Why Does it Matter
We are ready to close a deal. The loan to value is there. The deal is going to work we are just finishing some important steps on our final loan docs. We go down our checklist and we have just a few more things left. My finger will stop at environmental check. The first check happens at a property inspection and then we are check in with the county office. It comes up that there are some issues recorded in the office. The deal comes screeching to a halt. We get spooked and have to fly out again to see how we feel about the specific problems and estimate the cost and revalue the loan based on the new parameters.
The importance of collateral properties having clean environmental bills of health cannot be understated. Oftentimes discovering that a property has environmental issues is an automatic no for private lenders. Environmental concerns conversely are becoming more and more prevalent as standards become more stringent. The Comprehensive Environmental Response, Compensation, and Liability Act essentially says if you own the property you own the accompanying environmental problems. Hard money lenders who always face the risk of taking a property are terrified of the effects of the law. Those who lend on such properties haphazardly essentially run through a china shop blindfolded, and as my mother always said: “you break it you buy it.” So, the question becomes, “how can you as a borrower or a broker receive the maximum amount of funding in spite of environmental concerns?”
Seek first to Understand
How do you learn what’s wrong?
If you are aware of a problem conduct a phase 1 or phase 2 environmental site assessment (ESA). Going through this process is huge because coming with this information and proactively working to address it may help hard money lenders be more comfortable with it. In addition, these ESA’s can tell you exactly what you need and how much it will cost. Assessing the costs and the value of the property will inform the type of loan you can pursue and accept. If the prognosis is favorable you are going to do well.
Alternatively, if you understand the actual value of the problems or have a lender that can properly assess the value of the environmental concerns you can move forward with that understanding. If you have the time you should always seek an ESA.
How to Secure Funding
After receiving a positive relatively positive prognosis many lenders will lend simply based on the contingency that the borrower removes the environmental issues with a portion of the funds. We will call the county to check for issues before any changes as most lenders will as well. These concerns will come out so help your clients so that they can be proactive in addressing these issues. Hiding doesn’t work. Lenders unconsciously value honesty which can turn a loan in your favor. Say what you need the money for and, offer to use part of the funds to address the environmental concerns. By following this blueprint, lenders will be infinitely more likely to accept your loan.
So, you may ask what does Gravity Capital know about environmental concerns? Let’s see some of the success that our founder Dave has experienced
A Success story from Dave.
Many years ago, my attorney brought me the opportunity to buy a loan secured by property owned by a bank he represented. The loan secured an industrial property that had a gas tank on and the owner was afraid of the liability. I had owned a gas station and was very aware of the risks of having a small gas tank on the property. It was a small tank and had not been used for many years.
We bought the property for $150,000.00. took the tank out and then sold it for $360,000.00 right after the tank was removed. I split this with the attorney and another partner.
Remember to keep an open mind there is money to be found both in purchasing and lending on sites with environmental concerns. If you properly understand the risk, you can find opportunities you would have never imagined.