The Commercial Real Estate Informational Portal

Welcome to

Welcome to the Commercial Real Estate Expert Blog! A host of industry leading real estate professionals, lawyers, and consultants providing the latest in real estate relevant news and advice.

Phase Is on Foreclosures (2 Comments)

Entry by JoeDerhake

For environmental consultants, new loan due diligence has given way to pre-foreclosure due diligence.  As professionals, it’s our responsibility to examine the services and recommendations we provide to our clients and adjust these to our customer’s needs.  To understand the fundamental differences between the new loan Phase I ESA and a pre-foreclosure Phase I ESA, we must first understand how the client’s needs have changed.

When real estate is considered as collateral for a new loan, lenders are more concerned about the quality of the collateral and less interested in making sure the borrower is managing environmental liabilities appropriately.  Tenant health issues may not be a priority as the lender has no direct relationship with the tenant/occupant of the asset.

When a lender takes title after a foreclosure, these distant tenant issues become the lender’s direct responsibility.  Deep pockets are lightning rods for lawsuits, so once the lender takes title they become the deep pocket.

The pre-foreclosure Phase I should account for non-ASTM E1527 scope issues such as asbestos, lead, radon, mold, vapor intrusion, and regulatory compliance issues.  I’m not advocating full surveys for each of these issues on every foreclosure especially since costs minimization is important to lenders.  Rather, the Environmental Professional (EP) must have the acumen to advise the client on whether the liabilities exist and when more than a standard Phase I is needed.

The pre-foreclosure Phase I should also be more cautious with historical concerns, especially when grey area issues arise.  Under normal transactions, the lender can write-off the potential risks in these cases based on outside factors.  When the borrower is removed from the equation, these risks fall solely on the lender.

Another obstacle to prepare for is site access issues.  The site contacts during a foreclosure may be uncooperative and can at times be completely recalcitrant.  Majority of the site contacts provided are the borrowers that for whatever reason defaulted on the loan, so this response isn’t much of a surprise.  A recalcitrant site contact may cause multiple site visits causing consultants to staff locally.

Difficult and sometimes challenging, pre-foreclosure Phase Is are becoming more and more a reality given today’s economic climate.  Because the liabilities for the lender are greater, more is asked of the EP especially when lenders are acting more conservatively.  As such, the EP must ensure that the proper measures are taken to protect the interests of the client.

How does your due diligence requirements vary when working in a foreclose verse a new loan?