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CRE Finance World, Summer 2014

A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 63 The Evolving Approach to Environmental Risk Management and Due Diligence or any planned renovations. Lead-based paint, in particular, can be a source of significant third party liability for multi-family properties if painted surfaces are in poor condition. For asbestos, if materials are friable and must be abated, costs can often skyrocket. Radon, although naturally-occurring, represents a concern for residential and multi-family sites, as radon is a carcinogen. The environmental concerns detailed above are just a snapshot of the universe of potential environmental risk that can affect properties. In some instances, investigation and cleanup costs may exceed the value of the property. Investors and servicers should not assume that proper due diligence was done for the last purchaser, as due diligence requirements were often rushed or waived in the irrational exuberance of prior market conditions. Work-out groups should not rely on the due diligence that was performed at the time of the loan origination, and should take caution against allowing other factors to take precedence over environmental concerns. Changes to the Phase I ESA Standard An updated ASTM standard for Phase I Environmental Site Assessments was released in late 2013. Several important changes should be on the radar of the lending community. • New Focus on Vapor Migration: The Environmental Professional must now evaluate the potential for contamination within soil vapor, as well as the presence of contamination within soil and groundwater. Many sites with soil and/or groundwater contamination may have received No Further Action letters using risk based criteria allowing the contamination to remain in place. Taking the soil vapor pathway into consideration now brings attention to potential scenarios where indoor air quality is being impacted by those remaining concentrations. To achieve regulatory closure, the evaluation of whether the contamination remaining at a site poses a threat to human health or the environment may now include an evaluation of potential indoor air concerns, thus potentially raising the bar to achieve site closure. To be clear, a review of indoor air quality considerations is not required within the Phase I standard; however, review of a site’s regulatory standing and the standards used to achieve any prior site closures are pertinent to the judgments of the Environmental Professional. In addition, while the number of sites with closure that are being re-opened is relatively small, regulators are addressing active cases and requiring soil vapor to be considered during the risk based closures. The number of states with specific soil vapor criteria is growing, although not all states have standards in place. The potential for regulatory review of previously issued No Further Action determinations remains a risk for property owners; however, in most cases, assessment of these risks at previously closed sites is often left to the environmental and real estate professional community. Lenders and property owners are now challenged to understand the risk and associated liabilities associated with these scenarios. In addition for the potential for re-openers of previously closed cases, the evaluation of vapor phase contamination requires a closer look at nearby contamination plumes. In the past, it may have been possible to argue that an off-site groundwater plume was not the responsibility of the subject property owner, and therefore, nothing further was required for the prospective purchaser of a nearby site. However, the migration of vapor-phase contamination beneath a subject property building may represent a potential health risk to the building occupants, which then becomes a source of third party risk for the subject property owner. A detailed evaluation of vapor intrusion risk is not included in a Phase I ESA; however, a Phase I should include a discussion of potential vapor migration from nearby sites. • New Term — Controlled Recognized Environmental Condition: The new Phase I standard introduced the term Controlled Recognized Environmental Condition (CREC). A CREC signifies a site which had contamination that has been addressed to the satisfaction of the applicable regulatory authority (i.e. closure or no further action letters) with hazardous substances or petroleum products allowed to remain in place subject to implementation of required controls (i.e. activity and use limitations (AULs) or engineering controls). The lending community should be aware that a site with a CREC likely has limitations regarding the nature of potential future development. It should be noted that for cases closed more than several years ago, the levels of contamination may exceed current cleanup standards. Lenders should ensure their environmental risk policies are updated to reflect the institution’s approach to managing CRECs. Some may view a CREC similar to an Historical Recognized Environmental Condition (HREC); however, it is important to note that a CREC differs from an HREC in that future limitations or controls are placed on the property. In the event that a CREC exists, does the institution have a way to monitor whether the CREC controls are maintained? Does the borrower have a responsibility to report any proposed changes in land use to the lender, and if so, would the lender red flag a use that was not permitted under the conditional closure? A CREC can become a REC if changes to the use of the property occur (for example, the addition of multi-family units to a mixed use site) or if engineering


CRE Finance World, Summer 2014
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