Most Of Our Real Estate Transactions Require Envioronmental Insurance and/or Due Diligence.

For the last twenty years, Phase I environmental inspections have been as much a part of commercial real estate transactions as appraisals and property condition assessments. However, as the industry evolves, all participants are looking for ways to streamline the due diligence process without compromising the level of acceptable risk - this includes investors and lenders alike. Environmental insurance has quickly come to the forefront of real estate transactions as an acceptable means of mitigating both past and future claims of environmental contamination, and replacing the Phase I requirement. This seems like a positive move, but with the emergence of environmental insurance, commercial investors should be aware of the various components of this new product.

Environmental insurance allows the burden of liability to shift away from both the investor and the lender. For the first time, lenders can transfer future risk. A Phase I does not have "eyes"; it cannot look forward and anticipate a new environmental event during the term of the loan. Unlike environmental insurance, Phase I's do not protect the lender in case of loan default and environmental damage. An increasing number of lenders are now accepting environmental insurance for the obvious reason that they are actually reducing their overall exposure to potential environmental risks in the future. This coverage also applies equally to the property owner. Additionally, it should be noted that Phase I inspections typically take 2-3 weeks to complete at an average cost of $2,000 to $3,000. As most investors know, there are certain out-of-pocket expenses, including the cost of a Phase I, incurred with each acquisition or refinance regardless of whether the transaction closes or not. However, environmental insurance not only eliminates the inspection process altogether, but environmental insurance premiums are only paid if the transaction closes and can be ordered in a matter of days not weeks. Adding to the validity of this option is the fact that, through ratings agencies that generally agree that environmental insurance mitigates yet another area of potential concern that covers the lender on a forward-looking basis, the CMBS market likes it as well.

The insurance industry is in a major state of flux given recent events relating to terrorist threats and mold claims, and we believe it's critical to watch and report what we're seeing. Insurance costs have an immediate and direct impact on an investment's NOI, and so we'll continue to share our findings in order to better assist you in achieving your investments objectives.

Give us a call to discuss your financing needs.

 t.609.457.8500
f.800.878.8263
funding@southxcapital.com