Author: Garret Ponzi

SIC Codes
Standard Industrial Classification (SIC) codes were established in 1937 to identify a firm’s primary business activity.  These codes were initially used by federal governmental branches such as the Department of Labor and Statistics, US Census Bureau, Internal Revenue Service and the Social Security Administration, so that they could easily measure, analyze and share data. 

Initially, SIC codes were based on four digits, with the first two digits indicating the firm’s major industrial sector and the third and fourth numbers representing a business sub-classification. With the advent of environmental regulations, SIC codes also became a metric for identifying business activities that included the manufacture, use and storage of hazardous materials. Given recent advances in manufacturing, coupled with the development of new technologies and changes in labor practices, the depth of information provided by a 4 digit SIC code, developed over 85 years ago, has become somewhat inadequate. 

NAICS Codes
In 1997, SIC codes were replaced by the North American Industry Classification System (NAICS).  NAICS is used by US, Canadian and Mexican governments, as well as the Security and Exchange Commission, state and municipal regulators, insurance companies, financial institutions and many other organizations.  The longer six digit code allows for more flexibility and detail in assigning subsectors.  The first two digits of the NAICS code represent a specific business sector. Although similar to the old SIC codes, the additional detail provided by NAICS codes can be used to identify business activities that have a high probability of hazardous material use, generation or disposal.  Therefore, NAICS codes can be used to determine if a business is an “Environmentally Sensitive Industry.”  

The Small Business Administration (SBA) lists fifty-three NAICS codes that identify “environmentally sensitive” business activities.

SBA Standard Operating Procedure 50 10 5(G) Appendix 4 lists fifty-three NAICS codes that identify “environmentally sensitive” business activities for the U.S. Small Business Administration.  For any businesses falling into one of these 53 categories, the environmental due diligence must begin with a Phase I Environmental Site Assessment.  

Additionally, any business that sells, supplies or dispenses gasoline, or heating fuel is also considered “environmentally sensitive” and a Phase I is also required, even if the NAICS code for the business is not identified on the SBA Appendix 4 list.  When specifying NAICS codes, the codes should be those of the company occupying the subject property and prior occupants of the site, not those of the property owner or property manager.  Many banks also use the NAICS codes for non-SBA related identification, since these codes are a useful identifier of current and past property uses. 

If you would like a laminated copy of ERI’s SBA Environmental Investigation Flowchart, which provides a list of Environmentally Sensitive NAICS Codes on the reverse side for quick reference, please contact us at (704) 548.9333.

The development and maintenance of an environmental policy can present a challenge for lenders and banking risk managers that do not have an internal environmental staff.  The process not only includes a determination of the types and levels of due diligence that
will be required, but also includes the delineation of roles and responsibilities for policy execution and specific procedures to
follow based on the bank’s risk tolerance.

A good first step in policy development is bringing together key bank officers to discuss the major components of the policy and process.  

An essential ingredient in policy development meetings is a set of specific questions designed to address the major aspects of an environmental policy.

These questions include the following:

Although there are many possible answers to most of these questions, ERI’s environmental risk management policy development team is available to meet with your bank to discuss the pros and cons of the various options and assist you in policy development and implementation.  ERI has significant experience in addressing the specific concerns of a wide variety of key players who manage various internal banking operations, such as commercial real estate, corporate banking, business banking and special assets. This collaborative approach to policy development can lead to an efficient and streamlined environmental risk management program.

In response to the increasing environmental risk management needs of ERI’s loyal client base, we strive to keep you apprised of recent expansion/upgrades to our Information Technology (IT) infrastructure. As you may be aware, ERI has maintained redundant internet service providers for several years.  In the event of a carrier outage, we can immediately convert to a secondary internet connection, ensuring ERI’s staff of environmental risk professionals is capable of providing continuous service to our clients. ERI recently upgraded its internet connection from a 35 Mbps x 5 Mbps to a 100 Mbps x 20 Mbps, dedicated fiber optic solution.

