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CRE Finance World, Summer 2014

The Evolving Approach to Environmental Risk Management and Due Diligence controls stipulated in the closure requirements are not maintained. Until the environmental risk policies of the institutions are updated with respect to how CRECs are handled, reports that contain CRECs may be evaluated with inconsistent approaches. • Stronger Emphasis on Regulatory Agency File Reviews: The standard now contains stronger language about the Environmental Professional’s responsibility to review regulatory agency records for the subject property and nearby release sites. Most high- quality consulting firms have already been including agency records reviews in their assessments, and the intent with the change is to create greater consistency throughout the consulting community. The potential implications of this change to lenders include potentially higher costs and delays of complete assessment reports while the Environmental Professional awaits access to agency files. Responsiveness by regulatory agencies varies widely across the US. For example, access to Illinois Environmental Protection Agency (IEPA) records may take months, while records in nearby states are available online. Similarly, compliance records in some parts of Southern California may take weeks to obtain, with expensive review fees applied, whereas records in some parts of Northern California are available within a few days or online. When contracting with a firm for the performance of a Phase I ESA, especially for sites with known historical issues, it is prudent to inquire as to the typical agency response times in the region of the site. In addition, when comparing several proposals for the performance of a Phase I ESA, it is important to understand if the bid includes agency records reviews or if those will be billed separately. Overall, the changes to the Standard are solidifying changes that were already underway in the marketplace (the focus on vapor migration, for instance) or intended to create greater consistency in the Phase I ESA reporting. According to Dean Jeffrey Telego, Executive Co-Director for the Environmental Bankers Association (EBA), a non-profit trade association focused on environmental risk management in financial institutions, “Implementation of the ASTM E1527-13 Standard will require a different level of due diligence for the environmental professional and greater attendance for the unsuspecting site owner/borrower, developer or banker. The key changes in the ASTM E1527-13 will create an enhanced environmental due diligence now that the environmental professional will need to spend more time and greater attention to the definitions of a REC, CREC and HREC. This, plus more diligent agency file review determinations will influence the rate of deal-flow and CRE Finance World Summer 2014 64 securing of site closures. In addition I see the whole issue of vapor intrusion and vapor migration surfacing to become a potential disruptive feature with site reopeners, to closing deals, and bringing uncertainty to corporate risk management programs and challenging a client’s risk tolerance.” Updated OCC Comptroller’s Handbook In addition to the updates to the ASTM Standard, the OCC issued an updated Comptroller’s Handbook for Commercial Real Estate Lending in 2013. The updated Handbook states that an appropriate environmental risk management program should reflect the level and nature of the bank’s real estate lending activities, its risk profile, and consideration of applicable environmental laws. The OCC expects that the program be reviewed and approved annually by the bank’s board of directors or a designated committee of the board. In adopting an effective environmental risk management program, the OCC states that lending institutions should develop policies and procedures that reflect potential environmental risks associated with lending in markets and to industries served by the bank. A risk management policy should include a detailed description of the process by which lending staff determine the level of risk associated with a particular transaction, and are then able to identify which type of environmental assessment is warranted to support the lender’s overall risk approach. The OCC Handbook also states that an effective environmental risk management program should: • Require environmental risk assessment reports to be received and evaluated before the bank’s final commitment to lend on a transaction. • Establish procedures for assessing environmental concerns associated with assets before acquisition by the bank in workout or foreclosures as well as the bank’s investment in real estate assets for its own use. • Ensure that persons responsible for evaluating environmental risk possess relevant knowledge, skill, and competence. The bank’s program should specify selection criteria to evaluate and monitor the performance of third-party professionals, such as environmental experts or legal counsel, who may be consulted to assess environmental risk.


CRE Finance World, Summer 2014
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