Making Loans On Real Property with Environmental Issues

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Anytime There Is a Commercial Property, Reviewing Environmental Issues Is Necessary

By Dan J. Harkey

Real-life example: The loan was successfully closed, and the borrower was thrilled with the outcome.

Summary:

In the heart of Los Angeles, a unique lending opportunity unfolded…

A commercial parcel, strategically located and owned by a pizza restaurant operator for half a century, emerged as a potential goldmine. ..

The 30,000-square-foot parcel, now with a high-value premium due to new California laws that incentivize high-density housing in urban areas, held the potential for a three or four-story apartment complex and retail space. The property’s value as a redevelopment was significantly higher than its current value, making it a compelling case study of a successful real estate investment.

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Article:

The property’s journey was not without its challenges. The owner-operator, a tenacious individual, inherited the land from his grandfather. However, his father disputed his claim, leading to a five-year legal battle. Despite this, the owner-operator’s unwavering determination and perseverance shone through, and the court eventually ruled in his favor, clearing the way for the property’s redevelopment. His resilience in the face of adversity is truly inspiring.

Despite owning the property free and clear, the borrower found himself in a challenging financial situation due to the ongoing litigation. This situation, which included mounting legal fees and potential delays in the redevelopment process, tested the borrower’s determination. However, his unwavering commitment to stabilize his expenses, seek alternative funding sources, and ensure the property’s redevelopment could proceed was truly inspiring, earning him respect from all involved.

The borrower, recognizing the significance of a comprehensive environmental assessment, took the initiative to arrange and fund an appraisal and a phase I environmental site assessment. This proactive stance showcased the borrower’s dedication to the project and understanding of the potential ecological risks, earning him admiration from all involved. His proactive approach to environmental assessments reassured everyone about the project’s safety measures.

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A meticulous and comprehensive phase one environmental site assessment was conducted, a standard practice for all commercial properties. The evaluation identified an adjacent dry cleaner in operation since the 1950s, which was thorough and reassuring. This thoroughness, including a Phase 1 environmental site assessment and a Phase 2, in-depth evaluation with soil boring that identified and addressed all potential environmental issues, instilled a strong sense of confidence in the investment opportunity.

The dry cleaner has leaked dangerous chemicals, which spread to various locations around our subject property.

When contamination was discovered on our subject collateral property, the borrower and the environmental engineer took immediate action. The engineer reviewed the phase II results with soil borings and devised a comprehensive mitigation strategy. This strategy included using subsurface air blowers (about 10 feet below ground) with pipes to extract the gases into the air above the building. The proactive measure was pivotal in ensuring the property’s safety. The contamination was successfully eliminated over time, approximately 24 months, through a combination of soil extraction and treatment, and the EPA’s sign-off, a crucial regulatory approval indicating the property’s compliance with environmental standards, instilled confidence in the property’s safety and investment process.

A trust deed investor agreed to fund the loan and deposit a portion into a licensed construction fund controlled for disbursements to pay for the installation of the soil extraction system.