Think about the risks of lending money to a person who is buying a building site-unseen. The imagination runs wild with all sorts of dangers and threats that could be lurking. Even just a simple walk around the building could give you so much information that would rule out certain fatal flaws. Yet, lending on the purchase of a property without taking a look at the land below is absorbing a similar risk.
In many cases, a geotechnical evaluation is as valuable as a Property Condition Assessment (PCA) as far as protecting a lender from loan default due to catastrophic losses, building deterioration, and unexpected costs or construction delays. While Geotechnical studies are typically ordered as an add-on to equity-level PCAs by buyers requiring a full-picture understanding of a potential investment, there's a time and place for lenders to consider a geotechnical study as part of your due diligence process too.
Geotechnical Studies: How They Reduce The Risk Of Borrower Default
Geotechnical studies provide a comprehensive look at the earth below and around a prospective site. They are essential for protecting you from liabilities that could instantly swallow or destroy a property that appears to be in good condition (e.g. sinkholes, landslides, liquefaction), degrade an existing structure over time (e.g. settlement, corrosion, moisture intrusion), and/or add cost to or delay development (e.g. shallow groundwater, shallow rock, unsuitable soils).
In general the studies rely on thorough geologic research and understanding of geologic hazards (e.g. earthquakes, landslides, sinkholes, etc.), site reconnaissance (e.g. visual assessment of structures and the ground surface on and around the site), as well as soil sampling and laboratory testing.
When Geotech Studies Make Sense For A Lender
A Geotechnical study can protect you from a default that could result from catastrophic losses, building degradation, and/or unexpected costs and delays. A lender should consider a geotechnical study in the following situations:
- If the site is currently undeveloped or graded and no geotechnical data exists.
- If the site is currently undeveloped or graded, but the geotechnical data is incomplete, e.g. some areas of the site were not explored; boring logs, site plan, and/or lab data was not included; site geology or geologic hazards are not described; etc.
- If the site is currently undeveloped or graded, but the report is outdated, e.g. the report describes site features that are no longer present; there are new site features that were not discussed; and/or the report is more than 3 years old.
- If the site is currently developed, but additions in new areas of the site are planned – see notes 1 through 3
- If the site is currently developed and there are signs of soil related distress e.g. cracking, corrosion, moisture problems, racking doors or windows, site features out of level, poor quality asphalt, popped sidewalk panels, etc.
- If the site is currently developed, and there are no signs of soil related distress, but you are in a geologic hazard prone area with history of earthquakes, sinkholes, liquefaction, landslides, volcanoes, etc, and the geotechnical report is more than 5 years old.
Issues that occur below a site can have a significant impact on property value, and understanding these risks upfront will enable lenders to manage risk and make better business decisions.
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