Lessons Learned – Foreclosure-Related Environmental Issues: Offsite Sources

April 1st, 2012 by Geoffrey di Mauro Leave a reply »

There is always a concern about the condition of a commercial property when a lender is considering a foreclosure action.  Recently, a lender took control of a vacant property in foreclosure with the knowledge that an adjacent property had been an historical dry cleaner facility.  Additionally, it appeared that there was also a second potential offsite source of impacts, specifically an historical shed structure just beyond the property boundary which may have been associated with historical citrus grove operations at the site.

The lender commissioned an environmental consultant to undertake a Phase II intrusive assessment of both soil and groundwater at the most likely impact areas related to the two offsite sources.  The Phase II sampling data revealed that there were onsite chlorinated solvent impacts in the shallow groundwater table proximate to the former offsite drycleaner, but not at deeper groundwater levels.  There also appeared to be no soil impacts above action levels in the vicinity of the former grove shed.  Therefore, the former historical citrus shed structure was determined not to be a source of any migratory impacts to the foreclosed site.

Based on the available information, it appears that the lender foreclosed on property with impacts reasonably attributable to an offsite source, the historic drycleaner.  The consultant also indicated that the facility was eligible for participation in the State of Florida Drycleaning Solvent Cleanup Program.   As long as neither the lender nor any of its agents or representative took any action, or by omission, allowed any action to exacerbate the existing conditions, there is no reasonable likelihood that the State or local environmental agencies, or any third party, would take enforcement action against the lender.  Also, because the impacts appeared to originate from an offsite source that is no longer active, nor was there any apparent immanent threat to human health or the environment, therefore, there did not appear to be any reporting requirement by the lender at this time.

The lender had asked how much funds would need to be expended to remedy the identified impacts. However, based on the limited nature of the initial assessment data, the extent of the impacts (both horizontally and vertically) has not yet been quantified.  Therefore, it was not possible to determine the cleanup costs associated with this property based solely on the available data.

Also, it is not clear that further assessment and delineation of the impacts by the lender would provide sufficient marketing certainty to warrant the cost expenditure needed to fully grasp the extent and magnitude of the impacts.  While the lender knows how much of a security interest it has in the property, the lender cannot know in advance the cost to clearly delineate the impacts, so it is problematic to invest in further assessment. Therefore, in the circumstance where the lender is not a responsible party for the impacts, it would be more prudent for the lender to provide a prospective purchaser with the currently available environmental reports, and to allow such purchaser to do its own due diligence (with the appropriate warranties that purchaser shall take no action which exacerbates any identified issue and indemnifies the bank for any onsite activities which said buyer may conduct) and draw its own conclusions as to the extent of the issue the cost to address same.

As illustrated above, environmental impacts, even from adjacent activities, continue to have the potential to cause concern, whether for initial lending purposes or foreclosures.   On a proactive basis, pre-loan and pre-purchase assessment remains an appropriate and cost effective mechanism for reducing and managing transactional risk associated with both commercial and, in certain circumstances, residential real estate transactions.