The Green Property Condition Assessment (PCA), also known as a Green Physical Needs Assessment, offers the user advice on how to optimally run the asset that he or she is buying.  A Green Property Condition Assessment essentially combines a standard PCA and an Energy Audit to provide in-depth information on the building condition and increasing operational efficiency.

A standard PCA provides the user with Immediate Repairs and Replacement Reserves over a given term.  All of these costs are provided under two assumptions:  1) replace like with like; 2) replace equipment at the end of its useful life.  The Green PCA takes a much more real world approach—replace equipment when it is costing more to run than makes sense and replace equipment with new equipment that will maximize return on investment (ROI).  The “green” could just as easily symbolize more money as the environment. 

My sister company, Partner Energy, does hundreds of energy audits per year on commercial buildings.   The energy audits identify Energy Efficiency Measures (EEMs).  Many of these EEMs amount to replacing old, but functioning, HVAC equipment with newer higher SEER rated HVAC equipment (Seasonal Energy Efficiency Ratio).  These capital events have a very measurable ROI.  The Energy Audit might identify 6 to 18 EEMs and we will rank these in terms of ROI.  Most clients consider ROIs greater than 30% an obvious opportunity, and it is not uncommon for EEMs to result in such high ROIs.

What is a Green PCA?

Combining the energy audit with the PCA has obvious advantages.  We can provide more real world advice on the equipment replacement.  Replace the equipment either: 1) when it reaches the end of its useful life; or 2) when the energy saving associated with replacing the equipment meets the client’s ROI requirement.  

There are other financial incentives for conducting Green PCAs or implementing the recommended EEMs, such as incentives from the SBA, FHA and Fannie Mae. 

Small Business Administration (SBA) 504 Loan Program: Qualify for More by Going Green

Borrowers can increase their SBA 504 loan amount by up to $4 million by implementing projects that meet the SBA 504 new public policy goals of reducing energy consumption by 10% or generating renewable energy.  Click here for more info on the SBA energy program.

FHA/HUD and Fannie Mae: Green Refinance Plus

Green Refinance Plus is a program between HUD’s Federal Housing Administration (FHA) and Fannie Mae to allow owners of existing affordable rental housing properties to refinance into new mortgages that include funding for energy- and water-saving upgrades, along with other needed property renovations.  Under this program, borrowers must obtain a Green Physical Needs Assessment to identify property improvements that will reduce energy use and operating costs.

Additionally, many cities and states are requiring that building owners disclose their building’s energy efficiency or consumption. Click here to see the cities and states with energy disclosure requirements. This energy disclosure information can be identified during a Green PCA and/or an energy benchmarking study.

Making your Property Condition Assessment or Physical Needs Assessment a Green one really just makes dollars and sense.

In September 2010 the Small Business Jobs Act was passed into law.  Yesterday the rules for the refinance mechanism within the 504 loan program were announced.  This program will provide a significant tool for small business owners to refinance existing 504 program eligible debt.  Some key points from the new 504 Refi rules:

Eligibility

• Three sources of funding for the refinance project:
  • Third Party Lender (at least 50%)
  • SBA (not more than 40%)
  • Borrower (at least 10%)
• Most (at least 85%) of loan being refinanced must be used for 504 eligible purposes.
  • Borrower must certify that the debt meets the eligible use of proceeds standard.
  • Third Party Lender must also certify that it has no evidence of debt not meeting the use of proceeds standard.
• Loans being refinanced must be scheduled to mature on or before 12/31/2012.
• Loans being refinanced must be current.
• Small business must have been in business for two years prior to the submission of the application.
• Third Party loan and 504 loan cannot exceed 90% of the value of the fixed assets securing the loan.
  • The loan may never exceed the outstanding principal balance being refinanced.

Restrictions

• No refinancing of loans with an existing federal guaranty.
  • 7(a) loan
  • USDA loan
• No refinancing of debt to an Associate of the Borrower, SBIC, or New Market Ventures Capital Company.
• No refinancing of existing 504 projects.
• No refinancing where the creditor is in a position to sustain a loss causing a shift to SBA on all or a portion of a potential loss from an existing debt.
• All loans must be funded by the sale of the debenture within six (6) months of approval.
• The CDC must report any delinquency to SBA after loan approval but before loan funding.

As you can see the new regulations are specific in what types of loans can be refinanced and the requirements for both the lender and borrower.  This is a very exciting program from the SBA and should be a significant source of projects through 2012.

