Overview
The purpose of this policy is to establish safeguards and controls to limit Capital City Bank’s (Bank) exposure to potential environmental liability that can be associated with real property held as collateral or acquired by the Bank. The Bank recognizes that environmental contamination and the liability associated with that contamination may negatively impact the value of real estate collateral and, in instances where the Bank is an owner or operator of contaminated property, the Bank may incur significant direct liability. Further, the Bank recognizes that, in addition to impairing the value of the collateral, the borrower's liability for contamination may threaten the ability of the borrower to service the debt.
Environmental Risks
Environmental risk can be characterized as adverse consequences resulting from having generated or handled hazardous substances, or otherwise having been associated with the aftermath of subsequent contamination. Hazardous substance contamination is most often associated with industrial or manufacturing processes that involve chemicals or solvents in the manufacturing process or as waste products. Hazardous substances are also found in many other lines of business. The following examples demonstrate the diverse sources of potential hazardous substance contamination that should be of concern to Bank lending associates.
- Farmers and ranchers
- Use of fuel, fertilizers, herbicides, insecticides, and feedlot runoff
- Dry cleaners
- Various cleaning solvents
- Service station and convenience store operators
- Underground storage tanks
- Fertilizer and chemical dealers and applicators
- Storage and transportation of chemicals
- Lawn care businesses
- Application of lawn chemicals
- Trucking firms
- Local and long haul transporters of hazardous substances such as fuel or chemicals
- Automobile dealerships
Specific Risks to the Bank
The greatest risk to Capital City Bank is being held solely liable for a costly environmental clean-up. In this situation, the clean-up costs could far exceed the outstanding loan balance. We could attempt to recover such costs from the borrower, but many times such liability forces our borrowers into bankruptcy. A more common situation that may be encountered is when our real property collateral has been found to be contaminated by hazardous substances. Again, the cost of clean-up may exceed the loan balance and we have to forego foreclosure on the property at the risk of losing secured creditor status.
Another risk to the bank results when our borrowers, through the normal course of their operations, create hazardous substance contamination. The borrower’s solvency is threatened by being found liable for cleaning-up hazardous substance contamination. This can occur not only when we are financing real property, but also non-real estate secured loans such as for working capital or equipment financing.
Mitigation of Environmental Risk
Environmental Analysis During Application Process
For any loan that will be secured by commercial real estate, or to borrowers that are active in industrial materials not secured by real estate, the lending officer should conduct a visual inspection of the property.
During the loan application process, the lender must ensure the Environmental Checklist is completed by appropriate parties (portion by borrower/client and portion by lender). Ensure the borrower completes their portion of the Environmental Assessment even if the borrower is the buyer of the property. The borrower may not know the answers to all the questions; however, it will provide a testament as to their knowledge of the property as of current date.
The lending officer’s site inspection should focus on obvious areas such as:
- Soil discoloration
- Dying vegetation
- Unusual surface water or ponds
- Suspicious odors
- Dated drums or barrels
- How materials are stored.
In addition, during the site inspection, the lender should observe and document any adjacent properties (or within close proximity to the subject property) that have a “higher risk” land use as described in the Industries Considered Higher Risk tab. The Environmental Procedure Matrix delineates when it is appropriate to complete an Environmental Assessment Checklist, and/or acquire a Secured Creditor Risk Report/Environmental Risk Advisory (ERA) which will provide a risk score with a corresponding recommendation.
Environmental Assessments
Any assessment (for example: Environmental Assessment Checklist, Secured Creditor Risk Report [Environmental Risk Advisors], Phase I or Phase II Engineering Report) is to be completed prior to closing. Refer to the Environmental Procedure Matrix for guidance to determine the appropriate assessment for your property type and loan amount.
If a site visit indicates possible signs of contamination or sensitive areas (any question answered “yes” for Question #15 Environment Assessment Checklist), requires a Secured Creditor Risk Report to be completed by the Environmental Risk Advisor or a Phase I Environmental Analysis.
All Risk Scores prepared by the Environmental Risk Advisor will rate the property and provide a recommendation. The environmental Risk Score Categories are as follows:
- The environmental risk appears to be minimal and further investigation of the subject site and/or nearby properties reviewed as part of this analysis is not recommended.
- No risk issues identified, but tenant research evidences suspect security type (use).
- Adjacent or abutting concerns. Additional documentation may mitigate.
- Subject site concerns. Additional documentation may mitigate.
- Adjacent or abutting risk issues. Additional investigation or inquiry may mitigate.
- Subject site risk issues. Additional investigation or inquiry may mitigate.
A Risk Score of 1 requires no further action – proceed to closing.
