July 2012

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FEATURE ORIGINATION environmental reports as part of increased due diligence to mitigate risk in commercial real estate financing, Derhake says. In May 2011, Freddie Mac strengthened its assessment procedures for asbestos-con- taining materials and for related operations and maintenance programs for multifamily proper- ties. Fannie no longer accepts opinions that asbestos-containing materials were not present at construction—because they may have been added at a later date. Freddie also requires more com- prehensive sampling of materials for testing for asbestos-related environmental problems. For example, more units are typically sampled for asbestos and lead- based paint than were just a few years ago, Derhake says. Similarly, the U.S. Small Business Administration changed its due diligence requirements in October 2011. The SBA expanded the requirements for special-use facilities to include day care centers and similar residential care facilities for children to test for lead-based paint and lead in drinking water. There were also changes in the definitions of car-wash-only facilities and for an expansion of the definition of gas stations to include all fueling facilities. Another area where new inspection] in the 1990s may no longer pass. That has the potential to kill a deal." "A property owner or lender may find that a property that passed [environmental — Joseph P. Derhake, President, Partner Engineering and Science materials, products, systems, and services used in construction, manufacturing, and transporta- tion, including the Standard Practice for Environmental Site Assessments. ASTM last updated the Environmental Site Assessments in 2005 and is discussing some changes, including the man- datory regulatory agency file review, clarifications of defini- tions assessment report user requirements, the necessity of an "environmental professional" to conduct site assessments, and other matters, Derhake says. An environmental professional is someone who has at least five years of experience and an appropriate degree. There is no definitive date for a decision on any of these matters, so the discussions could easily carry into 2013 before ASTM makes any changes. environmental concerns are be- ing raised, according to Derhake, regards the issue of potentially volatile chemicals leaching into a building from "vapor intrusion"— air seeping in from the ground. While such concerns have been prevalent regarding chemicals from groundwater leaching into nearby properties for several years, the concern over vapor intrusion from the ground is relatively new, Derhake says. "A property owner or lender may find that a property that passed [environmental inspec- tion] in the 1990s may no longer pass," Derhake says. "That has the potential to kill a deal." While groundwater and other environmental contamina- tion—like the presence of volatile compounds from a leaking fuel 46 | THE M REPORT tank at the former site of a gaso- line station—can cost "well into six figures" to mitigate, vapor intrusion issues can usually be resolved at about 10 percent of that cost. Sometimes the vapor can be shunted outside; other times, different mitigation efforts will solve the problem. While still a significant expense, it's not enough to kill many transactions, Derhake says. Looking Ahead M and private lenders tend to follow the environmen- tal guidelines established by ASTM International of West Conshohocken, Pennsylvania, the standards-making body for standards could be coming soon. The SBA, the GSEs, HUD, ore stringent or otherwise changed environmental SECONDARY MARKET ANALYTICS SERVICING ORIGINATION

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