Phase 1 Environmental Site Assessment

 The Phase 1 Environmental Site Assessment is a report that illuminates the environmental liability associated with a real estate asset.   A Phase 1 Environmental Site Assessment (ESA) is required by lenders during the financing of commercial real estate.   The environmental consultant providing the Phase 1 ESA is required to inspect the property, review historical records on the property and research records available at government agencies.   This information is evaluated and an opinion is made as to whether past or present activities may have caused contamination of the soil or groundwater at the subject property.

In the event that the Phase 1 ESA uncovers a recognized environmental condition (REC)*, the environmental consultant will typically recommend a Phase 2 Environmental Site Assessment, which involves invasive soil or groundwater testing.   The geologist or engineer designing the Phase 2 Environmental Testing scope of work will rely on the Phase 1 Environmental Report to understand Areas of Concern and Chemicals of Concern. 

ASTM E1527-05

In 1993 the American Society for Testing and Materials (ASTM) published the first ASTM Standard: ASTM E1527-93 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.   Since then the standard has been updated several times, with the most recent update occurring on in 2005.  

The ASTM E1527-05 standard outlines the purpose and use of the Phase 1 ESA as well as the scope of work to be conducted, including: records review (historical and governmental records); site reconnaissance (inspection of the property and adjacent sites); interviews (with owners and occupants and local government officials); evaluation and report preparation.

Certain items are considered out of the scope of work for an ASTM Phase 1 ESA, such as asbestos, lead-based-paint (LBP), mold and radon; however, many consultants take these potential concerns into consideration during the Phase 1 process (discussed further below).

US EPA’s All Appropriate Inquiry Standard (AAI)

Federal law requires purchasers of real estate to do “all appropriate inquiry” to qualify for the innocent landowner defense under CERCLA*.  Ordering a third party Phase 1 Environmental Site Assessment has traditionally been the method by which landowners qualify for the all appropriate inquiry standard.  In 2005, the EPA published its final rule on requirements for all appropriate inquiry.

To a large extent the all appropriate inquiry (AAI) standard for Phase 1 Environmental Site Assessments mimicked the existing ASTM E1527-00 Standard.   The new AAI Standard for Phase 1 Environmental Site Assessments required a few new scope items, including:

1)      A more stringent definition of who qualifies as an Environmental Professional*, the person under which an AAI Phase 1 ESA must be conducted

2)      The AAI Phase 1 ESA allows either the user or the environmental professional perform a search for environmental liens (however the updated ASMT E1527-05 standard designates this as the user’s responsibility)

3)      Mandatory interviews, some of which were not previously mandatory

4)      Documentation of data gaps or uncertainties     

To a large extent the industry quickly adapted the AAI ruling for Phase 1 ESAs, which went into effect on November 1, 2006.   In 2005 the ASTM E1527 standard updated to include the major elements of the final AAI ruling.   The one exception is the environmental lien search requirement.  Many lenders have developed a “business risk” scope of work for Phase 1 Environmental Site Assessments that exclude the environmental lien search, as the environmental lien search is considered by some to not be worth the extra cost.

Today the EPA recognizes two ASTM standards as being AAI compliant: the ASTM 1527-05 Standard, as well as ASTM E2247-08 Standard, discussed below.

ASTM E2247-08

An additional ASTM standard for conducting Phase 1 ESAs was created in 2008 specifically for large tracts of primarily undeveloped land: ASTM E2247-08 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property.  The standard is very similar to the E1527-05 standard, with a few key exceptions: the approach to site reconnaissance (makes provisions for limited inspection/access), the regulatory records search (additional records requirements) and historical sources (fewer “standard” sources).

Other Custom Scopes of Work for Phase 1 ESAs

Most buyers must do the Phase 1 Environmental Study for a loan and many lenders and government agencies have developed custom scopes for work for Phase 1 Environmental Site Assessments.   A few examples are below:

SBA Phase 1 Environmental Site Assessments—SBA SOP 5010

The US Small Business Association (SBA) requires an environmental investigation of all commercial real estate loans, and has specific requirements for what kind of investigation is required and when. The requirements are based on a property’s environmental risk (determined by its NAICS Code*).  Some of the main particular requirements are: 

-          Environmental Questionnaires and/or Records Search with Risk Assessments (RSRAs) are required on “lower risk” sites (no NAICS Code match)

