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FEATURE ORIGINATION Investing in the Environment environmental property investments with increasing interest, but is the trend sustainable? By Phil Britt Lenders and commercial real estate professionals are eying L in commercial properties. Demands for Phase I envi- ronmental property assessments increased 10.7 percent in the first quarter of 2012, compared to the same period of 2011, according to Environmental Data Resources, a Milford, Connecticut-based market monitoring and informa- tion services firm. Based on the environmental reports, there should be in- creased activity in commercial real estate in the next several months, according to Joseph P. Derhake, president of Partner Engineering and Science, a Torrance, California-based environmental due diligence and consulting firm, which conducts the assessments for lenders and buyers prior to commercial property lending activity. That activity could be in the form of sales, new or refinanced lending to current owners, or foreclo- sures, Derhake says. enders are seeking an increasing number of environmental property reports as a result of some increased activity and new requirements by lenders of and investors where they were during the go- go days," Derhake adds. The major metropolitan strong growth in multifam- ily (four units and up) property transactions as portfolio lenders are cautiously re-entering the market, according to Derhake. Senior living facilities, particularly assisted living facilities and nurs- ing homes, have also seen growth. The activity can be attributed to a bounce off the market bottom and to the continuing graying of America—10,000 baby boomers areas experiencing the stron- gest growth are geographi- cally diverse, Derhake says. Salt Lake City tops the list with a 53 percent growth, fol- lowed by Memphis, 48 percent; Jacksonville, Florida, 38 percent; Boston, 33 percent; and Kansas City, Missouri, 32 percent. Each of those areas has seen "Transaction levels are still not CREFC Guidelines T addressed some environmen- tal concerns in a couple of its recent guidance documents regarding commercial real estate loans originated with the intention of being packaged and sold as commercial mortgage- backed securities, Derhake adds. "CREFC is paying a lot more attention to environmental is- sues. When the bonds related to these properties are issued, the lender has to sign off on the [environmental assessments] that [it has] done. It's much more rigorous than it once was." In those guideline documents, he Commercial Real Estate Finance Council (CREFC) Principles-Based Underwriting Framework and Model Representations and Warranties, are turning 65 every day, accord- ing to published reports. Environmental assessment ac- tivity for all types of commercial properties can be attributed to expanded concerns about envi- ronmental risks with commercial real estate, Derhake notes. CREFC stipulates that an under- writer must use a qualified envi- ronmental engineer to prepare a Phase I environmental assessment. If that assessment uncovers en- vironmental issues, then CREFC recommends the underwriter require a Phase 2 assessment, require remediation of any issues before closing, implement an envi- ronmental insurance policy, or, if all else fails, withdraw or reduced the amount of financing. The Model Representations and Warranties guidelines further recommend that the potential borrower be considered not responsible for mitigation of the environmental condition(s) or has fixed the environmental issue(s); has itself or has a third- party relationship with a party to provide 125 percent of the funds considered to be necessary to resolve the problem(s); or has an appropriate insurance policy in place to address the issue(s). Freddie, SBA Changes G overnment agencies are also seeking more thorough THE M REPORT | 45 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET