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Environmental Risk in CMBS 2.0--Know Your Options

When a Phase 1 Environmental report identifies an environmental concern, sometimes the recommendation is a Phase 2 Subsurface Investigation but that is not the only option.

By Charles Tallinger | Updated on August 16, 2011

For commercial mortgage backed securities (CMBS) lenders and borrowers alike, the environmental due diligence process is often little more than a formality. The best case scenario is that the Phase 1 Environmental Site Assessment (Phase 1 ESA) is completed, no environmental issues or recognized environmental conditions are identified, and the Phase I becomes just another document in the underwriting file. The other potential outcome is one that elevates the environmental due diligence process from file-filler to potential deal-killer.

A Phase 1 ESA that contains a recommendation for a Phase 2 Environmental Subsurface Investigation can be a major roadblock to closing a loan. Luckily there are two new documents that provide specific guidance on how environmental risk can be quantified and dealt with during a CMBS deal so as not to impede the issuance of the loan.

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