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Post-Recession: A New Phase For Environmental Assessments?

How did the recession change environmental due diligence?

The economy is not out of the woods yet, but the seemingly-long slow recovery has led to some new trends in the Phase 1 Environmental Site Assessment Due Diligence world. Phase 1 ESAs post-recession are seeing "tightening" on several fronts—risk tolerance, turnaround time, pricing—as well as some different players in the market, leading to a new landscape for environmental due diligence.

Environmental Risk Tolerance

During the recession, many banks were burned by fast and loose underwriting, as well as lean environmental due diligence policies. Many found themselves asking, "How did this contaminated site end up in our portfolio?" and "What do we do with this risk now?". As a result, many portfolio lenders are tightening their due diligence policies and have a much lower risk tolerance. Agency lenders have also revised and tightened their Phase 1 Environmental scope of work, and the re-emerging CMBS market is taking a second look at their policies and procedures. We have seen this firsthand manifested as higher scrutiny of particular environmental concerns, such as asbestos and vapor intrusion.

In particular, risk tolerance during the foreclosure process is extremely tight as lenders are requiring new due diligence be completed to help avoid liability not just from CERCLA/Superfund, but from a range of new issues (or rather, issues new to lenders) such as stormwater management. We are still seeing a lot of pre-foreclosure Phase 1 ESAs of raw land that was slated for residential development. Foreclosure on these sites requires attention to whether the lender could be subject to fines for uncontrolled erosion/sediment run-off.

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