Early environmental assessments can reduce downtime

During the mortgaging process, one of the reports that must be done prior to closing a loan is a Phase One Environmental Site Assessment, or ESA. Environmental studies are done to assure the lender that the property being financed is free of uncontained contaminants, such as underground oil or building asbestos, that might pose a health threat to the public and impair the value of the asset.

As anyone familiar with financing knows, unless your property gets a clean bill of health from the professional engaged to do this study, almost no lender will close a loan unless all environment-related problems are corrected, regardless of cost. Also, potential risks that might be problems, but are not apparent to the naked eye, generally require further analysis and testing, leading to Phase Two soil, groundwater and building investigations. The conclusions drawn from these reports result in remedial recommendations and/or removal of the offending problem(s), if necessary.

Usually, the ESA Phase One report is ordered after a mortgage commitment is issued and is done along with other loan closing documents such as appraisals and title reports. If there are no apparent environmental problems, the study can be completed and submitted within 30 days of being ordered. Once the lender is satisfied that everything is in order, the deal closes.

The Phase One report, which costs from $1,500 to $2,500 (or more, depending on the size of the property) is, hopefully, the only one needed in order to prove that the subject property is clean. The report documents the history, and includes a thorough walk-through inspection of the land and buildings, and interviews with staff and neighbors familiar with the site and surrounding properties. It also examines records that are available at relevant government offices, including copies of permits, violation notices, inspection and spill reports.

Back in time

The study also checks other available research material such as aerial photos (usually available from the 1930s through 1990) and Sanborn Insurance Co. maps, which show items of particular interest to fire insurance underwriters such as tanks, chemical storage areas, and the like. When available, these maps often provide property information dating back to 1900 or earlier.

Recently, a property that we are mortgaging underwent such an analysis. Everything was going fine during the walk-through until one of our restaurant tenant's employees offered the following comment: "I've heard that before the hotel was built there was a truck repair shop on this restaurant pad. See where those columns are? That was the location of the repair bays." Well, needless to say, that fellow's comment raised red flags with the environmental professional, who imagined leaking oil contaminants that were uncontained and possibly could have leached into the soil and an underground stream.

This led to many additional weeks of in-depth research until it was proven that, in fact, the tenant's employee was wrong and there was never such an improvement on the site. It also resulted in a two-month delay in loan closing. Because of the delay, I had to advance, out of pocket, more than $150,000 of contractor deposits that otherwise would have come out of the mortgage proceeds had the loan closed when it should have.

But what if we had needed to go to a second stage report and complete mitigation of environmental problems that were found? How long would that have taken? Would our lender have stayed interested in doing the funding? Would we have had enough money built into the mortgage proceeds to make an economic investment in the asset?

These questions got me thinking that, in the future, I might do an ESA well in advance of going for financing because I'd like to know if problems that could delay or abort financing need to be addressed so that I am not unexpectedly hit with this information at an untimely moment.

Of course, even if the ESA is clean, the lender might not accept that report and want to have a new one done at time of closing. Sure, it might cost me an extra $2,500 for a second report, but having it certainly would make life easier. My suggestion is that you do the same.

hmm@advanstar.com

Jeff Wilder is president of Wilder Ventures LLP, a New York City-based asset management company, and an adjunct professor at New York University. E-mail him at jswilder1@aol.com.

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