Environmental Risk Management Trends and Best Practices for Lenders and Appraisers
description
Transcript of Environmental Risk Management Trends and Best Practices for Lenders and Appraisers
![Page 1: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/1.jpg)
![Page 2: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/2.jpg)
Environmental Risk Management Trends and Best Practices for Lenders
and Appraisers
Derek EzovskiOutsourced Risk Management Solutions LLC
Eric SchwartzAmegy Bank
July 24, 2013
![Page 3: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/3.jpg)
3
Agenda1. Current Trends
2. Regulatory Changes to the Environmental Due Diligence process
3. Commercial Issues
4. How Appraisals and Environmental Converge
5. Q & A
![Page 4: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/4.jpg)
Appraiser Poll
Question:
Are environmental issues typically not looked at because of ignorance or apathy?
Response:
We don’t know and we don’t care…
![Page 5: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/5.jpg)
How Appraisals and Environmental are similar for Lenders
• Borrowers and lenders don’t “love” them• They are both often considered commodities by
the user• Lots of people seem to think they cost too much• There are many less than competent providers• Report can differ based on who the user is• Often the last thing necessary for loan approval
![Page 6: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/6.jpg)
How Appraisals and Environmental are different for Lenders
• Appraisals are regulated• Environmental is often still considered
discretionary• Most regulators do not define the appropriate
level of environmental due diligence
![Page 7: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/7.jpg)
Risk Management Challenge
• “…data is old the minute that it is put in. Information is more available than it has ever been, but the ability to know what is pertinent and what is true is more challenging today.”
– Martha Cummings – head of Risk, Banco Santander
![Page 8: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/8.jpg)
Current Trends in Lending• Pressure from regulators
• Workouts/Foreclosures
• SBA Lending on the Rise
• Continuously trying to do more with less
• Lenders updating environmental/appraisal policies to conduct: – More due diligence…on a greater % of loans
![Page 9: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/9.jpg)
Current Status of Banking• Bank closures have been occurring since 2007, most of which had
unusually high commercial-mortgage exposure.
• 2006 - 0• 2007 – 4• 2008 – 25• 2009 – 140• 2010 – 157• 2011 – 92• 2012 - 53
• EBA Survey - 63% of lenders that had an examination over the last couple of years were asked about their
environmental policy.
![Page 10: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/10.jpg)
Former State of the Market
Page 10
![Page 11: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/11.jpg)
CRE Lending
• While increasing bank leniency and improved fundamentals have helped revive the CRE
market, the high level of maturing debt remains a significant barrier to recovery.
• However, lenders’ focus on permanent loan resolutions through pre-foreclosure sales will likely provide opportunities for investors to acquire overleveraged properties at attractive prices. - excerpt from Deloitte CRE Study
![Page 12: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/12.jpg)
![Page 13: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/13.jpg)
Banking Issues
• Credit & Trust Risk• Collateral Devaluation• Direct Liability, Loan origination to foreclosure• Reputational Risk (Brand and Image)• Operational & Enterprise Risk• Market & Interest Rate Risk• Restructurings and Foreclosures• Sustainable Development & Finance
![Page 14: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/14.jpg)
Major Changes EPA’s All Appropriate Inquiry (AAI)
ASTM 1527-05
![Page 15: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/15.jpg)
Page 15
EPA’s All Appropriate Inquiries (AAI) Rule
• For the first time, there was a federal statutory authority saying what is needed for a Phase I environmental site assessment (not just an ASTM standard)
• Created by EPA under Brownfields Amendments to CERCLA in 2002.
• Biggest impact of AAI on lenders were the changes to FDIC guidelines – but there are other impacts of AAI including…
![Page 16: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/16.jpg)
Key Changes to Phase I ESAs under AAI
1. Defined qualifications for environmental professionals (EPs);
2. Emphasized responsibilities of the “user” (person seeking liability protection);
3. New levels of Phase I research for consultant;
4. Shorter shelf life for Phase I reports.
![Page 17: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/17.jpg)
Impact of AAI: Who Qualifies as an Environmental Professional?
