Partner does a high volume of physical due diligence for lenders, which is largely aimed at evaluating potential risks with the collateral that could impact the borrower’s finances or the bank’s ability to take back the property if the borrower defaults. 

What about when the bank will own the property?  Due diligence for bank branches and bank-owned facilities is usually far more comprehensive and covers a broader range of concerns.  The priorities during this situation are also quite different – less about risk tolerance and more about liability protection. 

Environmental Due Diligence for Bank Facilities

When the bank is the prospective property owner, a fully compliant AAI / ASTM E1527-05 Phase 1 Environmental Site Assessment is essential.  CERCLA liability protection is a prime concern as well as other federal and state laws, thus streamlined or “desktop” environmental reports that a lender might use during loan due diligence won’t make the grade for bank facility due diligence. 

Risk Tolerance

When acting as a lender, the bank may be willing to waive off an environmental concern identified at a borrower’s collateral for business reasons, such as if the borrower has a very strong relationship with the bank and is unlikely to default.  When the bank is the purchaser however, it will be far less likely to waive a potential concern identified in the Phase 1 ESA since it will be saddled with whatever environmental liability is associated with the property and any resulting cleanup costs or ongoing obligations.  The bank may use the information from the Phase 1 Environmental Site Assessment to assign liability and obligations of any environmental concerns to the seller, or set up an escrow account to cover the cost of the environmental obligations.

Human health risks are also a greater concern during facilities due diligence.  Off-site environmental concerns, such as an adjacent gas station with known contamination, may be given more scrutiny for their potential affect on the property or its occupants, namely from Vapor Encroachment / Intrusion (harmful vapors migrating onto the property or into the building).  The Phase 1 ESA will also likely include an evaluation of non-scope human health items such as asbestos, mold and radon and may include sampling for these items.   

Contamination and Development

Environmental contamination that is well controlled and doesn’t require further cleanup could still impose obligations on the owner such as maintaining institutional controls (for ex., capping contamination with a parking lot), and additional costs during construction.  Even when the contamination incident has been given a risk-based closure (there is still contamination in the ground but it does not normally pose a human health threat), construction activities such as excavating or grading can expose workers to contaminated soil or harmful vapors.  In these cases additional steps need to be taken such as wearing protective gear, and possibly disposing of the soil as hazardous waste. 

For this reason, a recognized environmental concern (REC) that might have been considered a Historical REC for pre-loan due diligence might not be considered historical during due diligence for a new bank branch facility, since it could still pose a future concern during development.

Natural and Cultural Resources

There are many natural and cultural resources that the bank should also consider during due diligence, such as endangered species habitat, wetlands, cultural and historic resources.  Many of these items are addressed through a NEPA Review (National Environmental Policy Act). 

Property Condition Due Diligence for Bank Facilities

Many lenders require Property Condition Reports during loan due diligence as a risk management tool to understand the condition of the property, and current and future expenditures required.  We sometimes refer to a lender Property Condition Report as the “generalist” approach because there is typically one well-qualified assessor that evaluates the entire property and all building systems.

As an owner, however, the bank will want to use the Property Condition Report a bit differently. The bank will experience all of the property’s issues after the purchase, so it will have a keen interest in identifying any major potential “deal killers” right up front, such as major HVAC issues or leaky plumbing.  Thus for our prospective purchaser clients we often employ the “specialist” approach by bringing in sub-specialists to do more in-depth analysis of building systems at the property, which are evaluated and incorporated into one Property Condition Report.  This is also sometimes referred to as an “Equity Property Condition Report.”  

Another important use for the Equity Property Condition Report is for the bank to be able to negotiate the purchase price based on the information identified, or to include repairs or warranties in the transaction.