The one place even conservative banks sometimes gamble dangerously.

In 1990, a major Florida bank was held liable for environmental issues discovered on a property they had financed—and for years to follow, the threat of lender liability hung over commercial real estate transactions throughout the state.

Finally, in 1996, the legislature passed the Asset Conservation Act, which protected lenders from environmental liability with a secured creditor exemption provision. The industry breathed a sigh of relief.

Fast-forward two decades to today.

Bankers no longer have to worry about liability issues when serious environmental problems are discovered on a property they’ve financed. However, they still need to fear the scenario of a real estate customer who suddenly faces financial responsibility when old contamination is discovered on a property.

One common outcome: that borrower defaults on the loan, and the lender must decide whether to take possession of a contaminated site.

Wouldn’t it have been better for all parties involved to be aware of the potential environmental risks inherent in a property in advance?

That’s where Phase I Environmental Site Assessments (ESAs) come into play, serving as an on-site evaluation of environmental warning signs. And that’s the one place where even conservative banks sometimes take a dangerous gamble.

The gamble comes in the form of relying on a “low-budget” Phase I assessor.

More than a few individuals operating as assessors are independent, home-based business without significant resources, experience or support.  Consequently, some banks have sadly learned that these inspectors are not able to adequately manage risks or undertake remediation efforts if contamination signs are found in the Phase I. Filing proper discharge notifications, navigating complicated administrative codes, plus understanding cleanup programs and methods to preserve real estate transactions in the midst of a discovery all require consultation from experienced professionals.

Even worse, some lenders have realized that when environmental problems surface, their individual, low-bid inspector may no longer even be in business.

A thorough, professional Phase I inspection is an essential part of the due diligence in a real estate transaction, and serves as a cost-effective precaution that can pay off dramatically for everyone if contamination is ever found on the site.