With regulatory changes in mind, keep an eye on lenders' environmental guidelines

Derek Ezovski, managing director, property-due-diligence group, Environmental Data Resources

As published in Scotsman Guide's Commercial Edition, March 2009.

A disciplined due-diligence process helps protect a lender's bottom line. And today, having a strong due-diligence program is more important than ever.

Scrutinizing deals for potential risk in a shaky economy -- particularly when an increase in bad debts is common -- makes good business sense for brokers. Here's why.

Keeping pace

When it comes to financing commercial real estate, environmental contamination is one risk that can impair -- or even kill -- a deal. Contaminated property securing a loan transaction can expose a lending institution to direct liability for cleanup costs, as well as to probable litigation.

It also can cause buyers to default if they're forced to divert cash flow to pay for remediation, and, in the case of foreclosure, it can leave the bank with property that may be difficult to sell.

Further, environmental issues can damage a bank's and a broker's reputation, brand and image.

For these reasons, most commercial lenders have adopted a formal environmental policy to help protect themselves from unnecessary exposure. Others have revised theirs recently because of major regulatory shifts. Recent changes include the first federal guidelines for environmental due diligence, released in November 2006 -- the U.S. Environmental Protection Agency's (EPA) All Appropriate Inquiry (AAI) rule -- and new environmental policies issued by regulators such as the Federal Deposit Insurance Corp.

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