Banks, borrowers and their supporting professionals, like everyone else, are having to adapt to the rapidly-changing circumstances surrounding COVID-19. With commercial and multi-family real estate, one of the more difficult issues is how to conduct a Phase I Environmental Site Assessment in order to qualify as the “All Appropriate Inquiry” that most lenders require. A full Phase I investigation includes items such as a site visit, interviews with knowledgeable people, and records research, but each of those are constrained during this global pandemic and shelter-in-place or stay-at-home orders. Lenders and environmental professionals, however, are getting creative and flexible in the ways they address this unique situation.
Because banks are considered an essential business service, many lenders are continuing to process loan applications, although they face the same logistical issues that we all are confronting with working from home. Depending on the type of loan involved, banks may be more flexible with the level of environmental due diligence required. For example, a refinance of a loan on a property where there was a recent Phase I, or the property has not changed, may not require any additional environmental review or a desktop review may suffice. Instead of one-size-fits-all approaches to due diligence, banks now are evaluating what’s needed on a property-by-property basis. In some instances, the environmental review may be called a “Limited Site Investigation,” instead of a Phase I, with follow-up site inspections conducted when the crisis abates.
Environmental professionals, while not specifically called out as an essential business service, are considered support for an essential business service, such as a bank. This allows them to conduct the necessary site assessments and fieldwork but, in many cases, they may not be able to do so because the subject property is closed; the people to be interviewed are staying at home, whether because of stay-at-home orders or illness; and the government agencies and offices with relevant property records are not open to the public. Furthermore, the consulting firms are cognizant of the health and safety needs of their employees and don’t want to place them at unnecessary risk.
In some instances, such as hospitals, long-term care facilities, assisted living facilities, nursing homes or senior living communities, environmental consultants simply are not conducting in-person interior inspections. In other cases, multi-family properties for example, the inspections may consist of looking only at vacant units and common areas, but foregoing occupied units. Other workarounds include the site contact walking through the building on FaceTime or having a resident take photographs. One pitfall is that a building occupant or resident may not be as aware of what to look for, or may even want to minimize issues that an environmental consultant would spot. If a site visit is absolutely necessary, some consultants are scheduling visits for weekends or evenings when fewer people are around, having the site contact open all doors, wearing gloves, and maintaining social distancing as much as possible. For larger, open properties, use of a drone may be a helpful substitute.
Communication between the client and the environmental professional is key. If the scope of work may be more limited by current conditions, that should be made clear from the outset and the parties reach consensus on the necessary adjustments. Communication between the consultant and site contact also is important, although privacy issues prevent inquiring about a site contact’s COVID-19 status. Indeed, not everyone is convinced that current measures, such as social distancing, are warranted. In those situations, the consultants are having to communicate in advance their practices and expectations.
About the Author
Mike Nesteroff is a preeminent environmental lawyer with extensive experience representing clients in environmental litigation, agency negotiations, property acquisition and leasing issues, and counseling clients on risk and compliance. During his 31 years at Lane Powell, Mike has represented clients in litigation claims involving hazardous material investigations, cleanups and cost recovery at sites in Washington, Oregon and Alaska. He has obtained a several million-dollar cost recovery judgment on behalf of one client and a defense verdict in another cost recovery case. Mike has also represented clients in litigation involving public records and obtained a favorable court of appeals ruling on a previously-untested exemption in the Washington Public Records Act.