Practical Considerations for Commercial Lenders Regarding Environmental Liability

Spring 2019

Publication| Real Estate Services| Environmental

In the context of making a loan secured by commercialreal estate, a lender is right to be concerned aboutenvironmental contamination at that property, and howit may impact potential liability for cleanup and thevalue of the property as collateral. According to a surveyby Environmental Data Resources (“EDR”), one out ofevery ten banks involved in commercial real estate loans hasexperienced losses due to environmental issues over a one yearperiod, with average losses of $1.2 million per loan. Thissurvey found that the smallest banks experienced the highestoccurrence of environmental losses, with lenders with assetsless than $1 billion experiencing almost 75 percent of loanlosses due to environmental contamination. EDR concludedthat one potential reason the smallest banks suffered the largestloan losses due to environmental contamination was becausethose banks performed less comprehensive environmental duediligence, and because smaller borrowers tended to walk awayfrom contaminated sites because cleanup costs often exceededtheir equity in the property.

This article reviews the specific factors on which liabilityfor contaminated real property is based, as well as availabledefenses and exemptions, so lenders can spot transactionalrisks throughout the life of a loan, and make informed lendingdecisions.

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