One of the most essential parts of doing due diligence when purchasing property is having an environmental site assessment, or ESA, completed. An environmental assessment is the method of inquiry used to determine the environmental impact and challenges facing a property. Examples of this include everything from the property’s soil to contamination from nearby sites. While an ESA is, of course, beneficial to clients, it’s also beneficial to lenders. Essentially, ordering an environmental assessment report gives everyone involved in the sale a heads-up about any potential problems down the road.
How is an environmental assessment helpful for a lender?
Since 1996, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) has excluded lender liability and reduced the direct liability for lenders. State laws, however, might still hold lenders accountable for any environmental liability associated with property held as collateral. Some potential environmental lending risks include cash flow impairment, collateral value decline, or even foreclosure. In a nutshell, unknown environmental effects can affect property values.
When should a lender order an environmental assessment report?
Typically, as a lender, you’ll have your own environmental risk policy which will stipulate what triggers the need for an environmental analysis. Usually, this is associated with the loan amount, but it can also be related to specific property types. For example, certain industries like those that perform on-site operations (gas stations, laundromats, quarries, food processing facilities, etc.) require environmental assessments. An ESA might also be required by prospective purchasers, property managers, and even sellers.
What are the components of an environmental analysis?
There are two phases of environmental site assessments. Phase I consists of historical research including property documentation outlining when it first held structures or when it was first used for agriculture. Aerial photographs, old fire maps, and other historical data will be used to draw conclusions. Phase II is usually implemented when Phase I identifies potential issues or for properties that require further investigation due to the property type. During Phase II, soil samples or other tests are conducted to garner deeper information about a property.
For an even more in depth look at environmental assessments, listen to our webinar with AEI Consultants. There, you’ll find a comprehensive overview. If you have other questions, don’t hesitate to let us know. As always, we’re here to help.