In order to make lending as easy as possible, lenders frequently desire pushing non-critical provisions to post-closing events. When it comes to environmental issues this can be done safely if lenders complete sufficient due diligence to understand their risk and to use loan terms and financial incentives to ensure that the borrower completes necessary actions.
Consider these four actions before pushing environmental issues to post-closing events:
- Complete the right amount of due diligence.
- Discuss environmental issues with the borrower.
- Agree on an escrow relative to the risk.
- Include environmental responses/requirements including milestones in loan docs.
1) Complete the right amount of due diligence to understand the magnitude of the environmental concern and the time-to-cure and the cost-to-cure the issue. Specific factors include:
- Complexity of the environmental issue
- Amount of data a borrower provides regarding the issue
- Ability or not to have site access
- Degree of risk the lender is willing to take
2) Discuss the issue with the borrower and environmental professionals associated with the issue to judge their understanding and to hear their plan for successfully completing the tasks-to-cure. Understanding the tasks-to-cure depends on a number of factors including:
- Thoroughness of borrower provided documentation
- Lender commissioned environmental report discoveries
- Title report findings regarding environmental encumbrances
3) Agree on an escrow that satisfies the regulatory/remedial actions and provides a reasonable contingency relative to the risk. Specific factors include:
- Details in a borrower provided cost and time budget
- Amount of equity in the underlying deal
- Strength of the borrower and their level of experience with similar projects
- Level of comfort relative to the level of risk
4) Document environmental responses/requirements in the loan terms. Including:
- Specific timelines and borrower deliverables
- Scopes of Work and/or regulatory action plans
- Allow the borrower to complete work within a given timeframe
Each project is unique and requires thoughtful and thorough environmental due diligence coupled with good banking.
Are you considering addressing environmental issues post-closing? Or should you enter the deal with the right information? Read more to help you make the best decision.