Professional/Educational Qualifications
Relevant
Experience
Professional engineer or professional geologist license/registration
3 years
Federal or state license/certification to perform environmental inquiries
3 years
B.A./B.S. degree or higher in any science or engineering field
5 years
No B.A./B.S. degree 10 years
Page 17
![Page 18: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/18.jpg)
Changes to Phase I’s - 2013
![Page 19: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/19.jpg)
Key Changes:
Simplified “Recognized Environmental Condition”
Definition
• More closely aligned with the EPA’s All Appropriate Inquiries (AAI)
“objective”
• de minimis extracted as a stand-alone definition
• Some instructional language added to historical and site visit sections
![Page 20: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/20.jpg)
• A Recognized Environmental Condition includes the presence of a release
• “de minimis” added to allow the Environmental Professional to immediately dismiss a minor spill
• “de minimis” used by some to describe contamination left in place and accepted by an agency
• E1527 Task Group (and EPA) concluded that the same term should not be used to describe both situations
Key Changes:
De minimis
![Page 21: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/21.jpg)
• Historical Recognized Environmental Condition definition originally developed pre-2002
– before the Bona Fide Prospective Purchaser landowner liability protection/continuing obligations requirements)
• Conditionally-closed sites currently handled four different ways
• Consistency needed
Key Changes:
Historical REC
![Page 22: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/22.jpg)
New: HREC Split
• Redefined Historical Recognized Environmental Condition– Past releases addressed to unrestricted residential use– Must consider current regulatory framework (rules change)– HRECs are not RECs
• Created new Controlled Recognized Environmental Condition term– Past releases addressed to non-residential standard, subject to some type of control– CRECs are RECs and must be included in the conclusions section of the report
• de minimis” CAN be used to describe an HREC
• de minimis” CAN NOT be used to describe a CREC
![Page 23: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/23.jpg)
Agency File/Records Reviews
• Some argued additional records review already required under current standard
• Some argued additional records beyond a database report are not required under current standard
• Clients thought it was already being done
• Consistency needed
• New language:– Should be conducted for property and adjoining properties– If not conducted, explain why– Alternate sources ok
![Page 24: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/24.jpg)
“User” Responsibilities
• The purpose of the “User Responsibilities” not previously explained– Grounded in “Factors the Courts will Consider” CERCLA amendments– Re-iterated in the 2002 amendments to CERCLA– 2002 amendments extended these responsibilities to include brownfield grantees
• Loan officers/realtors/brokers/etc., not typically seeking CERCLA liability protections or brownfields grant
• Some EPs asking the wrong people to the complete the “User” questionnaire
• Clarification needed
![Page 25: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/25.jpg)
• E1527 has been silent on vapor
• EPA recommended the task group not ignore the vapor pathway
• 2013 revision acknowledges the vapor pathway in “migration” definition
• Proposed language acknowledges soil vapor in “Activity and Use Limitations” definition
• Added discussion in Legal Appendix regarding vapor intrusion as it relates to CERCLA
• Clarifies “Indoor Air” non-scope
Vapor
![Page 26: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/26.jpg)
• Clarified “indoor air” exclusion– Added “unrelated to releases of hazardous substances or petroleum products
into the environment
• Revamped non-binding appendices– Revised Legal Appendix
– Revised Report Table of Contents and Format
– Developed a “Business Environmental Risk” Appendix to provide references and resource guidance
Non-Scope Considerationsand Appendices
![Page 27: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/27.jpg)
• Task group split about 50/50
• Ultimately agreed that:– Recommendations are not required by the standard.
– User should consider whether recommendations are desired.