-          “Higher risk” sites (with NAICS Code matches), must do a Phase 1 to start, except for “Car Wash Only Facilities”, which must do an Environmental Transaction Screen to start

-          Requirements for gas stations: Phase 1 and equipment testing compliance review

-          Requirements for dry cleaners: Phase 1, and automatic Phase 2 if the facility is 5 years or older

-          Requirements for pre-1980 day cares/schools/residential care facilities: lead-based-paint risk assessment and lead testing in drinking water

-          Phase 2s on gas stations and dry cleaners must be conducted by an environmental professional with a current professional geologist’s or engineer’s license

-          Require the consultant to grant the SBA reliance on the reports

The SBA generally recognizes the ASTM Standards for conducting Phase 1 ESAs.  Each October the SBA releases any new changes or updates to its standard operating procedures.

Fannie Mae Phase 1 Environmental Site Assessments

Fannie Mae has specific requirements for Phase 1 ESAs on its loans, which are detailed in the Environmental Hazard Management Procedures and Sections 209-310 of the Fannie Mae Guide. Fannie Mae generally recognizes the ASTM Standards for Phase 1s with some modifications, the main components of which are:

-          Site inspection is required to cover 10% of a property’s units, and 50% of any down units

-          Requires testing for asbestos, lead and radon in some circumstances:

• Considers building materials from 1979 or earlier as suspect asbestos-containing-materials (ACM). If consultants suspect ACM, they can either test for asbestos or recommend creating an ACM Operations & Maintenance (O&M) Plan (and assume that ACM is present)
• Requires testing for LBP on buildings constructed before 1978 unless it gives the lender a waiver, in which case LBP must be assumed present and an LBP O&M Plan be implemented
• Requires testing for lead in drinking water when a property has a private, non-municipal water supply
• Leaves radon sampling to the discretion of the consultant; however, it is prudent to conduct at least minimal sampling at properties in Zone 1 radon areas

Freddie Mac Phase 1 Environmental Site Assessments

Freddie Mac environmental assessments are conducted in accordance with the Freddie Mac Multifamily Seller/Servicer Guide and Chapter 14, “Environmental Requirements.”  Freddie Mac generally recognizes the ASTM Standards for Phase 1s with some modifications, the main components of which are:

-          Site inspection is required to cover 10% of a property’s units, and 50% of any down units

-          Check for State Super Lien Law, which would allow the state to place a first priority lien on a property in response to contamination

-          Requires testing for asbestos, lead-based-paint (LBP), mold and radon in some circumstances:

• Freddie leaves it to the consultant to determine the potential for ACM; however, prefers that consultants do not use a cutoff date for determining ACM potential. If consultants suspect ACM, they can either test for asbestos or recommend creating an ACM O&M Plan (and assume that ACM is present)
• Requires that borrowers either test for LBP on buildings constructed before 1978, or assume LBP is present and implement an LBP O&M Plan
• Requires testing for lead in drinking water when a property has a private, non-municipal water supply
• Requires that consultants investigate for mold-related hazards
• Requires radon sampling in Zone 1 radon areas: 10% of the lowest level units, or 1 sample per building, whichever is greater

HUD Phase 1 Environmental Site Assessments

HUD requires ASTM Phase 1 ESAs with additional Environmental Reviews (HUD Form 4128), which go well beyond the ASTM requirements. The 4128 Form covers a range of potential impacts of a project including:

-          Zoning

-          Air quality

-          Coastal barrier resources

-          Floodplains/wetlands and other natural features

-          Historic preservation

-          Noise abatement

-          Hazardous operations/toxic and radioactive chemicals (determined by the Phase 1)

-          A range of other concerns regarding the site location, suitability, stability, social/municipal services and transportation

If a potential issue is identified in the 4128 checklist, then further study may be required, such as formal Noise Surveys for properties in potential high-noise zones (an initial noise analysis is required on all projects). 

During the environmental review process, HUD also goes beyond ASTM by requiring lead paint surveys or Operations & Maintenance Plans (based on the age of the property), and vapor encroachment screenings (for all projects).

