Entry by JoeDerhake

Entry

The Environmental Bankers Association (EBA) concluded its first meeting of the year in South Carolina last week (Jan 11-14).  While Charleston was a beautiful venue, it was bitter sweet as we all said good-bye to Jeff and Tacy Telego.  Jeff and Tacy founded the EBA and served as co-executive directors for 21 years.  The program packed with great panels, open forums and social activities provided some great new insights and plenty of food for thought. A few interesting ideas and observations:

Legal Questions Surrounding SBA Loan Guarantees 
The U.S. Small Business Association’s Eric C. Benderson (Associate General Counsel for Litigation and Claims) used his presentation to illustrate some driving issues facing the SBA’s lending programs.  He described a case study in which SBA was guaranteed a loan on a CAFO facility.  The suit alleged that SBA failed to conduct a NEPA survey as required under Federal law, but the court rejected both the plaintiff’s argument, as well as the argument made by SBA that guaranteeing a loan doesn’t implicate NEPA’s review requirements.  The court enjoined SBA from making any payment on their loan guaranty, pending compliance with NEPA.

Legal Developments Affecting Lenders
Continuing the Legal discussion (during a panel titled: Legal Developments and Case Law Affecting Financial Institutions and Business Transactions moderated by Jeff Telego), lenders laid out a number of key loan provisions for cases where contamination is present.

The discussion included suggestions for indemnities, deep-pocketed guarantees and insurance, as well as requirements for the borrower to perform or backstop remediation if not completed by the responsible party.  There should be reserves for known and contingent liabilities (usually 125% – 150% of estimated costs) and indemnities and escrows should be assignable, and assigned to the lender. Lenders determine the level of remediation required and should retain the right to perform or cause further investigations. They must also receive notice of any material changes in conditions, which should represent an event of default. In such cases, a lender may require additional equity increased reserves additional receptacle lateral and other remedies. Insurance is also sometimes used where powers or sponsors are unwilling to endorse indemnity.

Comments About the High Volatility Commercial Real Estate Rules
The HVCRE Rule that was passed collectively by the OCC, FDIC and FRB late last year sets new capital standards for lenders, and includes a proposed risk-weighting element (setting higher capital requirements when lending on riskier assets).  EBA panelists discussed these new rules, stating that they require the use of “as completed” value for determining classification of the property and borrower’s equity contributions.  As a result, increasing fees and extended turnaround times have become a concern in the industry.  Speakers reemphasized that the results of the environmental review should be shared with the appraiser, and that even historical recognized environmental conditions can affect appraised value.  Because of this, appraisers must judge the impact of environmental conditions on market research, not opinion.

On the second day, EBA panelists discussed how Environmental Compliance Tools should be implemented as Part of the Due Diligence Process.  The session highlighted that the risk of release is not always the most significant risk associated with real estate transactions and that consideration of environmental health and safety compliance with applicable regulations could significantly impact the borrower’s ability to repay the debt.  The discussion focused on things the environmental assessor should look for during an inspection in order to be able to preemptively alert the client to compliance issues that could cause problems with a loan (for example, identifying permits a facility may require because permit fines can impact borrower’s ability to repay).  What about “explosive risks”? Should issues identified during an inspection that could indicate a bigger risk be included in a report if it is outside the client’s scope, or is it best to notify the client verbally? Another interesting question posed: at what point does an environmental assessment become a compliance report?

Finally – a thought that we’ve seen echoed in discussions with our clients is the rise of corporate responsibility and sustainability: Interest in responsible investing practices continues to grow. Stakeholder pressure is increasingly leading investors towards energy-efficient, retrofitted or otherwise sustainable properties. Assets under responsible management grew by nearly a third last year alone, and the number of investors using environmental, social and governance information increased by close to 25% last year.

Keywords

EBA, SBA, HVCRE Rule, Environmental Compliance, Sustainable Building