– Recommendations are an additional service
Recommendations
![Page 28: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/28.jpg)
• Anticipate ASTM/EPA process and publication completed sometime in 2013
• Can re-ballot existing E1527-05 as-is if necessary
Publication Timing
![Page 29: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/29.jpg)
Regulatory Issues
![Page 30: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/30.jpg)
“New” FDIC Guidance
• FDIC updated its Guidelines in November 2006.• Other regulatory agencies also updated their guidelines:
– NCUA (effective May 2008)– OCC– OTS– Federal Reserve
• FDIC’s guidance set the standard; FDIC is regarded as a leader in terms of environmental requirements.
• FFIEC implemented environmental policy training/education for examiners across all agencies (October 2007, May and June 2008)
• A majority of banks have reconsidered and revised their environmental policies.
30
![Page 31: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/31.jpg)
NCUA Environmental Guidance
![Page 32: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/32.jpg)
FDIC Focus
– FDIC emphasizes process and consistency.
– Ensures proper document management and records retention;
– Document due diligence;
– Track changes to policy and consistent application of policy.
– Banks must avoid “participating in management” of the business and thereby assuming liability under CERCLA.
– Many attorneys recommend a Phase I ESA in the event of foreclosure.
![Page 33: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/33.jpg)
Small Business Administration Update
• SBA updated its Environmental Policy
• Effective August 1, 2008 and updated five times since (most recently in June 2012).
• Went from 1000 pages to 400 pages.
• Especially important for institutions with preferred status who do SBA underwriting.
• 7A and 504 lenders must adhere to this policy.
• Has become default policy for many lenders.
![Page 34: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/34.jpg)
SBA Environmental Due Diligence Policy
2 levels of Environmental Due Diligence for SBA1. Phase I – for high risk properties
• If property type/use matches the list of NAICS codes for Environmentally Sensitive Conditions
2. Records Search with Risk Assessment – low risk properties• Includes a search of the government databases (compliant with AAI);
• A search of historical use records, and;
• A risk assessment by an environmental professional determining whether the site is “High”, “Elevated” or “Low” risk
• New Gas Station/Dry Cleaner Requirements
34
![Page 35: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/35.jpg)
Sample SBA Policy Matrix
Page 35
Minimum Due Diligence Requirements
Real Estate Loan Type
<$150K $150K < $2M
Low Risk Loans Questionnaire RSRA/TSA
High Risk* Loans – NAICS Codes
Phase I Phase I
Gas Station Phase I + Evidence of UST Compliance
Phase I + Evidence of UST Compliance
Dry Cleaners Phase I Phase I
Dry Cleaner (older than 5 years old)
Phase I and Phase II Phase I and Phase II
Special Use Facilities (i.e. Daycare)
More specific requirements (i.e. Lead Paint Testing, Lead in
Drinking Water, etc)
More specific requirements (i.e. Lead Paint Testing, Lead in
Drinking Water, etc)
![Page 36: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/36.jpg)
Impact of Lender Size/ResourcesRegional & National Lenders
• Resources in place to understand environmental issues on the property
• Screen for lower-risk loans
• Have staff/internal resources to manage environmental risk
Credit Unions/Community Banks• No on-staff environmental expertise (typically)
• Not as sophisticated with regard to environmental issues or due diligence options available
• Often rely only on environmental questionnaires and/or proceed without accurate knowledge of environmental condition of property
• Rely on external guidance to dictate their practices
![Page 37: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/37.jpg)
Types of Due Diligence
• Environmental questionnaire
• Desktop due diligence
• Transaction Screens
• Phase I Environmental Site Assessments
• Phase II, III, Remediation, etc.
