Commercial lenders often receive dated environmental reports on proposed collateral real estate. Often these reports are two or more years old and prepared for the borrower or a third party. Lenders often question whether a new Phase I environmental site assessment (ESA) is necessary or if an older Phase I will satisfy the bank’s due-diligence needs.
The industry standard for Phase I ESAs, ASTM E 1527-13, indicates that a Phase I requires an update after 6 months, and lenders are generally required to adhere to that timeline for loans involving the Small Business Administration (SBA). The primary objective of the ASTM standard is to ensure purchasers of real estate qualify for legal protection from environmental liability. However, in a pre-lending situation for non-SBA loans, banks are generally focused on determining the environmental risk to collateral value.
Although the 6-month shelf life may be appropriate for real estate acquisitions, SBA loans and foreclosures, lenders have generally extended the shelf life of Phase I ESAs. Even in the conservative Commercial -Backed Mortgage Securities (CMBS) market, a one-year shelf life is commonly used by CMBS underwriters and rating agencies.
How long can the shelf life be extended for commercial real estate transactions? The answer depends on the bank’s internal policies, the collateral property type as well as transaction-specific information such as loan size.
Many smaller banks do not have internal or outsourced environmental risk managers. For these banks, the optimal policy is generally more stringent to ensure consistency throughout the bank. A one-year shelf life may be an appropriate guideline for many transactions within these smaller institutions.
Banks that maintain internal or outsourced environmental risk managers can prudently allow more flexibility on dated reports. An environmental risk manager may utilize available online services and other current property information to update some information in an older Phase I. Upon acquiring this updated information, the environmental risk manager can use his or her independent, professional judgment to determine whether the existing assessment is sufficient.
While many banks adhere to a one- or two-year shelf life for Phase I ESAs, the decision is ultimately one best addressed by the individual bank during the development of its internal environmental risk policy.