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Accepting a property with known or potential environmental issues as collateral creates special challenges for the commercial lender. This could include properties with old tanks and old spills or leaks - even those that may long ago been have been cleaned up and closed by State agencies. Although more challenging, such properties can be addressed in a reasonable time frame, while minimizing the potential liabilities for the Lender.

Five key points the commercial Lender must keep in mind are:

In most States, laws protect Lenders from being financially responsible to investigate and cleanup contamination on a property they acquired through foreclosure. The exception is for tanks that remain on the property. The responsibility for investigations and cleanup of leaking tanks falls to the "owner" of the tank, which is typically the property owner. If a Lender comes to own tanks on a property due to foreclosure, the Lender may be responsible to remove the tanks in compliance with State and Federal requirements, and if leaking tanks are discovered, the Lender may be directly responsible for the remediation . Therefore, Lenders need to pay particular attention to tanks left on a property, especially if tanks have been abandoned in-place.

I N S I D E T H I S B R I E F I N G

1 Effect on Asset Value

2 What About Tanks?

3 How Long Does It Take To Get Liability Protection?

4 What Does A “Closed” Contamination Site Mean?

5 What If New Issues Are Found?

Lender Liability Protections are

available if Lender comes to own

contaminated property through foreclosure

However, this still impacts the value of the property because the next owner may need to complete

cleanup

2. If The Lender Ends Up Owning A Tank, They Own The Liabilities.

Regulatory Briefing Five Things Every Commercial Lender Should Know About Contaminated Properties

January 2017

For the Lender, the key risk to be managed is the potential that contamination on a property can have a material impact on the property value, and/or make the property less marketable in the event the Lender comes to own the property due to foreclosure. Old issues can directly affect the future use of a property. When old contamination issues are "closed" by agencies, it is common that restrictions are put in place that limit the future use of the property, or that require further cleanup if any redevelopment of the site is planned. This can reduce the value of the property to prospective Buyers.

1.Old Issues - Even "Closed" Issues Can Affect The Value Of The Asset.

© Caltha LLP 2017

Page 2 Regulatory Briefing

3. Plan Ahead For You And Your Borrower To Obtain Liability Protections. If you or your Borrower require liability relief letters, such as a no further action or no association letter, you will need to factor in the time required for these issues to be addressed. It is important to remember that agencies will issue these letters only if contamination is actually documented on the property, not simply based on the possibility that contamination could be present. Therefore, in some cases a site investigation needs to be conducted. It is not unusual for it to take 10-12 weeks to go through the full process.

4. "Closed" Or "No Further Action" Does Not Mean "Clean" When agencies issue a closure letter, no further action letter, or similar, they will often allow some contamination to remain on the property. The agency has simply concluded that the remaining contamination does not pose a significant risk to human health or the environment - under the existing conditions. These determinations are always "as-is, where-is" determinations. This does not mean that the agency has determined the site to be clean or that future uses or redevelopment of the property will not require further investigation and cleanup.

5. Unfortunately New Issues Can Be Discovered. One of the most challenging situations is when new contamination issues are uncovered, especially coming from neighboring properties. Leaking tanks and other sources of contamination are newly discovered each year, which can create additional issues which may need to be resolved between the Lender, the Borrower and the State agency. In addition, over time cleanup standards can change and new information on risks from contamination can "reopen" some closed issues.

One example is the current interest in "soil vapor encroachment"; many leaking tank sites that were closed prior to 2010 were not evaluated to determine if contaminants are migrating though soils and into nearby buildings. Although these sites may be closed, they can be reopened to address soil vapors. Therefore, evaluations of soil vapor intrusion have become increasingly common, especially since 2013.

Regulatory Briefings are published periodically by Caltha to highlight new or proposed environmental, health & safety regulations

Caltha LLP Phone: (763) 208-6430

Website: http://www.calthacompany.com

E-mail: info@calthacompany.com

Caltha LLP Services Caltha LLP provides expert due diligence support to Buyers, Sellers and Lenders. Click on the service area below for more information: Phase 1 Environmental Site Assessment Phase 2 Investigations Due Diligence Compliance Audits