A Risk Score of 2 or 3 may require a Phase I Environmental Analysis; however, this could be mitigated based on commentary provided by the Environmental Risk Advisor and discernment by the Lender. Specific commentary will be listed on page 2 of the analysis which identifies why the property received a 2 or 3 score. It will also provide information as to how to mitigate.
Risk Scores of 4 or higher will require a Phase I to be completed unless waived by Credit Committee or Senior Management in Credit Administration.
If a Phase I Environmental Analysis is recommended, use of the Letter of Engagement with Engineer is advised. This letter specifically addresses report format, testing guidelines, who may rely on the report, insurance requirements, etc. Collection of the fee prior to engagement is recommended should the loan not close due to contamination.
A Phase I Environmental Analysis is a qualitative assessment of the property that entails a more detailed analysis of the property and its past history. A written report will be submitted at the end of the assignment, which is to be performed by an independent environmental engineer. If the Phase I audit reveals the likelihood contamination exists, the report should be reviewed by an environmental attorney approved by the Bank for a recommendation in writing on how to proceed.
If a Phase II assessment is required, the report should be reviewed by Bank counsel specializing in environmental law. Upon review, Bank counsel should provide a recommendation in writing as to whether to proceed with the loan or not.
There may be occasions when Credit Committee will require a Phase I Environmental Analysis or other Environmental Assessment on a property which may fall outside the parameters identified in the Environmental Procedures Matrix. Credit Committee recommendations may include other elements inherent to the lending decision beyond those identified in the Environmental Procedures Matrix. As such, the Environmental Assessment recommendation by Credit Committee is to be executed prior to closing utilizing the Bank’s procedures for acquiring engineers, ordering ERA, etc.
Loan Agreements
All loans made secure by commercial real estate, or those made to borrowers in industries involved with materials that would be hazardous contaminants should include appropriate environmental indemnification language. The loan documents should include indemnities from borrowers for any cleanup costs incurred by the banking organization, and include affirmative covenants in loan agreements (and attendant default provisions) requiring the borrower to comply with all applicable Federal, state, and local environmental regulations.
Restrict Role in Management
Any procedures, especially those undertaken to assess and control environmental liability, cannot be construed as taking an active role in participating with, management, or day-to-day operations of the borrower’s business. Activities that could be considered active participation in the management of the borrower’s business, and therefore subject the bank to potential liability, include, but are not limited to membership on the borrower’s board of directors, assisting in day-to-day management and operating decisions, and participating in management changes. These considerations are especially important when the bank is actively involved in loan workouts or debt restructuring.
Closing Loans with Hazardous Substance Contamination
There are certain circumstances that the bank may proceed with the loan even when the property being used as collateral is contaminated. Some forms of contamination are considered to be acceptable from the standpoint of managing the risk involved. The most common forms of contamination that may be acceptable risks are the following:
- Minor illegal dumping
- Incidental spillage associated with an industrial process
- Small underground storage tank leaks
- Asbestos insulation
- Lead-based paint
In addition, some contaminated properties are in state or federally funded cleanup programs. Upon confirmation that the site is in a program, the Bank may choose to make a business decision to close on the loan. All loans closed that are secured by contaminated property must have a documented review and recommendation by approved Bank counsel; and approved by the Credit Administration Executive and/or Credit Administration Manager(s).
The two underlying issues separating an acceptable risk from an unacceptable risk are the likelihood of groundwater involvement and the difficulty associated with handling and disposing of the contaminant.
If the property is found to be contaminated, the loan should be closed by an attorney specializing in environmental law (the Ausley law firm being the Banks preferred counsel in Florida or Georgia and Jones Cork is an alternate for properties in Georgia). With the assistance of legal counsel, there should be a careful review of various additional protective measures such as:
- Risky carve outs
- Post-closing remediation escrow
- Remediation agreements
- Analysis of state reimbursement programs
- Various credit enhancements.
Monitoring of the clean-up after closing may also be necessary.
Renewals or Modifications
For existing loans which have previously undergone the procedures above or similar; the environmental status of the property is to be reassessed. Of primary concern are industries considered higher risk as identified in Industries Considered Higher Risk tab. Please refer the Environmental Procedure Matrix on what items are needed prior to closing for renewals or modifications. Although a high risk property, such as a gas station, may have completed a Phase I upon origination of the loan, an Environmental Risk Analysis will provide third party confirmation there has been no violations reported, the property has not been fined, or accidents since origination. In all instances (higher or lower risk) for industries considered higher risk, the Environmental Assessment Checklist is to be completed.