In “layperson terms,” this recent upgrade means a significant increase in the volume and speed at which ERI interacts with client IT systems.  We have now almost tripled the internet speed at which we can download reports from clients and more than quadrupled the speed at which we can upload reports/data back to you. Our new, faster fiber optic solution is also dedicated for ERI’s sole use. We do not share this bandwidth with any other nearby business, allowing us to maintain productivity during peak internet demand. This dedicated fiber optic connection also allows ERI to turn around multi-site environmental report reviews/portfolio reviews faster without sacrificing quality of work or impacting the security of your reports and documents.

ERI is committed to staying ahead of the technology curve when it comes to supporting your efforts to manage environmental risk.

In addition to our recent bandwidth upgrades, ERI also has the capability to deploy file portals or “private clouds” that will help facilitate communications by providing a central location to manage files between ERI and our clients.  Discrete logins can be provided to the client as well as specific project managers. A file portal can provide a centralized, secure alternative to email when transferring files, reports and information between ERI, commercial lenders and environmental consultants.  For example, if you engage ERI to review an entire portfolio of commercial property Environmental Site Assessments (ESAs), for which many environmental consultants were involved, a portal or cloud can be established so that both you and ERI have access to the entire portal.  The environmental consultants are provided a code which ONLY grants them access to those ESAs which they performed. If you have a pending project which would be more easily and securely managed through the development of a private cloud and accessed by discrete log-in pass codes, please contact a member of the ERI team for assistance.

ERI is committed to staying  ahead of the technology curve when it comes to supporting your efforts to manage environmental risk. Our staff of experienced environmental risk managers, all permanent employees working together in the same geographic location, promotes a “tried and true” approach to peer review and resourcing sharing which enhances quality control and service delivery.

An environmental questionnaire is often the first instrument used to evaluate the environmental risk associated with a specific property.   Many bank environmental risk policies require the borrower to complete an environmental questionnaire for all new loans and subsequent transactions, unless a Phase I Environmental Site Assessment has already been determined to be the proper level of due diligence.  While the format of environmental questionnaires vary from bank to bank, the information requested is the same.

•   What are the current and former business activities conducted on the subject      property?

•   Have hazardous materials ever been stored, used or disposed on the subject or      adjacent properties?

•   Has contamination been identified on the subject or adjacent properties?

•   Have hazardous building materials such as asbestos or
lead-based paint been identified on the subject property?

Environmental Questionnaires are generally considered valid for one year from the date of completion. 

Important information, which should be included on an Environmental Questionnaire, but often overlooked, is the North American Industry Classification System (NAICS) code.  NAICS codes can identify business activities that have a high probability of hazardous material use, generation or disposal.  Thus, NAICS codes can be used to determine if a business is an “Environmentally Sensitive Industry,” having a “High Risk” for environmental issues.  The Small Business Administration identifies fifty-three NAICS businesses that are considered environmentally sensitive.  As a result, if any industries associated with these NAICS codes have been present on the property, SBA will require a Phase I Environmental Site Assessment.

If you would like a free copy of the NAICS business codes classified as environmentally sensitive by the SBA, along with the SBA Environmental Investigation Flow Chart, please e-mail ERI and request our laminated guide, which we have prepared as a quick reference for our clients! Since the Office of the Comptroller of the Currency (OCC) recommends that the environmental conditions of the property be monitored for the life of the loan, an environmental questionnaire can also be used as an efficient and affordable tool to assist in compliance with this requirement.

The purpose of an Environmental Risk Management (ERM) program is to identify environmental issues that could result in losses and/or liability to the Bank.  Appropriate environmental due diligence minimizes financial loss attributable to diminished collateral value, impairment of the Borrower’s cash flow due to environmental costs, and inability to foreclose.

The Federal Deposit Insurance Corporation (FDIC) published an article titled “Guidelines for an Environmental Risk Program” which states, “…institutions should maintain an environmental risk program in order to evaluate the potential adverse effect of environmental contamination on the value of real property and the potential environmental liability associated with the real property.”  For a more detailed look at FDIC requirements, read the “Guidelines for an Environmental Risk Program.”

