Phoenix Brownfields University 2005


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Presentation on "AAI: Lender & Appraiser Perspectives" as invited guest speaker.

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Phoenix Brownfields University 2005

  1. 1. AAI: Appraiser & Lender Perspectives Mitch Kreeger, MAI, SRA Chief Appraiser, Affinity Bank [email_address]
  2. 2. Introduction <ul><li>Regulatory Compliance: USPAP Methodology </li></ul><ul><ul><li>(FIRREA, Appraisal Institute) </li></ul></ul><ul><li>Affinity Bank Loan Policy </li></ul><ul><li>Survey of Lender Policies </li></ul>
  3. 3. USPAP Advisory Opinion 9 – “Appraisal of Real Property That May Be Impacted by Environmental Contamination” <ul><li>Competency & Requisite Knowledge </li></ul><ul><ul><li>Have it, </li></ul></ul><ul><ul><li>Get it, or </li></ul></ul><ul><ul><li>Rely on outside experts </li></ul></ul><ul><ul><ul><li>(Extraordinary Assumption) </li></ul></ul></ul><ul><li>Relevant Property Characteristics – usually obtained from 3rd party experts (EPs) </li></ul>
  4. 4. Terms (USPAP AO-9) <ul><li>-- Property Value Diminution </li></ul><ul><li>-- Environmental Contamination </li></ul><ul><li>-- Environmental Risk </li></ul><ul><li>-- Environmental Stigma </li></ul><ul><li>-- Impaired Value: “as-is” value of a contaminated property. </li></ul><ul><li>-- Remediation Cost </li></ul><ul><li>-- Remediation Lifecycle: 3 stages of cleanup…before, during and after remediation. </li></ul>
  5. 5. Terms, cont. (AO-9) <ul><li>-- Source, Non-source, Adjacent and Proximate Sites: </li></ul><ul><ul><li>Source sites are the sites on which contamination is, or has been, generated. </li></ul></ul><ul><ul><li>Non-source sites are sites onto which contamination, generated from a source site, has migrated. </li></ul></ul><ul><ul><li>Adjacent site is not contaminated, but shares a common property line with a source site. </li></ul></ul><ul><ul><li>Proximate sites are not contaminated and not adjacent, but are in close proximity to the source site. </li></ul></ul><ul><li>-- Unimpaired Value: Market value under hypothetical condition (not contaminated). </li></ul>
  6. 6. Valuation Issues, As If Unimpaired <ul><li>Contaminated Property </li></ul><ul><ul><li>Hypothetical Condition </li></ul></ul><ul><ul><ul><li>“As if clean” (unimpaired) </li></ul></ul></ul><ul><li>Uncertain Contamination </li></ul><ul><ul><li>Extraordinary Assumption </li></ul></ul><ul><ul><ul><li>If property believed free of contamination, or </li></ul></ul></ul><ul><ul><ul><li>If environmental status uncertain </li></ul></ul></ul>
  7. 7. Valuation Issues, As Impaired (Brownfields) <ul><li>Highest & Best Use issues: </li></ul><ul><li>As If Unimpaired - no limitations from contamination </li></ul><ul><li>As Impaired - considers limitations due to environmental contamination and legal use restrictions associated with cleanup, and how it may affect: </li></ul><ul><ul><li>Feasibility of site development or redevelopment, </li></ul></ul><ul><ul><li>Use during and after remediation, and </li></ul></ul><ul><ul><li>Marketability </li></ul></ul><ul><li>Will excessive environmental risk and/or stigma deter site development or redevelopment until acceptable risk levels? </li></ul>
  8. 8. Satisfying USPAP SR 1-4 (Scope of Work) <ul><li>Impaired value may not equal unimpaired value less costs of remediation & compliance </li></ul><ul><li>Cost, Use & Risk Effects – potential value impact </li></ul><ul><ul><li>Cost: deductions for remediation costs </li></ul></ul><ul><ul><li>Use: impacts on utility of the site due to contamination </li></ul></ul><ul><ul><li>Risk: derived from market’s perception (Environmental Stigma) of increased environmental risk or uncertainty, based on actual market data </li></ul></ul>
  9. 9. Valuation Issues – Detrimental Conditions (DC) Matrix (Sources: Randall Bell, MAI; USPAP AO-9) Market resistance (stigma) Provide incentives for timely repairs -- Uncertainty -- Fear of unknowns -- Assess depth & breadth of issues Risk (Stigma) Ongoing Loss of Utility Loss of Utility during Redevelopment Loss of Utility Assessment Use -- O & M Plan -- Monitoring -- Ongoing costs -- Repair costs -- Remediation costs -- Redevelopment -- Assess extent of contamination -- ESAs, RAP Cost Ongoing Repair Assessment
  10. 10. Stages of Value Recovery (Source: Randall Bell, MAI)
  11. 11. Valuation (Appraisal) Issues <ul><li>Cost Approach </li></ul><ul><li>Remediation & compliance costs prior to, or during, site development or redevelopment </li></ul><ul><ul><li>soil, groundwater, asbestos, lead paint, mold, etc. </li></ul></ul><ul><li>Depreciation – physical, functional or economic </li></ul><ul><ul><li>May reflect capitalized long-term O&M plan expenses, change in H&BU, full/partial loss of use, etc. </li></ul></ul><ul><li>Income Approach </li></ul><ul><li>Rents ↓ or lease-up time ↑ (lower income) </li></ul><ul><li>Long-term O&M plan (higher expenses) </li></ul><ul><li>Potentially higher cap rate, discount rate, expenses </li></ul>