Foreclosures
Environmental assessments should be completed on foreclosure properties in accordance with the Bank’s Troubled Asset Policy. Please refer to the Environmental Procedure Matrix for guidance (Foreclosure is last column).
Approved Engineers List
It is the Bank’s policy to maintain a List of Approved Environmental Engineers who may prepare Phase I and Phase II Environmental Reports for the Bank. Vetting of the engineers is to be completed by the Real Estate Manager and consideration will be given to Professional Geologist and Professional Engineers with E&O Coverage (minimum of $1,000,000) and ample experience. Those who do not meet the minimum criteria will not be considered without consultation with Environmental Counsel (Rob Clarke).
Approved Environmental Risk Advisor
The Bank has only one approved Environmental Risk Advisor which is currently VeraCheck. While these reports are prepared by environmental professionals, this is not a licensed profession. As such, reports prepared by other like-kind organizations will not be accepted.
Useful Life
An Environmental Assessment (Secured Creditor Risk Report (Environmental Risk Advisors), Phase I or Phase II) that is no older than 1 year will be acceptable for the lending decision unless Credit Committee determines otherwise.
Industries Considered Higher Risk
The following list covers higher risk land uses. This list is NOT an all-inclusive list but attempts to capture the property types the Bank may need to make a lending decision.
There are 2 categories of land risk:
- Higher end: inherently contain more risk due to business activities using fuels, chemicals, and/or hazardous substances.
- Lower end: generally defined as those of an agricultural or medial nature.
| Higher End | Lower End |
|---|---|
| Airport | Bio-engineering |
Asphalt Plant |
Asbestos Abatement (mostly off-site) |
| Automobile or Boat dealerships (service areas) | Battery Sales |
| Auto Body Shop/Detail | Cattle Raising with Feedlot |
| Auto Oil Change/Lube Shop | Commercial Farm |
| Auto Repair Shop | Electric Motor/Equipment Repair |
| Auto Salvage | Embalming/Funeral Home/Death Care |
| Battery Reclamation | Gene Splicing/Virus/Germ Research Labs |
| Chemical Distributor | Lawn and garden centers/Nursery |
| Convenience Store/Service Station with Pumps | Car Wash Facility |
| Drum Tank Reclamation | |
| Drycleaners/Garment Services (not pick-up locations) | |
| Foundry | |
| Furniture Finishing/Refinishing | |
| Garbage Collection/Hauling | |
| Hazardous Waste Services | |
| Incinerator Operations | |
| Industrial Properties - Storage of paints, varnishes and/or hazardous materials | |
| Ink Production | |
| Junkyard, Scrap and Waste (Storage and Disposal) | |
| Laboratories (photo-finishing, commercial testing) | |
| Landfills | |
| Manufacturing (wood products, metals) | |
| Mining/Oil and Gas Extraction | |
| Paper Mill | |
| Pest Control/Extermination services | |
| Power Plants | |
| Railroad Yard | |
| Refinery - Petroleum & Petroleum Production, Storage or Distribution | |
| Septic Tank Cleaning Services | |
| Shipyard/Shipping Port | |
| Tannery | |
| Textile Dyeing/Finishing | |
| Wood Treatment Plant | |
| Appliance Manufacturing/Salvage | |
| Any property with Above Ground (AST) or Underground Storage Tanks (UST) |
FAQs
Click on the accordions below for frequently asked questions.
Click here for the Environmental Assessment Checklist.
How is a Commercial Farm defined and how would I know if my property would be classified as a Commercial Farm
The U.S. Department of Agriculture (USDA) provides farming typology which defines commercial farms as farms with $350,000 or more gross cash farm income and nonfamily farms.
The Environmental Protection Agency (EPA) does not have a specific definition for commercial farms. Additional information can be found in the glossary section of USDA - Farm Typology.
How do you define a Feedlot?
The Environmental Protection Agency (EPA) specifically addresses feedlots (AFOs) as:
- Animals have been, are, or will be stabled or confined and fed or maintained for a total of 45 days or more in any 12-month period
AND
- Crops, vegetation, forage growth, or post-harvest residues are not sustained in the normal growing season over an portion of the lot of facility
There is also an additional refinement recognized by the EPS - Concentrated Animal Feeding Operations (CAFOs) which is a very small segment of AFOs and has a more intense use.
Additional information can be found at USEPA - AFO Overview.
If we receive a no further action clause in a Phase I Environmental Analysis, do we still need to have a bank attorney review?
The policy indicates "if the Phase I audit reveals the likelihood that contamination exists, the reports should be reviewed by an attorney approved by the Bank for a recommendation in writing on how to proceed".
If your report indicates no further action, you would NOT require an attorney's recommendation as there is no likelihood of contamination.
