A breakdown on the purpose and use of reliance letters in Environmental Due Diligence.
The Purpose of Reliance Letters
A reliance letter is used in Commercial Real Estate (CRE) transactions to allow additional parties to rely on the contents of a consultant’s Environmental Site Assessment (ESA) report. When applicable, the extension of reliance allows those additionally listed to use, or rely upon, the report while avoiding the cost and time associated with a new assessment.
These legal documents can be requested by lenders outside of the original transaction as well as Community Development Corporations (CDCs) and the United States Small Business Administration (USSBA). What are some things that lenders should keep in mind in relation to reliance letters for environmental due diligence?
Who Requests/Issues a Reliance Letter?
A reliance letter may be requested by various parties, including lenders, purchasers, CDCs, USSBA, and others that are commonly involved in CRE transactions. The original client can also request an extension of reliance. In all cases, written authorization is required in order for the ESA report to be used by a third party.
After a request has been made to extend reliance on an ESA report, approval from the original client that directly engaged the ESA will need to be obtained. Once granted, a reliance letter must be prepared by the consultant that prepared the ESA report.
What Should Be Included in a Reliance Letter?
Reliance letters can be specific to lenders, consultants, or other parties involved in CRE transactions. The purpose is to protect all parties from incurring unintended liabilities related to the completion of an ESA.
As this is a specific legal document, it is common for the reliance request to include a user-specific requirements with pre-approved language. At a minimum, information included in a reliance letter should include:
- Date of reliance letter issuance
- The name(s) of the party issuing the letter and addressee
- ESA report date
- Subject property address
- Statement of reliance to the requestor
The requestor may also ask for evidence of insurance and/or a statement that the findings of the prior Phase I ESA are still valid.
Unless otherwise noted, a reliance letter is subject to the agreement with the entity that engaged the ESA. This allows the consultant to manage its potential liability to the relying party. As a result, lenders or other interested parties often require specific reliance letter language to protect their interests. This can include specific insurance requirements and language regarding limitations of liability. It is then up to the consultant who prepared the ESA report to determine if their report can adhere to any additional language or requirements.
A reliance letter does not provide any assurance that a property is or is not contaminated. It does provide greater transparency in asset protection as multiple entities review the same report. When extending reliance, the consultant accepts additional liability if the work completed was done incorrectly or not in accordance with applicable standards.
USSBA Reliance Letter
A reliance letter can be requested by a lender or borrower to extend the use of an ESA for outside financing. A common example of this would be when a Phase I or Transaction Screen ESA is used to obtain USSBA financing. Even if the USSBA is listed as an additional addressee on the report, all Transaction Screen, Phase I ESA, and Phase II ESA reports for USSBA consideration must include an environmental reliance letter prepared in accordance with USSBA requirements.
The standard USSBA reliance letter template must be executed “as is”. Any modification to the USSBA reliance letter, outside of those indicated in the template, will lead to the report being rejected. A rejected report means extended approval times and additional work for the lender, borrower, and consultant.
There are a few additional details to keep in mind in regard to environmental reliance letters. A reliance letter does not serve as an update to the report findings. If the property use has changed or the report is dated it is advisable to “update” the report. A Phase I ESA is considered valid for 180 days and may be updated by the original consultant within one year.
A reliance letter will not include an executive summary or any additional details related to the findings of the report. The party requesting a reliance letter should ensure they have a complete, finalized copy of the report.
Lastly, depending on the timing and nature of the reliance letter request, preparation of a letter may come with a fee. When applicable, prices for an ESA reliance letter can range from 10% to 20% of the original cost of work due to the time spent preparing the document as well as the extension of liability.
How Can LCS Assist?
LCS offers a range of services to assist lenders, including the dispersal of suggested reliance letter templates which can then be submitted to vendors for completion. We can also help to answer any questions on the limitations to liability provided within a specific environmental report or reliance letter.
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.