How Lenders Can Avoid Recognized Environmental Conditions

April 16th, 2013 by Geoffrey di Mauro Leave a reply »

Sometimes, the best way to deal with a problem is to avoid it as much as possible, instead of trying to tackle it head on. Recently, a lender client received a Phase I Environmental Site Assessment from the consultant for review use in a proposed loan transaction. The property in question was a citrus grove which included an active storage shed used to house petroleum products and agri-chemicals for use in the grove. The consultant identified the possibility that there had been historical and/or recent releases of petroleum products and agri-chemicals at the shed location, making that area an on-site Recognized Environmental Condition. The consultant recommended additional assessment of the shed area.
Normally, a lender would consider moving to the next step and ordering a Phase II assessment of soil and groundwater. However, the lender recognized that this would automatically cost the borrower, a long-term client of the lender, additional assessment fees, plus the distinct likelihood of environmental issues, such as potential confirmation of impacts, which could result in notification requirements to governmental authorities and additional assessment and/or cleanup costs. The lender understood that the borrower client was not enthusiastic about such prospects. The lender therefore sought a different approach to managing this situation.
In this circumstance, the most useful approach was to remove the problem from the equation. The borrower was seeking to borrow funds using the grove as collateral. Since the site consisted of hundreds of acres, while the storage shed area was situated on a one acre segment conveniently located along the edge of one of the boundary lines of the grove. It was suggested that the collateral site could be revised to exclude the problem area. This would require the property boundaries to be redrawn, to separate the storage shed area from the larger grove parcel.
The benefits of this approach were that the consultant could be asked to review the site, as if the storage shed were not part of the assessed area, and the designation of an on-site REC could be eliminated. In this manner, the lender was not at risk of having to lend on property that could be considered a potential source of onsite environmental impacts, while the borrower’s collateral was not materially reduced sufficient to negatively affect the amount of funds sought to be borrowed. Additionally, the lender could require the borrower to execute an indemnity associated with potential impacts from an off-site source and to ensure best practices were put in place with regards to the management of the offsite storage shed during the term of the loan, while the borrower was not required to actually make any current and costly assessment of the environmental condition of the shed area, nor required, to make and notifications to any governmental authorities.
Of course, there were legal and time costs to this approach, since the property boundaries had to be redrawn and recorded; however, there was no material impact to the borrower’s grove operations associated with this approach. Additionally, the new property boundaries allowed the consultant to properly identify the storage shed as a potential, but offsite, REC; this in turn, allowed the lender to take alternative measures to protect its collateral security rather than require borrower to undertake expensive environmental assessment with an unknown outcome. The outcome of this approach is that both the lender and the borrower were able to move forward with the loan transaction without material detriment to either party.
The takeaway here is that lenders can sometimes avoid the effects of Recognized Environmental Conditions just as easily as asking their borrower to address those same conditions, with the same or better results for the lender.