  12. 12. Valuation Issues, cont. <ul><li>Sales Comparison Approach </li></ul><ul><li>Sales of similarly impacted properties </li></ul><ul><li>Sales of non-impacted properties </li></ul><ul><li>Other Issues </li></ul><ul><li>Deduct remediation/compliance costs (before, during, after) </li></ul><ul><li>Redevelopment during remediation issues </li></ul><ul><ul><li>impaired use, reduced income, ongoing O&M… </li></ul></ul><ul><li>Impact from Environmental Stigma </li></ul><ul><li> “ After red tags…” article (Diane Wedner, LA Times, March 6, 2005) </li></ul>
  13. 13. Lender Point of View: Affinity Bank
  14. 14. Lender Point of View - Affinity Bank <ul><li>Low risk lender </li></ul><ul><ul><li>$1B assets </li></ul></ul><ul><ul><li>Privately owned </li></ul></ul><ul><li>FDIC Bulletin FIL-14-93 “Guidelines for an Environmental Risk Program” </li></ul><ul><li>Property Inspection – Site Visits </li></ul><ul><ul><li>Regional loan manager </li></ul></ul><ul><ul><li>Credit risk officer </li></ul></ul><ul><ul><li>Appraiser </li></ul></ul>
  15. 15. Lender Point of View - Affinity Bank Initial Due Diligence <ul><li>Environmental Risk Questionnaire (applicant) </li></ul><ul><li>Transaction Screen (bank ordered) </li></ul><ul><li>ESA: Phase I and/or Phase II (borrower) </li></ul><ul><li>Secured Creditor Impaired Property Policy (SCIPP) </li></ul><ul><ul><li>Potential environmental risk mitigation </li></ul></ul><ul><ul><li>Coverage must begin upon default , not foreclosure </li></ul></ul>
  16. 16. Lender Point of View - Affinity Bank Ongoing Due Diligence <ul><li>Training -- credit & lending personnel </li></ul><ul><li>Vendors/Consultants -- licensed + approved by Bank </li></ul><ul><li>AAI -- “Wait-and-See” until finalized, implemented </li></ul><ul><li>Environmental Insurance (SCIPP) -- monitor carriers, terms: </li></ul><ul><ul><li>Zurich – lesser of cleanup or outstanding loan balance upon default </li></ul></ul><ul><ul><li>AIG – lesser of cleanup or outstanding loan balance after foreclosure </li></ul></ul><ul><ul><li>Chubb – coverage is not transferable (secondary market) </li></ul></ul><ul><ul><li>Kemper – essentially out of business </li></ul></ul><ul><ul><li>Others – only carry property owner policies </li></ul></ul>
  17. 17. Lender Point of View: Lender Survey
  18. 18. Other Lender Policies <ul><li>Survey of Lender Appraisers & ERMs… </li></ul><ul><li>Does your bank do anything different due to AAI? </li></ul><ul><li>Does your bank lend on Brownfields? </li></ul><ul><li>What is your bank’s due diligence for lending on Brownfields or environmentally impacted sites? </li></ul><ul><li>Of 87 surveys on 4/15/05 (including Affinity Bank), </li></ul><ul><li>17 responses (20% response rate) received and culled. </li></ul>
  19. 19. Lender Survey: 1) “AAI” Policy Changes? <ul><li>No – 65% </li></ul><ul><li>Wait and see (majority) </li></ul><ul><li>Interim – follow ASTM </li></ul><ul><li>No AAI update if borrower already owns property </li></ul><ul><li>No AAI update if low risk or low dollar loan </li></ul><ul><li>Anticipate increased costs </li></ul><ul><li>Yes – 35% </li></ul><ul><li>Already updated Phase I scope of work for AAI </li></ul><ul><li>Increased due diligence per AAI </li></ul><ul><li>Consultants must meet AAI’s “EP” requirements </li></ul>
  20. 20. <ul><li>Yes (82%)… </li></ul><ul><li>Exposure: Very limited on case-by-case analysis, up to actively lending on Brownfields </li></ul><ul><li>Assess & quantify impact </li></ul><ul><li>Borrower must be financially able to manage & cover unexpected costs – credit decision </li></ul>Lender Survey: 2) Brownfield loans?
  21. 21. Lender Survey: 3) Due diligence? <ul><li>Define extent of contamination </li></ul><ul><li>Quantify impact </li></ul><ul><li>Review action plan (costs, timeline & budget) </li></ul><ul><li>Phase I, with Phase II &/or RAP if needed </li></ul><ul><li>Environmental Professionals, defined by AAI </li></ul><ul><li>Environmental Insurance (limited value) </li></ul><ul><li>Environmental Lawyers </li></ul>
  22. 22. Lender Survey: 3) Due diligence? <ul><li>Do NOT depend on liability risks, BFPP or other defenses </li></ul><ul><li>Underwrite to the risks </li></ul><ul><li>US EPA definition of AAI may not be supported by State authority over cleanup </li></ul><ul><li>Establish financial mitigation (escrow acct) </li></ul><ul><li>ASTM may be key to defining due diligence </li></ul>
  23. 23. Questions?
  24. 24. Sources & Links: <ul><li>Appraisal Institute ( ) </li></ul><ul><li>Environmental Bankers Association ( ) </li></ul><ul><li>Risk Management Association ( ) </li></ul><ul><li>Affinity Bank ( ) </li></ul><ul><li>Thanks to my survey respondents! </li></ul>