Collateral and Credit
Finding the Missing Piece
What is the value of environmental liability and stigma to property?
Bank appraisal and disposition departments need this information in order to profitably manage real estate lending, foreclosure, and owned property (REO) management practices. BB&J provides this critical information by assessing and investigating environmental conditions and by analyzing cost-to-cure using decision and risk analysis. This analytical approach tests “what if?” scenarios to establish the contingent environmental liability of impaired costs.
Loans and Liabilities
Lending can be a risky proposition and real estate collateral limits bank exposure to loss. At loan origination, bank appraisers establish the value of collateral property in order to align the credit available, the terms of the loan, and bank risk. Working directly for bank appraisal departments, BB&J quantifies the cost to cure environmental impairments on proposed collateral properties with industrial, commercial, or agricultural histories. These analyses quantify the probable value of material liabilities such as polluted soil, groundwater, and hazardous materials in building structures. They also quantify the potential stigma caused by environmental history or conditions, as well as other environmental concessions that might be needed to dispose of property from REO.
Unfortunately, some borrowers fail to perform and banks have the option to foreclose on collateral property. Appraisers need to know the value of environmental liability retirement obligations in order to determine whether to foreclose into REO, how to manage liability while in REO, and the likely net of “as-is” or cured disposition from REO. A key concern is whether the bank, as foreclosing lender, could become a property owner obligated to meet environmental compliance requirements.
BB&J’s analyses quantify the expected cost and cash flow needed to cure uncertain property impairments, and the stigma consequences of site history and failure to cure. They also determine the discounted disposition price for selling impaired REO property “as-is,” with or without indemnification for environmental liabilities. Additional advisory services have included developing discharger-borrower-bank negotiation strategies to assure that dischargers assume sole cleanup liability, before foreclosure.
Standards and Guidelines Observed
- SEC Regulations S-K, 101, 103, and 303
- FASB Standards
- FAS 157
- FAS 143
- FIN 47
- SEC SAB 92
- ASTM E 2137-06
- ASTME 2173
- AICPA SOP 96-1