small Business Administration (SBA) loans involving properties that are not identified on the SBA NAICS Codes of Environmentally Sensitive Industries list are also good candidates for Desktop Reports, specifically a Records Search with Risk Assessment (RSRA)/LCS EAQuick Loan Check Report. An RSRA cannot be used if the current or historical use of the property is included on this list on SBA-backed loans.
Lastly, Desktop Reports are often used to update to a loan in portfolio. These are cases where site usage has changed, previous environmental reports are “dated” and/or when modifications to the loan are being considered.
Examples of Environmental Risks Associated with Small Balance Loans
Although operations may appear to be innocuous, users of Desktop Reports should be aware of hidden environmental risks. These may include, but are not limited to:
- Use of hazardous materials
- Handling of hazardous wastes
- Soil and groundwater contamination from past operations
- Indoor air quality concerns
- Underground storage tanks (USTs) of unknown integrity
- On-site and adjacent regulatory concerns
In the event environmental risk is present, proper environmental due diligence can aid in the development of a strategy to understand and manage the risks before the transaction is complete. In some cases where environmental risks are identified, a Transaction Screen or Phase I Environmental Site Assessment will likely be recommended to complete in-depth research and a site inspection. Other cases may involve limited environmental risk where these risks can be managed within the context of loan parameters.
Solutions: Low-Cost Environmental Reports from LCS
When properly used within a lending institutions’ environmental policy, Desktop Reports provide a solution to help evaluate environmental risk and to be compliant with regulatory guidelines. With these considerations in mind, the LCS EAQuick suite of reports offers time savings and lower environmental due diligence costs. These limited-scope reports are completed as a screening tool in the evaluation of environmental risk for a property being backed by a small balance loan.
EAQuick Opinion Report
- Regulatory database review
- Review of an environmental questionnaire (if provided)
- Low or Elevated Risk Assessment with recommendations
EAQuick Loan Check Report
- All components of the EAQuick Opinion Report
- Historical research to 1940 or first developed use utilizing two sources of research
- Owner/operator interviews
- Exceeds USSBA environmental due diligence requirements for a Records Search with Risk Assessment (RSRA)
And as always….
LCS listens to your needs to develop products that are right for your lending transaction. Whether that be an individual appraisal, environmental or construction report, or a combination of services;
LCS will meet your needs in the most efficient, effective way possible.
To learn more, reach out to Liz Mahoney, Director of Sales & Business Development today.