In this case, because of the reduced property value, the lender stands to recover as little as a fraction of the loan balance. Alternatively, the lender may foreclose on the property and clean up the known contamination. Here, the lender ultimately still may not recover the loan balance due to the combination of the cleanup costs and the potential that the property's market value will remain reduced after the cleanup because of difficulty selling a previously contaminated property. Notwithstanding recent court cases and regulatory actions, lenders that take control of collateral properties may incur substantial cleanup costs, third-party damages, and legal fees if the property is contaminated. If a lender decides not to foreclose on the property, it can try suing the borrower, but will probably have little hope of recovering the loan value if the borrower has financial problems.
Lenders can reduce their environmental risks in several ways, including the following.
Phase I assessments typically cost a few thousand dollars and are completed in 2 to 3 weeks. I assessment will be sufficient to meet the lender's due diligence. Unfortunately, however, these assessments generally are conducted by junior consultants, involve only visual inspections, and have high error rates. They could lead to incorrect evaluations of a site's environmental risk. During a Phase II assessment, the consultant completes a more extensive evaluation of the site, which can include sampling of the soil and underlying groundwater.