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AAI: Appraiser & Lender Perspectives
Mitch Kreeger, MAI, SRAChief Appraiser, Affinity [email protected]
Introduction
Regulatory Compliance: USPAP Methodology
(FIRREA, Appraisal Institute)
Affinity Bank Loan Policy
Survey of Lender Policies
USPAP Advisory Opinion 9 – “Appraisal of Real Property That May Be Impacted by Environmental Contamination”
Competency & Requisite Knowledge Have it, Get it, or Rely on outside experts
(Extraordinary Assumption)
Relevant Property Characteristics – usually obtained from 3rd party experts (EPs)
Terms (USPAP AO-9)
-- Property Value Diminution
-- Environmental Contamination
-- Environmental Risk
-- Environmental Stigma
-- Impaired Value: “as-is” value of a contaminated property.
-- Remediation Cost
-- Remediation Lifecycle: 3 stages of cleanup…before, during and after remediation.
Terms, cont. (AO-9)
-- Source, Non-source, Adjacent and Proximate Sites: Source sites are the sites on which contamination is, or has been,
generated. Non-source sites are sites onto which contamination, generated from
a source site, has migrated. Adjacent site is not contaminated, but shares a common property line
with a source site. Proximate sites are not contaminated and not adjacent, but are in
close proximity to the source site.
-- Unimpaired Value: Market value under hypothetical condition (not contaminated).
Valuation Issues, As If Unimpaired
Contaminated Property Hypothetical Condition
“As if clean” (unimpaired)
Uncertain Contamination Extraordinary Assumption
If property believed free of contamination, or
If environmental status uncertain
Valuation Issues, As Impaired (Brownfields)
Highest & Best Use issues: As If Unimpaired - no limitations from contamination As Impaired - considers limitations due to environmental
contamination and legal use restrictions associated with cleanup, and how it may affect:
Feasibility of site development or redevelopment, Use during and after remediation, and Marketability
Will excessive environmental risk and/or stigma deter site development or redevelopment until acceptable risk levels?
Satisfying USPAP SR 1-4 (Scope of Work)
Impaired value may not equal unimpaired value less costs of remediation & compliance
Cost, Use & Risk Effects – potential value impact Cost: deductions for remediation costs Use: impacts on utility of the site due to contamination Risk: derived from market’s perception (Environmental
Stigma) of increased environmental risk or uncertainty, based on actual market data
Valuation Issues – Detrimental Conditions (DC) Matrix(Sources: Randall Bell, MAI; USPAP AO-9)
Assessment Repair Ongoing
Cost-- Assess extent of contamination-- ESAs, RAP
-- Repair costs-- Remediation costs-- Redevelopment
-- O & M Plan-- Monitoring-- Ongoing costs
Use Loss of Utility Assessment
Loss of Utility during Redevelopment
Ongoing Loss of Utility
Risk (Stigma)
-- Uncertainty-- Fear of unknowns-- Assess depth & breadth of issues
Provide incentives for timely repairs
Market resistance (stigma)
Stages of Value Recovery(Source: Randall Bell, MAI)
Stages of Value Recovery
0%20%40%60%80%
100%120%
Time
Prop
erty
Val
ue Unimpaired ValueDC Value
Valuation (Appraisal) Issues Cost Approach Remediation & compliance costs prior to, or during, site
development or redevelopment soil, groundwater, asbestos, lead paint, mold, etc.
Depreciation – physical, functional or economic May reflect capitalized long-term O&M plan expenses, change in
H&BU, full/partial loss of use, etc.
Income Approach Rents ↓ or lease-up time ↑ (lower income) Long-term O&M plan (higher expenses) Potentially higher cap rate, discount rate, expenses
Valuation Issues, cont.
Sales Comparison Approach Sales of similarly impacted properties Sales of non-impacted properties
Other Issues Deduct remediation/compliance costs (before, during, after) Redevelopment during remediation issues
impaired use, reduced income, ongoing O&M… Impact from Environmental Stigma
“After red tags…” article (Diane Wedner, LA Times, March 6, 2005)
Lender Point of View:
Affinity Bank
Lender Point of View - Affinity Bank
Low risk lender $1B assets Privately owned
FDIC Bulletin FIL-14-93 “Guidelines for an Environmental Risk Program”
Property Inspection – Site Visits Regional loan manager Credit risk officer Appraiser
Lender Point of View - Affinity BankInitial Due Diligence
Environmental Risk Questionnaire (applicant) Transaction Screen (bank ordered) ESA: Phase I and/or Phase II (borrower) Secured Creditor Impaired Property Policy
(SCIPP) Potential environmental risk mitigation Coverage must begin upon default, not
foreclosure
Lender Point of View - Affinity Bank Ongoing Due Diligence
Training -- credit & lending personnel Vendors/Consultants -- licensed + approved by Bank AAI -- “Wait-and-See” until finalized, implemented Environmental Insurance (SCIPP) -- monitor carriers, terms:
Zurich – lesser of cleanup or outstanding loan balance upon default AIG – lesser of cleanup or outstanding loan balance after foreclosure Chubb – coverage is not transferable (secondary market) Kemper – essentially out of business Others – only carry property owner policies
Lender Point of View:
Lender Survey
Other Lender PoliciesSurvey of Lender Appraisers & ERMs…
1. Does your bank do anything different due to AAI?
2. Does your bank lend on Brownfields?
3. What is your bank’s due diligence for lending on Brownfields or environmentally impacted sites?
Of 87 surveys on 4/15/05 (including Affinity Bank),17 responses (20% response rate) received and culled.
Lender Survey: 1) “AAI” Policy Changes?
No – 65% Wait and see (majority) Interim – follow ASTM No AAI update if borrower
already owns property No AAI update if low risk
or low dollar loan Anticipate increased costs
Yes – 35% Already updated Phase I
scope of work for AAI Increased due diligence per
AAI Consultants must meet
AAI’s “EP” requirements
Yes (82%)… Exposure: Very limited on case-by-case analysis, up to
actively lending on Brownfields Assess & quantify impact Borrower must be financially able to manage & cover
unexpected costs – credit decision
Lender Survey: 2) Brownfield loans?
Lender Survey: 3) Due diligence? Define extent of contamination Quantify impact Review action plan (costs, timeline & budget) Phase I, with Phase II &/or RAP if needed Environmental Professionals, defined by AAI Environmental Insurance (limited value) Environmental Lawyers
Lender Survey: 3) Due diligence? Do NOT depend on liability risks, BFPP or
other defenses Underwrite to the risks US EPA definition of AAI may not be
supported by State authority over cleanup Establish financial mitigation (escrow acct) ASTM may be key to defining due diligence
Questions?
Sources & Links: Appraisal Institute (
www.appraisalinstitute.org) Environmental Bankers Association (
www.envirobank.org) Risk Management Association (
www.rmahq.org) Affinity Bank (www.AffinityBank.com) Thanks to my survey respondents!