Q: When auditing commercial real estate, I come across the environmental screening, however, I don’t see where the borrower completes an environmental questionnaire. Is it alright that the borrowers are not being asked to complete an environmental questionnaire?
A: Yes, if that is what your environmental policy dictates. Some institutions skip the environmental questionnaire in lieu of moving to the second step of environmental due diligence, which is to obtain an environmental screening from an independent 3rd party.
If you make SBA loans secured by CRE, the SBA environmental questionnaire will be required on all loans on low-risk properties, and for SBA loans <$250K on low-risk properties the questionnaire may be the only requirement; however, above $250K this will be the preliminary screening tool. The questionnaire, on SBA or non-SBA CRE loans, really is intended to be a preliminary screening tool. Most of its value is gathering information about the historical use of the property or nearby environmental issues that would signal the need for further environmental due diligence.
As the example in the session demonstrated, when a borrower is purchasing the property, they often have little knowledge of these issues, thus moving to step 2, a 3rd party environmental assessment is the most common and best course of action. Based on the assessment, then the lender can determine if additional environmental due diligence - a phase I or II- is warranted.
Q: Also, if I understand correctly all commercial real estate loans should have a Hazardous Waste Indemnification signed by the borrower regardless of the current status of the environmental testing, is that correct?
A: Yes. Obtaining a Hazardous Waste Indemnification signed by the borrower and dated is a best practice in CRE loan documentation as it requires the borrower to commit to cover the cost of any potential environmental clean-up or environmental liabilities associated with the property. A Hazardous Waste Indemnification is not to be used in lieu of appropriate environmental due diligence. Any known risks that could affect the property's value need to be rectified prior to loan closing. The Hazardous Waste Indemnification is used to protect against the costs associated with unknown hazardous waste issues found on the property post-closing.
Course overview: Commercial Real Estate Loan Documentation