• Environmental insurance
![Page 38: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/38.jpg)
Policy Matrix Becoming Common
Page 38
Minimum Due Diligence Requirements
Real Estate Loan Type
<$250K $250K < $1M >$1M
Low Risk Loan - new
Questionnaire/Desktop Desktop/Transaction Screen
Phase I
High Risk* Loans - new
Phase I/Transaction Screen
Phase I/Transaction Screen
Phase I
Renewals -Low Risk
Questionnaire/Desktop Questionnaire/Desktop Questionnaire/Desktop
Renewals -High Risk
Questionnaire/Desktop Questionnaire/Desktop Desktop/Transaction Screen
Multi-Family Questionnaire/Desktop Desktop/Transaction Screen
Desktop/Transaction Screen
Outdated Phase I Questionnaire/Desktop Questionnaire/Desktop Desktop/Phase I update
![Page 39: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/39.jpg)
Common Residential Issues
• Lead Based Paint• Asbestos• Radon• Mold• Neighboring properties• Stormwater Runoff (for incomplete C&D)• Heating Oil Tanks• Meth Labs (emerging)
![Page 40: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/40.jpg)
Common Commercial Issues• UST’s
• Spills
• Storage/disposal of Hazardous Waste
• Superfund
• Vapor Intrusion
• Gas Stations
• Dry Cleaners
• Mold, lead, asbestos, etc.
• Stormwater Runoff
![Page 41: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/41.jpg)
Environmental Issues In Real Estate Valuation
–Contamination
–Green/Sustainability
![Page 42: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/42.jpg)
Environmental & Appraisals
Types of Contamination– Building Contamination
• E.g., asbestos, lead paint, radon, formaldehyde– Encapsulate, Enclosure, Removal
– Soil & Groundwater Contamination• E.g., hydrocarbons, solvents
– Phase I (initial review) through III (remediation)
![Page 43: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/43.jpg)
Environmental & Appraisals
Green/Sustainability
– A development that meets the needs of the present without compromising the ability of future generations to meet own needs
– Goal – merge the priorities of economic prosperity, environmental quality and social equity.
![Page 44: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/44.jpg)
NET ZERO HOUSE
![Page 45: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/45.jpg)
LEED PLATINUM 801 17TH, NW, DC
![Page 46: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/46.jpg)
Environmental & Appraisals
Green/Sustainability - Valuation Issues– Initial Costs are typically higher– Benefits both direct & indirect
• Direct – Reduced operating expenses – Reduced maintenance costs– Increased occupancy rates– Decreased tenant turnover– Possible increased rental rates
• Indirect – Appeal to tenants’ social conscience/image
– Is it too new to measure value premium???
![Page 47: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/47.jpg)
Examples of Environmental Concerns for Lenders
1. Foreclosures
2. “Boring” property that used to be auto shop…
3. Retail that used to be Gas Station
4. Removal of waste from a property by lender triggers possible action
![Page 48: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/48.jpg)
What the seller sees…
![Page 49: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/49.jpg)
What the buyer/lender should see…
![Page 50: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/50.jpg)
Summary • Lenders have unique processes and reasons for conducting due
diligence.
• Market pressures have reinforced long-term trend to increased due diligence.
• Regulators enforcing risk management due to a perceived over-concentration of risk regarding commercial real estate.
• Risk Management (Credit, Collateral, Environmental, etc.) is as critical as ever to lenders.
• Environmental and appraisals are both pieces of the puzzle that are being revised under the current environment.
![Page 52: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/52.jpg)
How to Learn More?
![Page 53: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/53.jpg)
Convergence of Appraisal and Environmental Services within
Financial Institutions
Eric Schwartz, MAI, SRAChief Appraiser
Appraisal Review DepartmentAmegy Bank of Texas
July 2013
Disclaimer: The opinions expressed are solely those of the author and are not necessarily the opinions of the management or employees of Amegy Bank.
July 24, 2013 53
![Page 54: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/54.jpg)
• Vendor Pool– Qualifications – Who is “qualified”?
