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Environmental Risk Management Trends and Best Practices for Lenders and Appraisers. Derek Ezovski Outsourced Risk Management Solutions LLC Eric Schwartz Amegy Bank July 24, 2013. Agenda . Current Trends Regulatory Changes to the Environmental Due Diligence process Commercial Issues

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environmental risk management trends and best practices for lenders and appraisers

Environmental Risk Management Trends and Best Practices for Lenders and Appraisers

Derek Ezovski

Outsourced Risk Management Solutions LLC

Eric Schwartz

Amegy Bank

July 24, 2013

  • Current Trends
  • Regulatory Changes to the Environmental Due Diligence process
  • Commercial Issues
  • How Appraisals and Environmental Converge
  • Q & A
appraiser poll
Appraiser Poll


Are environmental issues typically not looked at because of ignorance or apathy?


We don’t know and we don’t care…

how appraisals and environmental are similar for lenders
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
how appraisals and environmental are different for lenders
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
risk management challenge
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
current trends in lending
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
current status of banking
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.


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
banking issues
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
epa s all appropriate inquiries aai rule
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 15

key changes to phase i esas under aai
Key Changes to Phase I ESAs under AAI
  • Defined qualifications for environmental professionals (EPs);
  • Emphasized responsibilities of the “user” (person seeking liability protection);
  • New levels of Phase I research for consultant;
  • Shorter shelf life for Phase I reports.
key changes simplified recognized environmental condition definition
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

key changes de minimis
Key Changes: De minimis
  • 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 historical rec
Key Changes:Historical REC
  • 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
new hrec split
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
agency file records reviews
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
user responsibilities
“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
  • 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
non scope considerations and appendices
Non-Scope Considerationsand Appendices
  • 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
  • Task group split about 50/50
  • Ultimately agreed that:
    • Recommendations are not required by the standard.
    • Usershould consider whether recommendations are desired. 
    • Recommendations are an additional service
publication timing
Publication Timing
  • Anticipate ASTM/EPA process and publication completed sometime in 2013
  • Can re-ballot existing E1527-05 as-is if necessary
new fdic guidance
“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.
fdic focus
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.

small business administration update
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.

sba environmental due diligence policy
SBA Environmental Due Diligence Policy


2 levels of Environmental Due Diligence for SBA

    • Phase I – for high risk properties
      • If property type/use matches the list of NAICS codes for Environmentally Sensitive Conditions
    • 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
impact of lender size resources
Impact of Lender Size/Resources

Regional & 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
types of due diligence
Types of Due Diligence
  • Environmental questionnaire
  • Desktop due diligence
  • Transaction Screens
  • Phase I Environmental Site Assessments
  • Phase II, III, Remediation, etc.
  • Environmental insurance
common residential issues
Common Residential Issues
  • Lead Based Paint
  • Asbestos
  • Radon
  • Mold
  • Neighboring properties
  • Stormwater Runoff (for incomplete C&D)
  • Heating Oil Tanks
  • Meth Labs (emerging)
common commercial issues
Common Commercial Issues
  • UST’s
  • Spills
  • Storage/disposal of Hazardous Waste
  • Superfund
  • Vapor Intrusion
  • Gas Stations
  • Dry Cleaners
  • Mold, lead, asbestos, etc.
  • Stormwater Runoff
Environmental Issues In Real Estate Valuation
  • Contamination
  • Green/Sustainability
environmental appraisals
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)
environmental appraisals1
Environmental & Appraisals


  • 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.
environmental appraisals2
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???
examples of environmental concerns for lenders
Examples of Environmental Concerns for Lenders


“Boring” property that used to be auto shop…

Retail that used to be Gas Station

Removal of waste from a property by lender triggers possible action

  • 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.
contact information derek ezovski 860 838 5388 dezovski@orms com
Contact Information:Derek
convergence of appraisal and environmental services within financial institutions

Convergence of Appraisal and Environmental Services within Financial Institutions

Eric Schwartz, MAI, SRA

Chief Appraiser

Appraisal Review Department

Amegy 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

management of environmental services
Management of Environmental Services
  • Vendor Pool
    • Qualifications – Who is “qualified”?
      • Professional Credentials
      • Geographic competency
      • Property competency

July 24, 2013

management of environmental services1
Management of Environmental Services
  • Database Management
    • In-house
      • Pros-
        • Easily tailored to individual requirements
        • Use of existing resources
        • Customizable
        • Integration into other databases

July 24, 2013

management of environmental services2
Management of Environmental Services
  • 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

management of environmental services3
Management of Environmental Services
  • 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

management of environmental services4
Management of Environmental Services
  • 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

management of environmental services5
Management of Environmental Services
  • 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

management of environmental services6
Management of Environmental Services
  • Environmental due diligence
  • Least stringent to most stringent
    • ASTM Transaction Screen
    • Phase I “Lite” ESA
    • AAI/ASTM Phase I ESA

July 24, 2013

management of environmental services7
Management of Environmental Services
  • 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:

July 24, 2013

management of environmental services8
Management of Environmental Services
  • 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

management of environmental services9
Management of Environmental Services
  • 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

management of environmental services11
Management of Environmental Services
  • 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

management of environmental services13
Management of Environmental Services
  • 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

management of environmental services14
Management of Environmental Services
  • 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

management of environmental services15
Management of Environmental Services
  • 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

management of environmental services16
Management of Environmental Services
  • 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

management of environmental services17
Management of Environmental Services
  • 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

management of environmental services18
Management of Environmental Services
  • 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


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


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

management of environmental services19
Management of Environmental Services
  • 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

management of environmental services20
Management of Environmental Services
  • What steps would you take if you saw this during the property inspection?

July 24, 2013

management of environmental services22
Management of Environmental Services
  • 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

management of environmental services23
Management of Environmental Services
  • 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

how it all started
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

environmental risk management issues
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

  • Environmental credit risk management
  • Sustainable Financing (green buildings)
  • Brownfield Redevelopment
  • Sustainable development/carbon risk underwriting
  • Management issues
  • 2 Conferences per Year

EBA 2010