Foreclosure Phase 1 Environmental Site Assessments

Phase 1 ESAs done during pre-foreclosure process are similar to normal Phase 1s; however, strict adherence to the AAI/ASTM requirements is critical in order to maintain the secured creditor exemption or innocent landowner defense under CERCLA.  This includes conducting an Environmental Lien and/or Chain of Title search, which many lenders forego at loan origination. Some other concerns to consider:

-          Site access can be difficult due to recalcitrant site contacts

-          Asbestos, lead paint, radon, mold and other non-scope issues must be managed in order to maintain an assets’ safety and value

-          Erosion control at unfinished construction sites and other compliance concerns (not covered by AAI/ASTM)

-          A lender should evaluate any potential environmental liability and cleanup costs in comparison with the asset value when deciding whether to foreclose

Common Scope Additions to our Phase 1 ESAs

ASTM E1527-2005 recognizes several common additional scope items.  In our practice of environmental due diligence, we find that a lot of our clients are interested in investigation other environmental concerns under the cover of the Phase 1 Environmental Site Assessment.   The most commons additional scope items are:

1)      Asbestos Survey:  an asbestos survey is particularly important to buyers of old buildings or buyers who plan to demolish the buildings;

2)      Lead Paint Surveys: important in residential settings, for schools, and when a building is going to be demolished;

3)      Environmental Compliance Audits:  clients buying complex industrial operations are concerned about recognized environmental conditions as defined by ASTM E1527 as well as material non-compliant practices.    A Phase 1 ESA/Compliance Audit is the best way to understand all of the environmental liabilities associated with a manufacturing facility.

4)      Mold Survey: common for residential and hotels users of our service;

5)      Indoor Air Quality Survey:  common for high end office buyers and hotel buyers;

6)      Phase 2 Environmental Site Assessment:  clients buying property with known environmental concerns may want to do the Phase 1 & 2 Environmental concurrently.

For any questions on Phase 1 Environmental Site Assessments feel free to contact me or our Nicole Moore, our Technical Director of Environmental Due Diligence at 800-801-4923. 

Definitions

*A REC is defined as “the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, ground water, or surface water of the property.”

*CERCLA stands for Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Superfund law

*Environmental Professional:  Someone who possesses sufficient specific education, training and experience necessary to exercise professional judgment to develop opinions and conclusions regarding conditions indicative of releases or threatened releases of hazardous substances (or petroleum products) on, at, in or to a property. An EP must have:

-          A state or tribal issued certification or license and 3 years of relevant full-time experience; or

-          A Baccalaureate degree or higher in science or engineering and 5 years of relevant full-time work experience; or

-          10 years of relevant full-time work experience.

*NAICS Code: North American Industry Classification System. The SBA maintains a list of NAICS Codes of environmentally sensitive industries.

The SBA published their latest update their environmental policy in SOP 50 10 5 (C).    The SOP revisions take effect on October 1^st, 2010 we should all bone up on a few of the new elements of SOP 5010 5 (C) (pages 199 – 206 & 310 – 317).

One now technical, but important point, is that the Reliance Letter has had a revision and the Reliance Letter from SOP 5010 5 (B) will no longer be accepted by the SBA.   Lenders should make sure their environmental consultant knows of the new Reliance Letter before ordering an SBA Phase I Environmental Site Assessment.   

Overall the Environmental Requirement changes in this latest SOP were minor and summarized below.

• For loans less than $150,000 where the Environmental Questionnaire comes back showing further investigation is required, you may now have a Records Search with Risk Assessment (RSRA) performed instead of having to go to a Transaction Screen Report.  SBA believed that this was more with the natural progression of reporting and therefore made this change.
• When reviewing the NAICS Codes of Environmentally Sensitive Industries the code 8123 LAUNDRY & DRY CLEANING SERVICES it now will state if dry cleaning operations have ever existed on-site.  Prior to the revision it stated if dry cleaning operations on site.
• In Section f) Mitigating Factors that SBA will rely upon to disburse before completion of remediation or monitoring, for section f) titled Escrow Account the new SOP clarifies two issues.  The first being that the money put into the escrow account can’t come from funds from the SBA loan itself.  The second clarification answers the question if the money in the escrow account can be used for the actual remediation itself or if it needs to stay in the escrow account until the remediation is completed.  Yes, it can be used for the remediation costs—similar to a construction loan.
• In Section g) Groundwater Contamination Originating from Another Site, the revision to the SOP eliminates the sentence, “and lender can demonstrate that the contamination has not caused significant damage to the collateral value and marketability of the Property”.   They made this change understanding the lender really couldn’t demonstrate or comply with this requirement.
• The Reliance Letter in appendix 3 has been modified by adding the words “as it impacts the property” at the end of the last sentence in regards to a Phase II Environmental Site Assessment.
• Special Use Facilities (Section H), when a Phase II is required for a dry cleaners in operation for more than five years the Phase II must be conducted by an independent Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience.
• Appendix 5: Requirements Pertaining to Gas Station Loans, Phase I’s no longer need to be conducted by an Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience.  It can now be conducted by an Environmental Professional meeting the requirements as outlined in Appendix 2: Definitions. 
• Appendix 5: Requirements Pertaining to Gas Station Loans, Phase II’s must be conducted by an Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience.

