As 2011 draws to a close, PVC is celebrating its first anniversary. Thank you to all of my clients, past and present, for your continued support and for helping to make year one a success. I wish you and your family all the best the holiday season has to offer and warm wishes for a prosperous New Year.
No end-of-year message would be complete, however, without a “best of” list. After 20 years in the industry, I’ve noticed several common concerns that clients routinely seek help on. Here, then, are my top five Q&As of 2011:
1. Is this existing Phase I report too old?
That depends. Under any circumstance, a 20 year-old Phase I is going to be inadequate, but a report less than 10 years old might not be.
First, determining that the report was completed pursuant to industry standards and with a standard of care is a must. Second, some streamlined investigation can determine if anything of significance has changed at the property since the Phase I was completed (e.g., high-risk building occupants, new tanks, spills in the area, etc.). Means of answering these questions include updated borrower questionnaires and Database surveys. If nothing of consequence has changed, a new Phase I may be deemed unnecessary; the incurred fees of the streamlined investigation are a fraction of the cost of a new Phase I.
Note that some situations require a new Phase I regardless of mitigating factors (e.g., certain SBA 504 deals).
2. Should I rely upon a report (e.g., Phase I) that wasn’t prepared for the bank?
Maybe. First, determine if the report is of adequate quality and completed by a reputable firm. If so, ask the firm for a reliance letter and to be named as an additional insured on their insurance policy.
Lastly, see Question 1 above for information about the need for additional investigation.
3. If an RAO has recently been filed, why should I need anything else?
A Response Action Outcome (RAO) is used to close an open spill condition with the Massachusetts DEP. The key word here is condition…not site.
Example: An RAO is filed at a gas station for a spill of waste oil that was released from a failed underground storage tank. The tank is removed, contaminated soil is excavated, and the condition is closed.
Note, however, that none of the testing associated with this single condition has any relationship to other potential “recognized environmental conditions” on the property (e.g., gasoline tanks and pumps, hydraulic lifts and floor drains in the garage, or a fuel oil UST on the other side of the building). An RAO is a good sign that certain adverse conditions have been closed, but it’s only a piece of the puzzle.
4. Should I still be concerned about asbestos? It’s not as topical as it was in the 1990s.
To a certain degree…yes. However, one of the reasons asbestos isn’t front and center anymore is that so many building owners addressed the presence of asbestos during the renovation boom from the mid-1990s through mid-2000s.
Additionally, the FDIC had what some would consider an overemphasis on asbestos conditions in the early 1990s, when they were heavily involved in the New England commercial real estate market.
Some environmental firms still conduct cursory asbestos investigations (visual only) as part of a Phase I, while others clearly state that it is not part of the scope. Lenders should have their asbestos radar up on redevelopment deals or when considering foreclosure.
5. How detrimental is the existence of an AUL if I need to foreclose?
On some deals, an Activity and Use Limitation (AUL) will have little if any negative impact. On others, it can be more significant. For example, an AUL that simply limits access to subsurface soils at an industrial facility (in an industrial-zoned neighborhood) is unlikely to have any negative impact on value.
However, an AUL that prohibits residential development at a former suburban mill complex (in a mixed-use and mixed-zoned area) could limit the number of potential buyers and thus the resale value of the property, especially if it was otherwise an ideal candidate for redevelopment into an apartment complex.