Environmental Risk Presentation

05/02/23 1

Environmental Risk Management

05/02/23 2

Introduction Assist in the entry into commercial

lending David Switzer, BS, JD, LLM Yeoman Group –environmental risk

managers for lenders

05/02/23 3

Topics of Discussion A Bit of History Overview - Why lenders care The standard approach A better approach

05/02/23 4

A bit of history

Prior to 1980 – dump at will! 1980 CERCLA 1985 – Lenders held liable! 1995 – Lenders exempted (in

Michigan)!

05/02/23 5

So Why Do You Care? Need to know the real value of the

property Upon foreclosure, lender does

become liable for site cleanup Need to be able to foreclose or

there is no collateral

05/02/23 6

Brownfields Contaminated properties can be

good collateral Just need to know value Can be additional TIF and SBT

funding for the Borrower

05/02/23 7

Madison Hts Example Minor soil contamination – affects

fish $400,000 to developer Boon to downtown

05/02/23 8

Traditional Approach Phase I ESA Phase II ESA BEA or cleanup ALWAYS GET FUNDS TO

COVER – commitment fee

05/02/23 9

Phase I ESA Government database Site visit History Interviews

05/02/23 10

Phase II ESA Soil borings Soil and water testing

05/02/23 11

BEA Unique to Michigan Must be contaminated property Protects against liability for pre-

existing contamination Due Care is still required Doesn’t revalue the property Whoa! Locks in contamination

05/02/23 12

Too Slick! One sample high in lead Grabbed a BEA Resale became a nightmare

05/02/23 13

Non-Scope Issues Not covered by Phase I ESA Still devalue property and are

owner liability issues Wetlands Asbestos Lead-based paint Radon Mold

05/02/23 14

Wetlands

05/02/23 15

Asbestos

05/02/23 16

Lead Based Paint

05/02/23 17

Radon

05/02/23 18

Mold

05/02/23 19

Hot topics today Volatilization to indoor air Factor of 100x Easily controlled

05/02/23 20

Problems with Standard Approach Phase I too broad, too narrow, too

expensive and takes too long. Phase II can be too expansive and

too expensive BEA not helpful in all situations –

not possible in some

05/02/23 21

A Better Approach -Environmental Risk Management

Requires environmental risk manager – not geologist

Non-traditional path to assessment Saves time, money – and

sometimes the loan

05/02/23 22

Lack of ERM

05/02/23 23

October 2006 Case Local bank held liable once it took

possession. Sued by the Trust to whom it sold the property.

05/02/23 24

ERM Objectives Know value of collateral Be able to foreclose Protect bank from liability

05/02/23 25

Valuation Appraisers exempt out and treat as clean Methods are numerous

Cost Income capitalization comparisons

05/02/23 26

Cost Approach Appraiser will figure cost to

reproduce from scratch minus depreciation.

Env adjustment. Further subtract cleanup or closure cost

05/02/23 27

Comparison Approach Appraiser will find comps Env adjustment – gas stations,

brownfields, dry cleaners comps

05/02/23 28

Income Capitalization Appraiser will compute the ability

of the property to produce income Env adjustment – subtract fees to

stay in compliance

05/02/23 29

A Policy is Required By regulation To guide (and control) lenders Analysis required Policy is part of marketing plan

05/02/23 30

Take Charge! Borrowers need assistance Borrowers may have conflict ESAs differ depending upon client Control quality Bank lists are impossible to maintain

05/02/23 31

Next Steps Institute a policy Contact an environmental risk

management firm

There’s only one!