Illinois recently became the first state to pass legislation that limits lender liability concerning the cleanup of contaminated industrial sites.
The change is likely to spur increased financing of businesses secured by such properties, commonly known as brownfields. It is hoped that the change will boost redevelopment projects in urban markets, according to bankers and observers.
"It's a large step in the right direction." said John H. Hurwith, chairman and chief executive of $130 million-asset First Commercial Bank of Chicago, which has a number of petroleum-related contaminated sites in its market.
Brownfields are an issue across the nation and have many implications for lenders considering financing new development on them. Somewhere between 130,000 and 450,000 brownfield sites exist nationwide, with potential cleanup costs of $650 billion, according to the General Accounting Office.
The Chicago area has Illinois' largest concentration of brownfields, with about 2,000 sites totaling more than 1,500 acres, according to the Chicago Brownfields Forum, a coalition that has developed model lending policies and procedures for financing such properties.
Last month, the Illinois General Assembly addressed the liability issue, passing legislation that replaces strict joint and several liability, in which an owner, including a secured creditor, could be held liable for all cleanup costs regardless of contribution to the contamination. The new legislation provides for proportionate-share liability, in which parties are responsible only for the contamination they have caused.
Illinois Gov. Jim Edgar is expected to sign the bill, which is a compromise from earlier legislation, sources said.
"Illinois is at the forefront for brownfields development," said James P. O'Brien, an attorney in the Chicago office of Chapman & Cutler, who has been active in the Chicago Brownfields Forum.
The change in liability will help borrowers and lenders who want to take advantage of state environmental cleanup programs while allaying concerns about excessive liability.
Financial institutions "will have an immediate immeasurable enhancement of their real estate portfolios, will be able to better characterize and quantify potential environmental issues during underwriting, and will be able to use more creative approaches relative to foreclosure," wrote Randy A. Muller, vice president of environmental services at Bank of America- Illinois, Chicago, in a statement praising the new legislation.
Mr. Muller, who also heads the Illinois Bankers Association's environmental issues committee, said in an interview that the change also is likely to help small banks - which often don't have the staffing for underwriting such loans - do more brownfield lending.
"I think the intent is to get more smaller and mid-size banks into the loans," he said.
For one, $130 million-asset Maywood-Proviso State Bank will explore more projects in its largely older industrial market, said Chuck Race, senior vice president and senior lending officer. He said proportionate-share liability will make all lenders "less gun-shy" about securing commercial loans with real estate properties.