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This article considers the basic components of environmental risk management, the various factors considered by most lenders, and the information needed to facilitate the closing of the transaction. Although loans may be secured through various means, the author focuses on transactions secured by real estate or real property.
Conducting environmental due diligence--whether a Phase I environmental site assessment or Phase II subsurface study--is the mainstay of the environmental consulting industry. Much of this due diligence is conducted on behalf of either a lender or a purchaser and, in almost every instance, is done to obtain a financing decision. However, consultants generally have little understanding of how the lending industry uses the data they collect. What they do see is the variability in how each lender applies policy, procedures, and use of the consultant's work product. Lenders can ensure receiving the information they need to fulfill their due diligence requirements by making their wants known to the consultant.
Due Diligence Ensures Collateral
Each institution administers loan policy a bit differently, although with the same goal of due diligence. Generally, due diligence is required when a loan is supported by real estate or real property. This way, in the event of a default and subsequent foreclosure, the institution can sell the real estate or property and repay the debt. In such instances, the real estate or real property becomes the collateral. Loans also may be secured by personal guarantees, accounts receivable outstandings, inventory, marketable securities, and other non-real-estate or non-real property, and these may even be cross-collateralized with real estate or real property.
Let's take a closer look at the lending process and the varied approach by some lenders, followed by some suggested "do's" and "don'ts."
Varied Due Diligence Objectives
Each party in a real estate loan transaction has its own reason for conducting due diligence, but all share the objective of executing the transaction:
* Lenders need to be informed of the borrowers' known and potential liabilities to …