TORRANCE, CA-Environmental due diligence in the CMBS 2.0 environment is different than before, and there are new tools that commercial real estate professionals can use to navigate through the changes.

Those changes were discussed recently during a panel chaired by Partner Engineering and Science, Inc. President Joe Derhake, PE, at a recent Environmental Bankers Association conference in Newport, RI, called “Sailing into the Winds of Change; New Risks and Rewards.” Derhake’s panel included Cathy McGowen, Wells Fargo; Damian Wach, Eurohypo; and Andrew Perel, Michelman & Robinson, LLP.

One of the new tools available for environmental due diligence is environmental insurance. “Environmental insurance is a tool, when properly used, that can enable us to do deals that in the past were not possible – whether as a mitigant, swap for an environmental indemnity, or merely because the borrower/purchaser is risk adverse,” said Perel.  “Working out the details of the insurance policy can be tricky, but putting the right policy in place is important.”

The discussions also included:

  • The impact of CREFC’s Model Representations and Warranties on environmental due diligence.
  • If the Model Reps and Warranties language governing Phase 1 Environmental Site Assessments, which is different than the ASTM language, will cause concerns about vapor intrusion risk.
  • Suggestions that Model Reps and Warranties make to mitigate environmental concerns other than Phase 2 Environmental Testing, such as environmental insurance, hold backs and indemnity and how those are being used in the real world.
  • How insurance products serve as swap outs for environmental indemnity.
  • How the CREFC’s guidance on Seismic Risk Assesments, wind damage risk and replacement reserves has impacted engineering due diligence and if the replacement report numbers outlined in Property Condition Reports have risen due to credit pressure from CMBS 1.0.

The panel also dealt with B-piece buyers, or the purchasers of B, BB/Bb or unrated bond classes, and if they are putting pressure on the underwriting process. “B-piece buyers are boring down on ambiguity which puts pressure on due diligence firms to fully resolve the issues,” Derhake said.

The EBA meets twice a year to discuss environmental due diligence and other topics. Click here to view the latest meeting’s program and other materials.