Environmental Risk Management Updates and Best Practices for

Environmental Risk Management Updates and Best Practices for

Environmental Risk Management Updates and Best Practices for Lenders and Appraisers Derek Ezovski AI Connect July 28, 2015 1 Agenda

Technical Updates Regulatory Updates Lender Issues Mike to discuss the overall lender process

Dereks Background Environmental Engineer/MBA Formerly worked for Fleet Bank, Marsh, EDR Most of my career has been as a risk management advisor to non-environmental professionals (lending, insurance, risk

management) Current Trends in Lending/Financing of Commercial Real Estate Pressure from regulators Newer ASTM Standards for Phase Is & Transaction Screens

New UST Guidelines OCC Guidelines SBA Lending Lenders updating environmental/appraisal policies

More levels/forms of due diligence than ever before on more loans Seems to be a big push in the CRE market again 4 5 Appraiser Poll

Question: Are environmental issues typically not looked at because of ignorance or apathy? Response: We dont know and we dont care Borrowers/Loan Officers Reaction when you tell them they need to do environmental The Reaction when they find out there are Environmental Problems Risk Management Challenge

Information is more available than it has ever been, but the ability to know what is pertinent and what is true is more challenging today. Martha Cummings head of Risk, Banco Santander Similarities between Environmental and Appraisal

Lenders often hate us both; Get done at the end of a loan (once all the important stuff is already done and usually at the same time as the closing date is being scheduled) Somewhat outside the deal Checkbox mentality Environmental Desktop Screens similar to Evaluations..

Yetits critical for collateral valuation Challenges that Appraisers Face Pressure on bank appraisal/environmental departments Cost to cure calculations Not all appraisers are competent to assess environmental impacts (might have to call one in) Bidding process appraisers would need to know this upfront because the as-is impaired is a different kind of assignment Potential project delay/cost increase

Key Changes to Phase Is 2013 New: HREC Redefined Historical Recognized Environmental Condition Past releases addressed to unrestricted residential use Must consider current regulatory framework (rules change) HRECs are not RECs Created new Controlled Recognized Environmental Condition term

Past releases addressed to non-residential standard, subject to some type of control CRECs are RECs and must be included in the conclusions section of the report Agency File/Records Reviews Clients thought it was already being done Consistency needed New language: Should be conducted for property and adjoining properties

If not conducted, explain why Alternate sources ok Vapor E1527 has been silent on vapor EPA recommended the task group not ignore the vapor pathway 2013 revision acknowledges the vapor pathway in migration definition Clarifies Indoor Air non-scope Vapor Intrusion The Trouble with Dry Cleaners

Recommendations Task group split about 50/50 Ultimately agreed that: Recommendations are not required by the standard. User should consider whether recommendations are desired.

Recommendations are an additional service New UST Regulations (Highlights) EPA recently released an updated revision to the UST rules in the Federal Register (40 CFR 280 & 281) Major points

Release detection required more often Emergency Generators Airports Operator Training required More inspections required Owners must be notified if fuel type changes

(<10% of ethanol, 20% Biodiesel) Regulators vs. Lenders Regulators Are Talking About Environmental http://www.occ.gov/publications/ publications-by-type/comptrollers-handbook/ cre.pdf New FDIC Guidance

FDIC updated its Guidelines in November 2006. NCUA updated their guidelines and issued guidance in May 2008. FDICs guidance set the standard; FDIC is regarded as a leader in terms of environmental requirements. FFIEC implemented environmental policy training/education for examiners across all agencies (October 2007, May and June 2008) A majority of lenders have reconsidered and revised

their environmental policies. OCC Updates Develop policies and procedures that reflect potential environmental risks associated with lending Provide for receipt and evaluation of environmental reports prior to making final commitment. Ensure that persons responsible for evaluating environmental risk possess relevant knowledge, skill and competence. A banks policy should reflect the EPAs AAI rule. OCC Updates

The policy should include: Analysis of current laws and due diligence requirements; A level of due diligence internally required on all real estate transactions Risk thresholds based on property type, use and loan amount for determining when and what type of due diligence is used; Varying due diligence methods depending on the type of loan, the loan amount and the risk category, including questionnaire or screening, site visit, government records review, historical records review, etc.

OCC Updates The policy should include: The potential for impacts from asbestos and lead based paint; Appraisal requirements for disclosing and taking into consideration any environmental risk factors; Criteria for evaluating environmental risk factors and costs in the loan approval process; Criteria for evaluating environmental risk factors and costs in the loan approval process; Environmental documentation for commitment letters, reps and warranty, etc.

A means of evaluating potential environmental liabilities for foreclosures. Small Business Administration Update SBA updated its Environmental Policy Effective August 1, 2008 and updated six times since (most recently in June 2014). Especially important for institutions with preferred status who do SBA underwriting. 7A and 504 lenders must adhere to this policy. Has become default policy for many lenders.

