Richards Layton & Finger
 

Practical Considerations for Commercial Lenders Regarding Environmental Liability

Spring 2019

In the context of making a loan secured by commercial real estate, a lender is right to be concerned about environmental contamination at that property, and how it may impact potential liability for cleanup and the value of the property as collateral. According to a survey by Environmental Data Resources (“EDR”), one out of every ten banks involved in commercial real estate loans has experienced losses due to environmental issues over a one year period, with average losses of $1.2 million per loan. This survey found that the smallest banks experienced the highest occurrence of environmental losses, with lenders with assets less than $1 billion experiencing almost 75 percent of loan losses due to environmental contamination. EDR concluded that one potential reason the smallest banks suffered the largest loan losses due to environmental contamination was because those banks performed less comprehensive environmental due diligence, and because smaller borrowers tended to walk away from contaminated sites because cleanup costs often exceeded their equity in the property.

This article reviews the specific factors on which liability for contaminated real property is based, as well as available defenses and exemptions, so lenders can spot transactional risks throughout the life of a loan, and make informed lending decisions.