Partner Engineering and Science has a SBA Division dedicated to assisting lenders in understanding SBA’s Environmental Requirements and providing Environmental Reports nationwide for 7a and 504 loans.  Gary Reynolds is our SBA Expert and works closely with many lenders, CDC’s, and attorneys nationwide.

Keywords

SBA Phase I Environmental Site Assessment, SOP 50 10 5 (C), SBA Environmental Policy, Phase 1 ESA

Entry by: Gary Reynolds

So what report do you need for your 504 or 7a loan?  This depends on the current and past businesses that occupied your property.  SBA has created a NAICS codes list of “Environmentally Sensitive Industries”.  The type and depth of an environmental investigation to be performed varies with the risks of contamination.  The higher the risk for contamination, the more in-depth the study that will be required. This list can be found at www.partneresi.com under the “Resources” tab.   Once there simply click on SBA NAICS Code List.  If the property type is not listed (and the loan value is over $150,000) you can begin your environmental investigation with a RSRA (Records Search with Risk Assessment) as shown in the SBA SOP Decision Tree (Flowchart) found on Partner’s “Resources” page.  If the loan amount is under $150,000 (and the property type is not found on the NAICS list) then the lender can fill out an EQ (Environmental Questionnaire) with the owner/occupant of the property and submit to SBA.

When you order a Records Search with Risk Assessment (RSRA), the lender is required to do a site visit and fill out an EQ (Environmental Questionnaire) with the owner/occupant and submit with the RSRA report to SBA.  For a copy of an Environmental Questionnaire, that meets SBA requirements, you can find one on Partner’s “Resources” page. ( Please note that the SBA Reliance Letter is not to accompany a RSRA report.)

When a RSRA report comes back with High Risk, SBA requires that the lender must then proceed to a Phase I.
For property types that are listed on the NAICS list, SBA dictates that the lender/borrower must begin with a Phase I Environmental Site Assessment (ESA).  The Phase I must be AAI compliant (ASTM 1527-05) and must be accompanied by the SBA Reliance Letter.

In Appendix 2 of SOP 5010 5 (B) you will find a great resource, “Definitions” (available on our “Resources” page).  Here, you will find various definitions including those regarding an Environmental Professional, various report types, information needed in an Environmental Questionnaire, etc.

Appendix 5 of SOP 5010 5 (B) “Requirements Pertaining to Gas Station Loans” (available on “Resources” page) shows that all Gas Stations must begin with a Phase I ESA with the additional requirement that it be conducted by an independent Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience. This has been a common screen out when the Environmental Professional isn’t a PE or PG – and something that anyone engaging an Environmental Firm should be asking about.

A great source of information for understanding a Phase I can be found on Partner’s “Resources” page under the heading, “A Guide to Understanding SBA Environmental Due Diligence for Commercial Properties”.  This “booklet” can be ordered from Partner at no cost, or you can view it online.

The SBA Environmental Appeals committee Environmentalappeals@sba.gov is a great resource for those that have situations that are “abnormal”.  They can provide clarification and rulings for those types of properties.  Another valuable resource is Stephen Reynolds, Chief Environmental Engineer for SBA in Sacramento.  Steve Reynolds can be reached at Stephen.Reynolds@sba.gov and is a valuable resource for CDC’s and various other lenders.

The assumption of an SBA loan would fall under SOP 50 50 4A (“Loan Servicing”).  There is no requirement in SOP 50 50 4A for an environmental investigation when an existing SBA loan is being assumed.  You as a lender may have your own environmental requirements apart from what SBA requires.

As I mentioned in my first posting, I took a survey of the Environmental Bankers Association Membership as to what is and is not a recognized environmental condition.  The results were presented at the Environmental Bankers Association Conference in Utah on June 9th.   The survey results are posted on the EBA’s Website and my website (www.partneresi.com).