• Professional Credentials• Geographic competency• Property competency
July 24, 2013 54
Management of Environmental Services
![Page 55: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/55.jpg)
• Database Management– In-house
• Pros-– Easily tailored to individual requirements– Use of existing resources– Customizable– Integration into other databases
July 24, 2013 55
Management of Environmental Services
![Page 56: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/56.jpg)
• Database Management– In-house (continued)
• Cons:– Reallocation of limited resources– Functional requirements may not be understood by staff– ASTM standards may seem “foreign” to appraisers/reviewers
July 24, 2013 56
Management of Environmental Services
![Page 57: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/57.jpg)
• On-line database management tools– Real Estate Management Information Service – RIMS
• Web based project management system– Procurement and tracking– Vendor management– Performance
• Pros:– Reasonably low cost– Automated credential monitoring– Secure report upload/download/storage
July 24, 2013 57
Management of Environmental Services
![Page 58: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/58.jpg)
• Features to look for –– Online service request– Ease of interface for vendor and management– Automated task and project tracking– Vendor Performance reports– Contact database management system– 24/7 accessibility
July 24, 2013 58
Management of Environmental Services
![Page 59: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/59.jpg)
• Synergies of task types– Appraisals and environmental reports must be tied to the same
project. Requires a hierarchical management system similar to:• Project
– Task» External » Internal
– Reporting» External» Internal
July 24, 2013 59
Management of Environmental Services
![Page 60: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/60.jpg)
• Environmental due diligence• Least stringent to most stringent
– ASTM Transaction Screen– Phase I “Lite” ESA– AAI/ASTM Phase I ESA
July 24, 2013 60
Management of Environmental Services
![Page 61: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/61.jpg)
• Bank personnel and appraisers should possess some level of competency with:– ASTM E-1527-05: Standard Practice for Environmental Site
Assessments: Phase I Environmental Site Assessment Process (known as ESA)
– ASTM E-1528-06: Standard Practice for Environmental Site Assessments: Transaction Screen Process
» Reference: www.astm.org
July 24, 2013 61
Management of Environmental Services
![Page 62: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/62.jpg)
• Process Management – Within the appraisal/real estate unit?
• Maintain database of appropriate service providers• Understand qualifications of service providers• Internal reviews of Transaction Screens, Phase I “Lite”
and Phase I– Recommendations may need to be outsourced to qualified
environmental experts/attorneys
July 24, 2013 62
Management of Environmental Services
![Page 63: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/63.jpg)
• The appraiser’s role– Eyes, ears and nose of the lender
• Recognize your limitations• You are likely not an environmental professional, but…• Tell us what you see/smell and hear (the contact say)• Why?.....................
July 24, 2013 63
Management of Environmental Services
![Page 64: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/64.jpg)
July 24, 2013 64
Management of Environmental Services
![Page 65: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/65.jpg)
• Some banks ask you to note if you observed any of the following:– Storage tanks– Collection Sites– Drums/containers and/or pesticides/chemicals– Asbestos– Miscellaneous
• Soil contamination• Water leaks• Water damage• Mold
July 24, 2013 65
Management of Environmental Services
![Page 66: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/66.jpg)
July 24, 2013 66
Management of Environmental Services
![Page 67: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/67.jpg)
• Exposure Draft of Proposed Revisions to Guide Note 6: Consideration of Hazardous Substances in the Appraisal Process (5/28/2013)
• Guide notes are not part of the standards of professional practice but instead provide guidance on how the standards may apply to specific issues.
July 24, 2013 67
Management of Environmental Services
![Page 68: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/68.jpg)
• Highlights of the proposed revisions to Guide Note 6– Explains the differences between the existence of
hazardous substance(s) and environmental contamination;
– Consideration of the Competency Rule and Scope of Work Rule
– Extraordinary assumptions and hypothetical conditions
– Definitions– Basis of proper valuation
July 24, 2013 68
Management of Environmental Services
![Page 69: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/69.jpg)
– Guide Note 6-Consideration of hazardous substances in the appraisal process is fundamental to the appraisal of real property.
– Need for special consideration to the impact of hazardous substance on the valuation of real property.
– Hazardous substances are considered environmental contamination when their concentrations exceed appropriate regulatory standards. (see definitions in GN6)
July 24, 2013 69
Management of Environmental Services
![Page 70: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/70.jpg)
• Guide Note 6- Competency• Competency rule in USPAP, Code of
Professional Practice and the International Valuation Standards (IVS)
• Most appraisers do not have the knowledge, training and expertise required to detect the presence of hazardous substances or to measure the quantities of such material.
