How to Buy and Read Environmental Assessments
Lack of sophistication about environmental reports can make realty and development lenders more vulnerable to liability suits on asbestos and other environmental hazards.
If a building winds up in default, the lender assumes responsibility for its asbestos and other environmental problems.
In some cases, the cost of a cleanup has taken priority over the bank's mortgage; such "superliens" have been an enormous financial headache for bankers.
When cleanups have cost more than the buildings' value, lenders have been left with unpaid debts.
No wonder so many banks are in trouble!
Environmental Due Diligence
To protect yourself, you must contract for a thorough environmental due diligence report.
But if you do not know what to look for in an environmental assessment, you may wind up in effect buying a ticket for the Titanic.
You need to know what questions to ask, how much a cleanup might cost, how thorough the assessment is, whose interests it represents, what was looked for, and what was ignored.
A building's owner, whether borrower or lender, cannot be expected to know every chemical that is present in the air, the walls, and the foundation. It is neither physically nor financially possible to learn of every potential hazard.
Even if you had the most sophisticated tools and an unlimited supply of cash to find problems, how could you know if a minute quantity of some substance posed a threat?
Furthermore, today's apparently benign chemical may well be identified tomorrow as a hazardous waste.
However, a banker who insists on a sophisticated environmental assessment and perhaps even a cleanup will obviously have a better chance to avoid such problems.
An environmental assessment can and should become your first line of protection.
A preliminary investigation, known as a phase 1, is designed to assess the possibility of environmental hazards. Such an assessment can be narrow or broad in scope, depending on site specifics and the concerns of the client.
Once it has been decided that an environmental assessment will be performed, guidelines must be established.
At the start, establish the scope of the work to be done. Industrial, residential, and commercial buildings have different requirements. Industrial ones, for example, may have been storage sites for chemicals.
The final report should contain a detailed description of the procedures that were used for collecting data. There should also be a list of all the regulatory agencies consulted and the records examined.
Don't accept so-called boiler-plate assessments - ever. The job should include:
* A review of all regulatory records.
* A review of a site's history.
* A site inspection.
* Detailed personal interviews with people familiar with the site, who may include owners, neighbors, and on-site personnel.
* Identification of potentially hazardous or toxic substances.
When to Test
For the most part, a phase 1 assessment of a property is like a doctor's taking a history and making an initial examination of a patient.
Most testing the consultant might recommend is reserved for phase 2.
The exception is asbestos.
If the presence of materials containing asbestos is suspected, whoever orders the overall assessment should specify that it include taking of samples during phase 1.
If tests on those samples warrant, the phase 1 report should recommend a particular method of remediation, explain that recommendation, and give a guideline for costs, in time and money. (There are, after all, many variations and degrees of remediation. A report that simply advocates across-the-board removal of asbestos should immediately be suspect.)
Other problems that may be found during phase 1 include the storage of hazardous materials, among them solid wastes. It may become evident that soil samplings, testing of underground storage tanks, and tests for randon and PCBs are necessary. The phase 1 report should recommend specific types of tests and explain why they are needed, how long they would take, what they would cost, and so on.
During the phase 1 investigation, the banker should ask for an interim report. A verbal consultation may be satisfactory, since all the information will ultimately appear in the written report. If the consultant finds potential for problems, the scope of the work can be adjusted accordingly.
Ms. Segal is president and chief executive of Silver Seagull Environmental Corp., an environmental-assessemnt company-based in Brooklyn, N.Y.