OCC Handbook/ Commercial Real Estate Booklet

The Office of the Comptroller of the Currency (“OCC”) oversees a system of national banks and federal savings associations involved in Commercial Real Estate and Construction Lending, assuring that these institutions are safe, sound, competitive, and capable of providing for the banking needs of customers as best as possible.

The OCC issues a handbook, which according to the OCC Handbook itself,” The Office of the Comptroller of the Currency’s (OCC) Comptroller’s Handbook booklet, “Commercial Real Estate Lending,” provides guidance for bank examiners and bankers on commercial real estate (CRE) lending activities.”

It specifically cites risk, “The booklet addresses the risks inherent in CRE lending as well as risks unique to specific lending activities and property types. Also discussed are supervisory expectations and regulatory requirements for prudent risk management. “

The Comptroller’s Handbook was updated in August of 2013. For further information regarding the  updates, visit

http://www.partneresi.com/resources/occ-handbook-commercial-real-estate-booklet.php

Controlled Recognized Environmental Condition (CREC)

Controlled Recognized Environmental Condition (CREC) is a proposed new term for the ASTM E1527 standard for Phase I Environmental Site Assessments (ESAs).  The Controlled REC concept was introduced to address contaminated sites that have received risk-based regulatory closure, where no further remediation is required but residual contamination still exists at a site and the property is subject to activity and use limitations or “AULs.”  These sites, where contamination is controlled but could still pose ongoing or future obligations on the owner (such as special precautions during construction or grading activities), have been a source of some confusion to the environmental due diligence industry with regards to how they should be classified.  The Controlled Recognized Environmental Condition or “CREC”, if accepted, would be a distinct classification from Historical Recognized Environmental Condition (HREC) and Recognized Environmental Condition (REC). The environmental professional would be required to list any CRECs identified in the findings and conclusions section of the Phase I Environmental Site Assessment report.

Recognized Environmental Condition- REC

A Recognized Environmental Condition (REC) is defined by ASTM as “the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, ground water, or surface water of the property. The term includes hazardous substances or petroleum products even under conditions in compliance with laws.” The term REC does not include de minimis conditions.

Historical Recognized Environmental Condition- HREC

A Historical Recognized Environmental Condition is defined by ASTM as “an environmental condition which in the past would have been considered a recognized environmental condition, but which may or may not be considered a recognized environmental condition currently.” The determination of whether an environmental condition is a recognized environmental condition (REC) or a historical recognized environmental condition (HREC) lies with the environmental professional, and depends upon how the condition impacts the current or future use of the property. A release that was remediated and given regulatory closure may be considered an HREC unless it is determined to have a significant current or future impact on the property, at which point the environmental professional may deem it a REC.

Environmental Professional (EP)

An Environmental Professional is someone qualified to conduct and/or supervise a Phase I Environmental Site Assessment, based on experience and education requirements. An Environmental Professional or “EP” must possess sufficient knowledge and experience to exercise professional judgment, appropriately evaluate risks and form conclusions regarding conditions indicative of releases or threatened releases at a property. The requirements for an Environmental Professional include:

A federal, state or tribal issued certification or license (Professional Geologist, Professional Engineer or other certification to perform environmental inquiries) and 3 years of relevant full-time experience;

or

A Baccalaureate degree or higher in science or engineering and 5 years of relevant full-time work experience;

or

10 years of relevant full-time work experience.

Business Environmental Risk

Business Environmental Risk is characterized by the American Society for Testing and Materials (ASTM) as “a risk which can have a material environmental or environmentally-driven impact on the business associated with the current or planned use of a parcel of commercial real estate, not necessarily limited to those environmental issues required to be investigated in this practice (ESA, ASTM E1527-05). Consideration of business environmental risk issues may involve addressing one or more non-scope considerations.”

The conventional non-scope environmental business risk items alluded to include:

• Asbestos
• Lead Paint
• Lead in Drinking Water
• Radon
• Wetlands
• Ecological resources
• Endangered Species
• Cultural and historic resources
• Regulatory compliance
• Industrial Hygiene
• Health and Safety
• Indoor air quality
• Biological agents
• Mold

Business Environmental Risk is by definition very broad and can encompass many types of risk, not limited to the above list.

Environmental Site Assessment- ESA

The Environmental Site Assessment is a process of evaluating the environmental liability of a real estate asset. Specifically, Environmental Site Assessment or “ESA” is the process of conducting “all appropriate inquiry” into the past or present uses of a property to determine whether the property is impacted by a “recognized environmental condition” (REC). The ESA process includes a site inspection, a review of historical records of the property and research of records available at government agencies. This information is detailed and evaluated in the Phase I Environmental Site Assessment Report, and an opinion is made as to whether past or present activities may have caused a release of hazardous substances or petroleum products at the property. The ESA is the primary tool used to qualify a user for the Landowner Liability Protections under CERCLA. Learn more about ESAs here.

ASTM E1527-05 Standard – Phase I Environmental Site Assessments

The ASTM E1527-05 Standard is the industry standard used for Phase I Environmental Site Assessments. Fully named “ASTM E1527-05 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process,” the Standard outlines the purpose and use of the Phase I ESA as well as the scope of work to be conducted, including: records review (historical and governmental records); site reconnaissance (inspection of the property and adjacent sites); interviews (with owners and occupants and local government officials); evaluation and report preparation.

The ASTM E1527-05 Standard was formed by the American Society for Testing and Materials (now ASTM International), and is designed to meet the EPA’s condition for All Appropriate Inquiry for environmental due diligence. The E1527 Standard for Phase I ESAs has gone through many versions, the latest being finalized in 2005. The standard is reviewed and revised by the ASTM Committee E50 on Environmental Risk Assessment, Risk Management and Corrective Action.

All Appropriate Inquiry – AAI

All Appropriate Inquiry or “AAI” is defined by ASTM and EPA (through CERCLA) as the process of conducting inquiry “into the previous ownership and uses of the property consistent with good commercial or customary practice…that will qualify a party to a commercial real estate transaction for one of the threshold criteria for satisfying the LLPs to CERCLA liability.” Essentially, conducting all appropriate inquiry consists of environmental due diligence conducted prior to a property transaction to determine whether a property may have been contaminated by past or current activities, in order for a user (for example, the prospective purchaser) to be exempt from liability for contamination that existed on a property prior to the property transaction.

The AAI requirement began with the CERCLA or “Superfund” law of 1980, and was refined by several later laws: the Superfund Amendment and Reauthorization Act (SARA) in 1986; the Asset Conservation, Lender Liability and Deposit Insurance Protection Act in 1996; and the Small Business Liability Relief and Brownfields Revitalization Act (“Brownfields Amendments”) in 2002. The most recent ruling regarding what composes AAI was decided in 2005 by the EPA’s Final Rule on All Appropriate Inquiries.

Comprehensive Environmental Response, Compensation and Liability Act – CERCLA

Also known as the “Superfund” law, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) was enacted in 1980 and, among other things, gave the federal government the ability to respond to releases or threatened releases of hazardous substances, and to pursue polluters (“responsible parties”) or potential polluters (“potentially responsible parties”) for the cleanup of contaminated sites.

CERCLA created the need to conduct “all appropriate inquiry” prior to a property transaction to qualify for exemption from CERCLA liability for cleanup costs.

CERCLA was amended by the Superfund Amendment and Reauthorization Act (SARA) in 1986.