July 24, 2013 70
Management of Environmental Services
![Page 71: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/71.jpg)
• Guide Note 6- Competency (continued)• If the assignment calls for the appraiser to
take into account most appraisers rely on other professionals for assistance.
• If the appraiser lacks the knowledge and expertise they have to disclose that lack of knowledge and experience prior to the acceptance of the assignment.
July 24, 2013 71
Management of Environmental Services
![Page 72: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/72.jpg)
• Guide Note 6 – Scope of Work• How and to what extent the appraisal problem
will address known or suspected hazardous materials that may impact the property.
• Assignment conditions cannot limit the scope of work such that the assignment results are not credible for the intended use.
• Cannot allow the client’s objectives or the intended use to cause assignment results to be biased.
July 24, 2013 72
Management of Environmental Services
![Page 73: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/73.jpg)
• Guide Note 6 – Extraordinary Assumptions and Hypothetical Conditions
• Extraordinary assumptions would be employed when you are relying on the work of others.
• Hypothetical conditions are used when the appraiser estimates the value of the property known to be contaminated in an unimpaired or uncontaminated condition.
July 24, 2013 73
![Page 74: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/74.jpg)
• Guide Note 6 – Basis for Property Valuation• Impaired value – The “as is” value of the
property• Unimpaired value – The market value
developed of the contaminated property employing a hypothetical condition the property is not contaminated
• Diminution of value – Effects of costs to remediate plus use costs plus risk (stigma too).
July 24, 2013 74
![Page 75: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/75.jpg)
• What’s the appraiser to do?– If you see it….report it.
• Call the client• Take photos and send them to the client• Write it up in your report• Calculate diminution in value if appropriate• Employ a hypothetical condition or extraordinary
assumption if appropriate• Ensure your results are credible
July 24, 2013 75
Management of Environmental Services
![Page 76: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/76.jpg)
July 24, 2013 76
Management of Environmental Services
• What steps would you take if you saw this during the property inspection?
![Page 77: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/77.jpg)
July 24, 2013 77
Management of Environmental Services
![Page 78: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/78.jpg)
• If FNMA, SBA, HUD and the bank are concerned about environmental conditions….shouldn’t you be?
• What is your client’s policy?– Do they require Transaction Screens based on
loan amounts?
July 24, 2013 78
Management of Environmental Services
![Page 79: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/79.jpg)
• Resources– Guide Note 6 – Exposure Draft is out (5/28/13)– Analyzing the Effects of Environmental
Contamination on Real Property (AI Seminar)– USPAP – Competency Rule; Advisory Opinion 9– SBA SOP 50 10 5(C) Subpart B, Chapter 4 for 7A
loans and Subpart C, Chapter 3 for 504 loans– NAICS Codes of Environmentally sensitive
industries
July 24, 2013 79
Management of Environmental Services
![Page 80: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/80.jpg)
EBA 2010 www.envirobank.org
![Page 81: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/81.jpg)
How it all started ...
• Lender liability issues in the early 1990s • Environmental regulations• Bankers wanted a place to share best
practices and to learn additional skills
EBA 2010 www.envirobank.org
![Page 82: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/82.jpg)
Environmental Risk ManagementIssues
• Bank Risk Tolerance• Business Environmental Risk• Distressed Assets&
Restructurings• Loan modifications/renewals• Workouts, Foreclosure,
Bankruptcy• Climate Change Risk • Bank Failures
EBA 2010 www.envirobank.org
![Page 83: Environmental Risk Management Trends and Best Practices for Lenders and Appraisers](https://reader035.fdocuments.in/reader035/viewer/2022062423/568146f2550346895db42715/html5/thumbnails/83.jpg)
Training
• Environmental credit risk management • Sustainable Financing (green buildings) • Brownfield Redevelopment • Sustainable development/carbon risk
underwriting• Management issues• 2 Conferences per Year
EBA 2010 www.envirobank.org