In 2013, the Office of the Comptroller of the Currency (OCC) published the Comptroller’s Handbook, Commercial Real Estate Lending, which also addresses environmental risk management.  Specifically, the OCC states,“…the bank’s loan policy should establish a program for assessing the potential adverse effect of environmental contamination and ensure appropriate controls to limit the bank’s exposure to environmental liability associated with the real estate taken as collateral.” The OCC’s eighteen bullet points detailing the components of an effective ERM program can be found here beginning on page 69.

Do you need assistance creating or updating your financial institution’s environmental policy?  

ERI can create or amend an environmental policy in order to meet your Bank’s real estate lending practices and risk tolerance.

Please stay tuned, as ERI will be developing articles related to the key elements of an effective ERM program. Representative topics include responsibilities of key bank officers, loan documentation, levels of environmental due diligence, risk mitigation and loan monitoring, among others.

Although there are very specific guidelines and regulations which govern the management of asbestos in public school systems, these regulations do not apply to commercial and industrial buildings. An OSHA provision in the construction asbestos standard, 1926.1101(k)(2)(ii)(D), requires property owners to notify tenants of the location and quantity of ACMs in leased space.

Facility owners can safely manage asbestos through the development and proper use of an asbestos operations and maintenance plan.

ACMs are only dangerous if they are damaged, which can occur through routine maintenance or building renovation activities involving damaged, friable asbestos. Friable asbestos can be crushed or pulverized by hand, posing the most significant potential for asbestos to be released and become airborne. Friable asbestos building materials were typically used as insulation to wrap HVAC ductwork, hot water pipe runs as well as piping elbows. It was also employed in spray-on coating materials, which were routinely applied to surfaces for the insulation of firewalls and to add “texture” to ceilings for visual effects. Although non-friable asbestos can also become airborne, it is typically embedded in a matrix, thus making the release of airborne asbestos unlikely. Non-friable asbestos was routinely used in the manufacture of 9 x 9 inch floor tiles (although other sizes of floor tile have been found to contain asbestos), as well as the glue or “mastic” used to adhere the floor tile to the floor surface. Non-friable asbestos was  also used in a material typically referred to as “transite wall board,” which has a translucent appearance similar to plastic/fiberglass and it typically appears to be “wavy” and somewhat flexible, as well as being waterproof.

Facility owners can safely manage asbestos through the development and proper use of an asbestos operations and maintenance plan (“asbestos O&M Plan”). An asbestos O&M Plan typically identifies the location, type and condition of asbestos building materials. An asbestos O&M Plan is referenced by building maintenance and construction renovation contractors to determine if their activities will impact or disturb building materials which contain asbestos. If the contractor reviews the asbestos O&M Plan and determines that their activities will potentially come into contact and disturb asbestos containing building materials, they should take the proper precautions and engage licensed asbestos professionals to minimize the possibility that airborne asbestos will be released.

Additionally, prudent owners of buildings which contain asbestos and who have developed asbestos O&M Plans (typically buildings constructed prior to the early 1980s), should perform an asbestos re-inspection every few years. Since asbestos building re-inspection efforts focus on the “condition of asbestos” which was outlined in the original asbestos O&M Plan, the relative cost to conduct a building asbestos re-inspection, is SIGNIFICANTLY less than the cost to identify ACMs during the original asbestos survey. This “extra precautionary measure” is used to document that the asbestos identified previously and documented in the original asbestos O&M Plan has not been damaged. Damaged friable asbestos should be evaluated by a professional and should either be removed or encapsulated/repaired to minimize the release of airborne asbestos fibers.

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) recommend environmental monitoring during the life of the loan. The OCC places monitoring under the bank’s Environmental Risk Management Program to “…provide guidelines that the lending staff should follow for monitoring potential environmental concerns for the duration of loans held in the bank’s loan portfolio.”  

