Freddie Mac has very specific requirements for environmental and engineering due diligence. Freddie Mac Phase 1 Environmental Site Assessments and Engineering Assessments (also called Property Condition Reports) have to be conducted according to Freddie’s Multifamily Seller/Servicer Guide, which often goes above and beyond standard due diligence requirements.
In the past year, Freddie Mac has released updates on requirements for environmental due diligence and guidance for environmental and engineering best practices. The updates and guidance have centered on clarifying and expanding the scope of work that consultants must perform – which makes one wonder if perhaps Freddie Mac had received numerous bad reports from unqualified servicers. Servicers must be well acquainted with Freddie’s standards including the recent changes in order to avoid delays and facilitate the due diligence process.
Freddie Mac Due Diligence Best Practices
The Freddie Mac Best Practices released in August of 2010 contains many helpful tips for lenders. Particularly, Freddie Mac advises lenders on:
- Selecting the best environmental and engineering consultants (not strictly on price or turnaround time)
- Communication between lender, seller and consultant (provide relevant information upfront and feedback in a timely manner)
- Evaluating consultant reports (reviewing the whole report, not just the executive summary, for thoroughness and compliance)
The guidance also advises consultants on common mistakes in conducting Freddie Mac Phase 1 ESAs and Freddie Mac Property Condition Reports. Common environmental and engineering consultant errors include:
- Not evaluating risks
- Not indicating when further study is required to quantify a concern
- Inadequate justification of waiver requests
- Omitting costs to complete work in progress
- Manipulating the reserve analysis
- Not following up on pending information
- Not following the asbestos or radon gas scopes of work for sampling
Not including recommendations and cost estimates for identified concerns
Freddie Mac May 2011 Environmental Revisions
The most recent environmental requirements of the Freddie Mac Multifamily Seller/Servicer Guide were released on May 31st, 2011. Click here for a full detail of the changes. The most significant change is a new requirement for the environmental consultant to indicate whether there is a State Super Lien Law in the state of the subject property. The State Super Lien would allow the state to put a first priority lien on the property as a result of environmental contamination.
Another recent change is clarification on when and how asbestos testing should be conducted, as well as when an asbestos Operations and Maintenance (O&M) Plan is acceptable in lieu of testing. The consultant’s opinion on whether asbestos testing is required cannot be based solely on the construction date of the building.
Other changes include inspection requirements (number of units required relative to number of units and phases of construction, inspection of PCB containing equipment) and revisions to Form 1103.
To avoid pitfalls and setbacks, Freddie Mac lenders will want a consultant with thorough experience in navigating Freddie Mac’s requirements and who will stay abreast of the frequent standard changes.