Lender Environmental Protection
Hosted by UCPM, Inc.Presented by:
Bart JarmanJohn Farinacci
Discussion Topics• Environmental Due Diligence • Lender Environmental Protection– Benefits– Lender Coverage– Portfolio Process
• Alternatives to LE Portfolio• Q & A
Environmental Due Diligence
• Commercial Lenders Require Environmental Due Diligence
• Needed to preserve certain immunities granted by CERCLA
• Lenders create their own due diligence protocol
• Attempt to Minimize Risk Through:
Environmental Due Diligence – Loan Underwriting Guidelines– Transaction Screens/Environmental Database
Reports– Phase I ESAs– Environmental Questionnaires– Environmental Policy & Procedures– Financial Collateral (Indemnification, Escrow
Funds)
Two Major Concerns Remain with Traditional Environmental Due Diligence:
1.Retention of Potential Liability
2.Compromise of Collateral
Historically Lenders Have Retained the Risk of Environmental Loss
Lender Environmental Protection
Lender Environmental Liability Developed as an Alternative and/or Enhancement to Traditional Due Diligence and to Address Previously noted Concerns
Lender Environmental Protection
Lender policies are intended to provide coverage to protect the collateral value in the event of a loan default and a pollution event that is first discovered on or at the covered location during the policy period
Insurance Benefits• Reduce or eliminate the Cost of
Traditional Due Diligence
• Streamline Loan Process • Protect Bank Assets by Protecting
Against Loss of Collateral Value
Insurance Benefits• Insure Lender Liability on Collateral
or REO Property
• Reduce Risk Associated with Financing Commercial Real Estate
Insurance Benefits• Provide Cash Flow Management in
the Event of a Claim
• Enhance Capital Market Deals
• Provide Competitive Advantage
Lender Coverage• Structure– Portfolio (New or Existing)– Single Site
• Policy Payout Options– Lesser Of– Outstanding Loan Balance & Extra Expense
Lender Coverage • Insuring Agreements– Default: Pays Lesser of the Cost of Cleanup
or Loan Balance Depending on Policy Form– Third Party Claim – Provides Legal Defense
and Indemnification– Foreclosure – Pays Cost of Cleanup
Lender Coverage• Underwritten to Financial & Environmental
Considerations• Financial evaluations:
– Portfolio assesses Lender guidelines – Single site assesses borrower strength for each
deal• Environmental Evaluations done for each Loan
Customer Profile• Commercial Banks• Mortgage Bankers• Lenders & Loan Originators• Financial Institutions & Investors• Life Insurance Companies• Pension Funds
Lender Coverage - Portfolio• Portfolio Policy– Provides Pre-determined pricing– For a group of loans that grows from
inception for a specific period of time– Loans categorized as Non-Suspect or
Suspect
Portfolio Process• Application– Carrier Application– Sample Loan Documents– Lender Financials – 2 years– Loan Underwriting Guidelines Including
Minimum DSCR & Maximum LTV– Environmental Policy/Procedures
Portfolio Process• Pricing Considerations: – Number of Loans to be Included–Make-up of Portfolio– Limits (both per incident & aggregate)– Term– Deductible
Portfolio Process• Quote/Binding– Quote includes 2 premiums:• Non-Suspect Loans• Suspect Loans
– Premiums good for defined period– Deposit Premium to bind– Deposit Premium is a credit against
future premiums
Portfolio Process• On-Going Processing
– The Lender enters loan specific information electronically direct to the carrier
– Lender receives response from the carrier generally within 24 hours
– Lender Collects Insurance Premium at Loan Closing
– Monthly Reconciliation
Portfolio Process• Monthly Reconciliation– Carrier generated monthly agent report– Prior month activity: loans approved
for coverage, loans declined– Reconciliation with lender to determine
which approved loans have closed– Closed loans reported to carrier
Portfolio Process• Monthly Reconciliation– Closed Loans Endorsed to Policy per
Monthly Reconciliation– Invoice for Additional Premium After
Reconciliation
Other Options• Lender Environmental Protection – Single
Site • Environmental Site Liability with Borrower
as Named Insured & Lender as Additional Insured
Lender Coverage – Single Site• Process– Application– Copies of Environmental Reports– Borrower Financials– PSA– Loan Documents– DSCR Analysis– Appraisal Confirming LTV
Lender Coverage – Single Site• Pricing Considerations
• Limits• Current & Historical Property Use• Clean or Dirty• Neighboring/Regional Issues• Borrower Financial Strength/
Dynamics of Deal• Term & Deductible
Borrower Coverage• Environmental Site Liability with Borrower
as Named Insured• Possible Alternative for Some Lenders for
Strong Borrowers• Lender Included as Additional Insured• Also Available When Borrower wants
Coverage in Addition to Lenders Coverage
Questions?