Archive for July, 2013

Lessons Learned – Periodic Post Closing Follow Up on Borrower Environmental Obligations

July 1st, 2013

Occasionally, a Lender has a borrower whose property, whether a new purchase or a refinance, has certain pre-existing environmental concerns. Perhaps the improvements were constructed prior to 1978, and there may be Asbestos Containing Materials (ACMs) or Lead based paint (LBP) concerns, or perhaps there are soil impacts resulting from periodic historical releases associated with normal agricultural uses of a property. In circumstances where pre-loan removal or remediation of the concern is not feasible, Lenders may address these concerns via an environmental indemnity, requiring borrowers to mitigate or properly manage any existing concerns to ensure that such concerns are not problematic during the term of the loan, either for human health and safety reasons, or for servicing the loan.

Often times, a policy of “management in place” is sufficient to address the Lender’s concerns and help the borrower maintain best business practices. This frequently means that an Operations and Maintenance Plan (O&M Plan) would be put in place at the commencement of the loan, to run at least during the term of the loan, if not longer. The O&M Plan would require the borrower to properly manage the issues of concern, and not exacerbate the impacts or create any pathways of exposure which could negatively affect normal business operations or ability to service the loan. For ACM and LBP issues, this could me only de minimus and non-intrusive maintenance and refurbishment of affected areas during the term of the loan, to reduce the likelihood of exposure to such concerns. Site (re)development that might mean material disturbance of affected areas could require consultation with and pre-approval of mitigation plans by the Lender, to ensure that the terms and conditions of the environmental indemnity were being met. Changes to the Approved Use of the property should also be subject to Lender consultation and pre-approval; since such a change could alter the identified pathways of exposure which the O&M Plan was supposed to address, and thereby increase the risk of environmental liability.

As a matter of compliance and monitoring, Lenders should consider requiring the borrower to provide, at least annually, a summary of borrower’s efforts and activities to “manage in place” any identified pre-existing environmental conditions, if periodic site visits are not feasible. By requiring borrower to provide the Lender with even a brief statement stating that the O&M Plan is being properly managed and that there has been no material change or exacerbation of the identified impacts, the Lender is compelling the borrower to pay at least periodic attention to the obligations that the borrower agreed to at the time of the closing of the loan. At the same time, the Lender can demonstrate that it was diligent in following up on its obligations to maintain a situational awareness concerning its collateral, by reviewing and notating where necessary such periodic borrower summaries.

This periodic follow up by borrowers and Lenders is cost effective and does not require much time or resources to implement, but serves to ensure that both borrower and Lender have a plan in place which provides periodic follow up on such pre-existing environmental conditions. If there is no change in circumstances, then no additional resources are required; if the review identifies a change, then both parties have the opportunity to correct the situation sooner, when the situation is more manageable, rather than later, when the fix may be more costly and time consuming. As the old adage says, “an ounce of prevention is with a pound of cure.”