SBA Environmental Due Diligence Policy 2 levels of Environmental Due Diligence for SBA 1. Phase I for high risk properties If property type/use matches the list of NAICS codes for Environmentally Sensitive Conditions 2. Records Search with Risk Assessment low risk properties

Includes a search of the government databases (compliant with AAI); A search of historical use records, and; A risk assessment by an environmental professional determining whether the site is High, Elevated or Low risk Sample SBA Policy Matrix

Minimum Due Diligence Requirements Real Estate Loan Type <$150K $150K < $5MM Questionnaire RSRA/TSA Phase I

Phase I Phase I + Evidence of UST Compliance Phase I + Evidence of UST Compliance Phase I Phase I Dry Cleaner (older than 5

years old) Phase I and Phase II Phase I and Phase II Special Use Facilities (i.e. Daycare) More specific requirements (i.e. Lead Paint Testing, Lead in Drinking Water, etc) More specific requirements (i.e.

Lead Paint Testing, Lead in Drinking Water, etc) Low Risk Loans High Risk* Loans NAICS Codes Gas Station Dry Cleaners Impact of Lender Size/Resources Regional & National Lenders Resources in place to understand environmental issues on the

property Screen for lower-risk loans Have staff/internal resources to manage environmental risk However, often very are in silos from appraisal Credit Unions/Community Banks No on-staff environmental expertise (typically) Not as sophisticated with regard to environmental issues or due diligence options available

Often rely only on environmental questionnaires and/or proceed without accurate knowledge of environmental condition of property Rely on external guidance to dictate their practices Environmental Due Diligence Options

Environmental questionnaire (EQ) Desktop due diligence Transaction Screen Assessment (TSA) Phase I Environmental Site Assessments Phase II, III, Remediation, etc.

Storm water Issues Sustainability/Green Issues Environmental Insurance Others Common Commercial Issues USTs

Fuel Oil Tanks Spills Storage/disposal of Hazardous Waste Vapor Intrusion

Gas Stations Dry Cleaners Mold, lead, asbestos, radon, etc. Storm water Runoff Superfund Environmental Issues on CRE August 5, 2014 33

Different Perspectives on Phase I Seller Phase I Buyer Phase I What the Seller Sees What the Buyer/Lender Should See Management of Environmental Services Whats the appraiser to do? If you see it.report it.

Call the client/email the client Take photos and send them to the client Write it up in your report/Put it in the letter of transmittal Calculate diminution in value if appropriate Employ a hypothetical condition or extraordinary assumption if appropriate Ensure your results are credible 37 Summary

Lenders have unique processes and reasons for conducting due diligence. Market pressures have reinforced long-term trend to increased due diligence. Regulators enforcing risk management due to a perceived

over-concentration of risk regarding commercial real estate. Risk Management (Credit, Collateral, Environmental, etc.) is as critical as ever to lenders. Best Practices/Takeaways Create and follow environmental policies and procedures; Use commitment fees from borrowers to cover the costs of the due diligence;

At a minimum, obtain an environmental questionnaire and some form of government environmental records for each commercial transaction; Different types of properties require different levels of due diligence; Start the process as early as possible to allow enough time for evaluation and follow-up work that may be required. Work with a company or expert that has experience in this area and consider outsourcing the review process similar to other functions that are not core-competencies of the bank . Environmental Banker Association (EBA)

Great organization to help with environmental policies, procedures, and implementation Member of the Board of Governors Happy to help with any questions Upcoming Meetings January 2016 Long Beach, CA

June 2016 Fort Worth, TX Its Risk Management How Much and How Long?? ORMS Overview ORMS was founded with credit unions, community and regional banks as its primary focus; ORMS serves as natural extension of our lender clients; ORMS helps lenders develop and execute environmental policies and procedures; ORMS helps lenders focus on the low level due diligence needs;

ORMS helps lenders review and make decisions on existing environmental reports and information; ORMS helps lenders do more risk management in a cost-effective manner by outsourcing the environmental risk management process. ORMS helps with the 5 Steps of Risk Management Identify Risk Assess Risk Develop Controls or Risk Strategy Implement policy/controls Evaluate policy/controls Product and Services

ORMS EnviroFlash current data review and opinion designed for low risk loans ORMS Desktop Review (RSRA) research + opinion current data + historical ORMS Property File Review 3rd Party Reviews/Phase I Updates Assistance with selection of environmental consultants on behalf of clients Policy Development and Evaluation Training Programs

How ORMS is Different ORMS doesnt do Phase Is/Phase IIs (although we can help you manage through the process). ORMS is set up to be a business advisor with our clients, not a data driven product. We evaluate each situation and help select the most effective solution. ORMS makes sense of the issues so that you can make a informed risk-based decisions. ORMS provides services nationwide.

How ORMS is Different ORMS provides solutions/strategies to resolve environmental issues; We do more research: Property cards Internet Search We utilize environmental risk management professionals We provide follow up help Our program includes data + so much more. WE CAN WORK WITH YOU AND YOUR BORROWERS TO HELP FIGURE OUT SOLUTIONS

TO THE ISSUES Questions?? Derek Ezovski Outsourced Risk Management Solutions [email protected] 877.407.ORMS 860.838.5388

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