By Donald McFadden, C.G.
Director of Environmental Services
St.Germain
Managing environmental risk in commercial real estate (CRE) lending can be challenging. Although it’s something the lending community has been doing for decades, it has historically been viewed as unnecessary and routinely forgotten.
In today’s lending climate though, environmental risk cannot be ignored. When properly implemented, an Environmental Risk Management Program (ERMP) can be efficient, inexpensive, and an asset to both the lending institution and the customer.
There are four key elements to an effective ERMP:
1. Consider Current Guidelines and Best Management Practices (BMPs) in the Policy.
A strong ERMP starts with a policy that includes current regulatory guidance. Banking regulators that provide guidance include the OCC (Office of the Comptroller of the Currency) and FDIC (Federal Deposit Insurance Corporation). Consulting the regulator’s website is a good place to get the latest guidance that applies to the lending community.
The U.S. Small Business Administration (SBA) also has developed BMPs as part of their Standard Operating Procedure (SOP) for environmental investigations. This document details when to use a questionnaire, a Records Search with Risk Assessment (RSRA), a Transaction Screen, or a Phase I Environmental Site Assessment (ESA). Lenders can choose to follow the SOP or consult the BMPs even when they are not engaging in SBA lending.
2. Functional Review Procedures.
The review process needs to function efficiently. Being able to make operational adjustments without having to make frequent changes to the policy is important. Having detailed procedures will allow a lender with any level of experience to easily follow procedures from initial environmental review conversations with the borrower, to the types of review tools used at each level of the process, to managing allowable exceptions.
3. Informing Customer of Value.
The tone of the initial fee conversation with the borrower can highlight how an environmental review can benefit the borrower. If performed properly, the environmental review can provide valuable data to a borrower prior to purchase. The risk for contamination may be identified, giving the borrower an opportunity to renegotiate with a seller for specific financial or remedial steps prior to sale. This ensures more financial stability for both the borrower and the lender.
4. Involve Environmental Expertise.
Both OCC and FDIC guidance emphasize the need for expertise when evaluating environmental risk. The responsibilities of the ERMP are often delegated to a lender’s in-house staff who may not have the experience or the desire to meet the demands of the position. The in-house individual often has many responsibilities that fall outside the environmental risk management program and the environmental review process falls to the bottom of their list of priorities.
Smaller institutions may not maintain the volume of CRE lending to justify dedicating responsibility to a properly trained full-time employee or hiring an environmental expert. However, it does not need to be expensive to retain a highly qualified environmental consultant to ensure the quality of the ERMP. A fee-based structure allows the transfer of the environmental review directly to the customer, making it a cost-neutral program for the lender.
Although there are many aspects to consider when developing and maintaining an ERMP; consideration of current guidelines and BMPs in the review policy, functional review procedures, valuation, and involving environmental expertise will go a long way to establishing an effective program. When developed and maintained correctly, an ERMP can be very beneficial to both the lending institution and the borrower.
For more information on effective ERMPs, contact us or call me at 207-591-7000 x 39.