Craig Whittaker founded Environmental Solutions Group in 2002 to provide impartial evaluation of properties relative to environmental health. He has assessed more than 1500 properties, has written thousands of environmental reports and is frequently asked to speak about building science issues.
As the housing recovery continues to deplete the existing housing stock, the number of residential foreclosures for sale continues to drop steadily. This is indeed good news for realtors and homebuilders alike, however, there still remains a dark cloud over commercial properties foreclosed upon by the bank. Many of these bank-owned properties reportedly come with an environmental liability, namely mold.
As it’s been nearly three years since I have blogged about the challenge of buying a foreclosed property (see ‘Buyer Beware of Foreclosures’ posted in July 2010), I have some new thoughts that focus on commercial properties. I must first give credit to Russ Banham for his recent article in Business Insurance titled “Foreclosed properties may come with environmental liabilities”. Anyone looking at buying foreclosed commercial property should read Mr. Banham’s article as it delves into the many liabilities faced by banks and buyers – especially mid-market firms without the resources of the big banks to overcome a serious issue.
One of the main concerns with bank-owned properties is the bank having some level of control of the use or operation of the property. This creates bank liability not only for that property, but also for third-party liabilities associated with damage or injury to tenants or an adjacent property owner for contamination that may have migrated to their property. As Mr. Banham states, the issue requires superior due diligence.
Neil Glazer, an attorney and toxic torts expert in New York, has seen the ugly side of commercial foreclosures. Mr. Glazer speaks of banks purchasing commercial properties in bulk with plans to renovate and resell them. The problem is that the properties are often contaminated by mold, which means the bank is going to be paying for what can be a costly cleanup prior to sale.
There are a number of risk management maneuvers the bank can try, such as purchasing environmental impairment liability, pollution liability, secured impaired property insurance and lender’s collateral environmental insurance. Insurance can help create some comfort over taking title to a foreclosed commercial property, but it can be expensive and therefore prohibitive to mid-market institutions. The bank can also attempt to protect itself from liability by asking the borrower to name it as an insured on the borrower’s policy, assuming the borrower carries an environmental insurance and is willing to name the bank on the policy.
According to Debra Hausser, who markets environmental site and specialties products at Zurich North America, there may be times when a bank wants to assume the environmental liabilities of a foreclosed property. It is often in the best interest of the bank to clean up the property to avoid having to sell it at a discount due to environmental contamination.
Perhaps the most affordable means for a bank to protect itself is to have an environmental assessment of a property prior to listing it for sale. A good report could be shared with prospective buyers, and the bank would also have an opportunity to correct any glaring issues before a buyer discovers them.