Lender Environmental Protection

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?

UCPM Follow-upJohn Farinacci(949)629-3850jfarinacci@ucpm.com

Bart Jarman(480) 682-1562bjarman@ucpm.com