Over the years, environmental issues requiring mitigation before a CMBS conduit loan can close have declined. However, one issue related to dry cleaners still surfaces from time to time.
Properties identified as having a current or former dry cleaner that performs or historically performed “on-site” dry cleaning face a Phase II subsurface investigation in almost every instance, if a Phase II subsurface investigation was not already completed.
A Phase II subsurface investigation will determine whether tetrachloroethylene (also known as perchloroethylene or “PERC”) is present in the soil beneath the dry cleaner’s tenant space. PERC is an extremely hazardous chemical known to cause cancer and has been linked to increased risk of developing Parkinson’s disease. PERC can penetrate concrete fairly easily and leach into the soil.
The scope of the investigative work requires drilling small holes in the slab beneath the dry cleaner’s tenant space and testing the soil. The work can cost $5,000-$10,000 or more.
Many of our CMBS clients elect an alternative solution to mitigate the environmental concern. They purchase environmental insurance obtained by the lender. The policy term is 12-13 years (term of loan plus 2-3 years) and the policy premium is roughly a one-time payment at closing of approximately $50,000 (roughly $4,000 per year). The premium is paid at closing only if the loan closes.
We at ValueXpress may be able to assist our clients by having the policy premium added to the loan proceeds. Therefore, the sponsor would not have to come out of pocket for the premium.