West Chester, PA - November 5, 2008 - Is your business considering a commercial real estate sale or purchase?  If so, Brickhouse Environmental has observed an important trend in commercial lending that may impact those plans.    Lenders are carefully evaluating their commercial mortgage portfolios in an attempt to develop more accurate estimates of the fair value of the underlying assets.  In some cases, they are realizing that the easy credit markets of the past few years has resulted in their making commercial real estate loans without having conducted robust environmental due diligence studies. 
 
For example, while most lenders required Phase I Environmental Assessments as part of the loan approval process, the results and conclusions of those studies may have been discounted because of the apparent strong credit of the parties involved.   In some cases, the environmental consultant may have identified environmental issues.  However, Phase II assessments, while recommended, were not performed because the parties were able to post some other collateral to help offset the risk associated with poorly defined environmental liabilities.  
 
Fast forward to today. The forward looking view of the economy is weak; the value of the collateral is in question; and the bank's capital ratios are being scrutinized by regulators and shareholders alike.  Many of those commercial mortgages don't look quite so healthy.
 
Our local observations seem to be part of a larger nationwide trend. The October Federal Reserve Senior Loan Officer survey showed that about 85% of domestic banks reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms. About 75% of domestic banks said they tightened standards on such loans to small firms.
 
Naturally, the due diligence pendulum is swinging rapidly in the other direction.  Lenders are reviewing their internal due diligence requirements.  They are looking at the quality of the due diligence reports they have been accepting, and they are beginning to implement new standards to better protect the value of the loans.  Applications for new commercial mortgages are coming under more careful evaluation, not just in terms of the creditworthiness of the borrower, but in terms of the environmental risk associated with the underlying asset.
 
In practical terms, this means that the scope, costs, and timeframe required for the environmental investigation needed to obtain a commercial loan is increasing.  Previously, a $2,000 to $3,000 Phase I Environmental Assessment may have sufficed to obtain a mortgage on commercial property.  Now, in order to make the lender comfortable, a more invasive and costly $5,000 to $15,000 soil or groundwater investigation may be needed in order to ensure that the underground storage tank removed five years ago didn't result in some undiscovered soil or groundwater contamination.
 
The bottom line is that the financial crisis that we have been hearing so much about is filtering down to businesses in ways you may not have considered.  If you are considering the sale or purchase of commercial real estate, you may want to budget additional time and money in order to prove that the properties values won't be impaired by poorly defined or undiscovered environmental liabilities.
 
About Brickhouse Environmental- Brickhouse Environmental is a high quality full service environmental consulting company that has been servicing the commercial real estate market for over 30 years.  If you would like to learn more, please visit our website at www.brickhouse-environmental.com, or call and speak to one of our experienced environmental professionals.