Foreclosure Phase One ESA

In January, my firm, Partner Engineering and Science, was engaged to do more Phase I Environmental Site Assessments (Phase I ESAs) on foreclosures than on new deals for commercial properties. Bad sign. Also as sign that purveyors of Phase I ESAs must learn to hone our product to meet a new customer need.

Regardless of whether a Phase I ESA supports a new loan of a foreclosure our primary responsibility is to identify recognized environmental conditions. That is constant. However, when doing Phase I ESAs for foreclosure we are asked to dig a little deeper and look further down the road to identify sources of liability.

When writing new loans the lender is mostly concerned with the quality of the collateral and can afford to pay less attention to environmental compliance issues if they do not have the potential to affect collateral value. As the bank has no direct ties to the tenants/occupants of the property, remote risks to tenant health are not worth exploring. When taking title to an asset, lenders often feel that all such risks must be understood and fully mitigated.

In a Phase I ESA is support of foreclosure, the lender will generally take title of the property, and once this happens, they also assume management of the property. With management comes more direct exposure to environmental liabilities associated with the property. The once distant concerns are now the direct responsibility of the bank. As such, it would be in the lender’s best interest to be more cautious with any environmental concerns, such as mold, asbestos, vapor intrusion, and hazardous waste storage.

In the world of SBA Lenders, foreclosures are governed by a different SBA Standard Operating Procedure—SOP 50-51. The SBA’s SOP for new loans and foreclosures is different. Note that the SBA expects to revise its SOP 50-51 in 2009 and the standard will likely move closer to the requirements of the SBA’s new loan SOP 50-10.

The Phase I ESA purveyor must ensure that the appropriate measures are taken to protect the interest of the lender as the liabilities for the lender are much greater during foreclosures.