Similarly, the FDIC’s guidance states, “The environmental risk assessment should continue during the life of the loan by monitoring the borrower and the real property collateral for potential environmental concerns.”  While this monitoring should be addressed in the bank’s Environmental Policy, neither governing authority specifically details how this monitoring is to occur.

While there is no clear-cut guidance on how environmental monitoring during the life of the loan is to occur, the monitoring should evaluate the environmental risks associated with the collateral by monitoring the following:

• Changes in the business activities of the borrower for environmental concerns
• Regulatory compliance of the borrower
• Potential for environmental contamination to adversely affect the collateral value

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) recommend environmental monitoring during the life of the loan. The OCC places monitoring under the bank’s Environmental Risk Management Program to “…provide guidelines that the lending staff should follow for monitoring potential environmental concerns for the duration of loans held in the bank’s loan portfolio.”  

Similarly, the FDIC’s guidance states, “The environmental risk assessment should continue during the life of the loan by monitoring the borrower and the real property collateral for potential environmental concerns.”  While this monitoring should be addressed in the bank’s Environmental Policy, neither governing authority specifically details how this monitoring is to occur.

While there is no clear-cut guidance on how environmental monitoring during the life of the loan is to occur, the monitoring should evaluate the environmental risks associated with the collateral by monitoring the following:

• Changes in the business activities of the borrower for environmental concerns
• Regulatory compliance of the borrower
• Potential for environmental contamination to adversely affect the collateral value

The U.S. Environmental Protection Agency (EPA) formally announced on Monday, October 6, 2014, that it will be amending the All Appropriate Inquiries Rule (40 CFR part 312).  Specifically, the EPA is replacing the reference to ASTM International’s E1527-05 standard practice with a reference to the updated ASTM E1527-13 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessments Process.”  The EPA has announced the changes will be effective beginning October 6, 2015.  ASTM International published the updated ASTM E1527-13 standard in November 2013 and it is currently the recognized industry standard to conduct all appropriate inquiries under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

A copy of the Federal Register including this announcement can be found here.

Due to the hazards associated with lead, the federal government banned the production of lead-based paint in 1978. However, millions of homes and other properties across the United States had already been impacted by its use in construction for decades.   Peeling and chipping paint and lead dust pose serious health hazards if not addressed.  Homes and businesses with pipes containing lead and/or lead-based solder also provide an avenue for lead to be released into drinking water, creating another potential route for exposure. The Small Business Administration (SBA) Standard Operating Procedures (SOPs) require lead assessments for “Special Use Facilities” constructed prior to 1980.  Special Use Facilities include childcare centers, nursery schools or residential facilities occupied by children. The SBA also recognizes residential care facilities constructed prior to 1980 as facilities having increased lead exposure risk.

The required lead assessments include a lead-based paint risk assessment and testing for lead in drinking water.  Lead risk assessments should be conducted based on guidelines established by the U.S. Department of Housing and Urban Development (HUD) as required by the Environmental Protection Agency (EPA).  The risk assessment focuses on the potential dust hazards that may result from peeling or damaged paint along both the exterior and interior of target facilities. Lead in soil along the exteriors of facilities should also be evaluated as a potential exposure risk.  Soil surrounding building structures can easily be contaminated with lead paint particulates, resulting from refinishing/sandblasting older exterior walls, which were formerly painted with lead-based paint. Soils contaminated with lead-based paint particulates can readily be transferred into building structures via tenant traffic. An inspection for lead-based paint, although not specifically required, includes surveying a facility and performing surface by surface testing of building components such as walls, doors and windows with an X-Ray Fluorescence analyzer (XRF).  Paint or other coatings with lead levels above an established threshold are considered lead-based paint and may require special training to manage.  Water samples should be collected from drinking water outlets and analyzed in a certified laboratory for lead.

SBA SOPs states, “Disbursement will not be authorized unless the risk for lead exposure to infants and small children has been sufficiently minimized.” Compliance with the SOPs will help ensure a smooth closing process while reducing the health risks to occupants at collateral properties.