Lenders and Foreclosure on Impacted Properties (Onsite Sources)

July 15th, 2012 by Geoffrey di Mauro Leave a reply »

In the prior Lessons Learned, we discussed off-site environmental impacts threatening a potential foreclosure property.  However, the options can be different for a lender if the foreclosure site itself has onsite impacts. State and Federal law have different requirements concerning reporting and affirmative actions depending on the type, nature and extent of any onsite impacts (for example, petroleum products versus arsenic), including whether there is an “imminent threat to human health and the environment.”   Recently, a lender was considering taking back a former agricultural property, for which the former borrower had planned to develop for residential housing.   During the course of the pre-foreclosure due diligence, Phase II intrusive sampling and analysis of a Recognized Environmental Condition identified in the Phase I assessment revealed that there were soil impacts at the site, presumably related to the prior agricultural use.

In this particular instance, the lender commissioned an environmental consultant to undertake further intrusive assessment of the soils and groundwater in the suspect area (a former storage and mixing shed) to try to determine the scope and extent of the impacts prior to the foreclosure deadline.  The assessment sampling data revealed that there were limited onsite arsenic and other agriculturally related impacts in the top foot of soil (and apparently not in groundwater), in area proximate to the storage and mixing shed, in an approximately 30×40 foot area.  The consultant also identified certain containers and drums at the shed which appeared to be associated with the former agricultural operations of the site.  The consultant was asked for and provided a cost estimate for the removal of the impacted soil and preparation of a source removal report/ Site Rehabilitation Completion request, which it provided to the lender for evaluation.

Because no discrete discharge or release was identified, and no “imminent threat to human health or the environment” was identified (which factors affect the determination of whether there is a reporting requirement to any governmental agency), and since the cleanup estimate was materially smaller than the current appraisal value of the site, the lender determined that there was a limited likelihood of liability which was outweighed by the value of the foreclosure property.   The lender determined to defer cleanup of the identified impact for the present, with the understanding that the information identifying the scope and extent of the impacts would need to be part of the disclosure packet to any prospective purchaser, and for possible later action.   However, in an abundance of caution, the lender instructed the consultant to remove and properly dispose of the onsite containers and drums, to address the possibility of future accidental releases.  The lender also determined to put a security fence around the impacted area and shed to manage the potential for contact by third parties with the impacts.

The lender was aware that the fact of impacts might be perceived as an impediment to the marketing and sale of the site to a third party, however, in this instance, the existing assessment and delineation of the impacts by the lender could provide sufficient marketing certainty regarding the costs to correct the issue.  Additionally, any prospective purchaser could also 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 and the cost to address same.  Ultimately, appropriate assessment and management of risk and current property conditions allows the lender to make informed decisions about the options for disposition of an asset.