When Environmental Assessments Are Required
Environmental hazard assessments aren't automatic for every condo or co-op loan. They're only required when your lender discovers potential environmental problems while reviewing the project during underwriting.
Say you're buying a unit in a converted warehouse building. During the project review, your lender notices the building was previously used for manufacturing. That industrial history raises red flags about possible soil contamination or hazardous materials. The lender would then order an environmental assessment to investigate further.
The assessment requirement kicks in during the lender's due diligence process, not because of anything you as the borrower do or don't do. Your lender is essentially asking: "Is this building safe, and are there any environmental issues that could affect the property value or pose health risks?"
Understanding Phase I Environmental Assessments
A Phase I assessment serves as the first line of investigation. Think of it as environmental detective work that doesn't involve any actual testing or sampling.
The consultant reviews available records about the property and surrounding area. They interview people familiar with the site's history - former owners, long-time residents, or local officials who might know about past uses. They also conduct a thorough visual inspection of the building, the grounds, and neighboring properties.
The goal is to answer a basic question: Is there enough information to determine whether this property has environmental problems? If the Phase I assessment finds clear evidence that the site is clean, that might be the end of the investigation. But if it uncovers potential issues or can't reach a definitive conclusion, the lender will likely require a Phase II assessment.
When Phase II Assessments Become Necessary
Phase II assessments involve actual physical testing and sampling. Your lender orders one when the Phase I assessment either identifies specific problems or leaves too many questions unanswered.
Consider a condo project built on a former gas station site. The Phase I assessment might reveal old underground storage tanks were removed years ago, but the consultant can't determine from records alone whether any fuel leaked into the soil. That uncertainty triggers a Phase II assessment with soil sampling and groundwater testing.
Phase II assessments also happen when the Phase I identifies specific hazards that need quantification. Maybe the consultant spots asbestos-containing materials in the building's mechanical systems. The Phase II would then test those materials to determine the exact type and extent of asbestos present.
Required Documentation and Consultant Qualifications
Your lender must choose the environmental consultant carefully. The consultant cannot have any business relationship with you, the seller, or any other party involved in the transaction. This independence requirement prevents conflicts of interest that could compromise the assessment's objectivity.
The consultant must have appropriate education, training, and experience for environmental assessments. While Fannie Mae doesn't specify exact credentials, lenders typically look for consultants with environmental science backgrounds and relevant certifications.
For Phase II assessments, the consultant's report must include several specific elements. The report needs a complete description of all sampling procedures used, full laboratory results from any testing, and the consultant's professional recommendations based on the findings.
The report must also include a certification statement confirming that all work followed regulatory standards and good management practices. An officer of the consulting firm must sign this certification, taking responsibility for the assessment's quality and accuracy.
Types of Testing in Phase II Assessments
Phase II assessments can involve various types of environmental testing depending on the suspected hazards. Soil sampling and analysis represents the most common type of testing, especially for properties with industrial histories or known contamination sources.
Groundwater testing becomes necessary when there's potential for contamination to have reached underground water sources. This is particularly important for properties near gas stations, dry cleaners, or manufacturing facilities that used chemicals.
Underground storage tank investigations focus on properties that currently have or previously had fuel storage tanks. Even after tank removal, contamination can persist in surrounding soil for decades.
Asbestos sampling targets buildings constructed before 1980, when asbestos use in construction materials was common. The testing identifies not just the presence of asbestos but also its condition and potential for becoming airborne.
Testing for polychlorinated biphenyls (PCBs) applies to properties with electrical equipment manufactured before 1979, when PCBs were commonly used in transformers and other electrical components.
Why These Rules Exist
Fannie Mae requires environmental assessments to protect both borrowers and investors from properties with serious environmental liabilities. Environmental problems can dramatically affect property values and create ongoing health and safety risks.
Consider a condo building with widespread asbestos contamination. The cost of proper abatement could run into hundreds of thousands of dollars, potentially exceeding the value of individual units. Without proper assessment, buyers could unknowingly purchase units in buildings with massive hidden liabilities.
The two-phase approach balances thoroughness with cost efficiency. Phase I assessments cost much less than Phase II testing, so it makes sense to screen properties first with the less expensive option. Only properties that show potential problems or inconclusive results move to the more expensive Phase II testing.
The consultant independence requirements prevent situations where environmental assessments might be influenced by financial incentives to approve problematic properties.
Common Complications and Red Flags
Environmental assessments can delay your closing if problems are discovered that require remediation. The timeline depends on the severity of issues found and the complexity of any required cleanup.
Some environmental problems cannot be remediated to acceptable standards within reasonable timeframes or budgets. Properties with extensive soil contamination or groundwater pollution might be deemed unacceptable for Fannie Mae financing regardless of remediation efforts.
Neighboring property issues can also complicate assessments. If a nearby property is subject to Superfund cleanup or other major environmental enforcement actions, that could affect your property's environmental status even if your building itself is clean.
Historical uses of the property matter significantly. Properties that housed gas stations, dry cleaners, auto repair shops, manufacturing facilities, or chemical storage operations face higher scrutiny and more extensive testing requirements.
The age of the building influences assessment scope. Older buildings face greater likelihood of asbestos, lead paint, or other hazardous materials that were commonly used in past decades but are now known to pose health risks.
Fannie Mae reserves the right to reject assessments from consultants who have provided substandard work in the past. If your lender's chosen consultant is on Fannie Mae's unacceptable list, you'll need to start over with a different consultant, adding time and cost to the process.
References
For the official guidelines, see B4-2.1-04: Environmental Hazard Assessments in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B4-2.1-04, Environmental Hazard Assessments (06/03/2020)
Overview
Types of Environmental Hazard Assessments
Phase I Environmental Hazard Assessment
Phase II Environmental Hazard Assessment Description
Who Should Complete the Phase II Environmental Hazard Assessment
Phase II Environmental Hazard Assessment Report Forms and Requirements
Kinds of Testing or Sampling Under Phase II Environmental Hazard Assessments
Results of an Environmental Hazard Assessment
Overview
An environmental hazard assessment is required for condo and co-op projects if an environmental problem is identified by the lender through performance of its project underwriting or due diligence. If environmental problems are identified, the problems must be determined to be acceptable. Lenders should keep a copy of this assessment in the project review file.
Types of Environmental Hazard Assessments
The table below describes two types of environmental hazard assessments.
Phase I assessment (see
Phase I assessment identifies problems or
Phase I assessment is inconclusive with regard to any particular hazard.
Acceptability of Consultants
Fannie Mae reserves the right to notify lenders that a particular consultant is no longer acceptable. Fannie Mae also reserves the right to refuse to accept, at any time, any future environmental assessment, report, warranty, or certification from individual consultants, specific consulting firms, or specific branch offices of consulting firms.
Phase I Environmental Hazard Assessment
A Phase I assessment enables lenders to quickly determine whether adequate information exists to evaluate the environmental status of a property. A Phase I assessment is principally a screening process that focuses on reviewing the available documentation, interviewing people who are knowledgeable about the site operations, and inspecting the site, the building, and adjoining properties. Fannie Mae does not require a specific form for a Phase I assessment.
Any report that is thorough and professionally prepared will be acceptable. For a suggested format, see E-2-02, Suggested Format for Phase I Environmental Hazard AssessmentsE-2-02, Suggested Format for Phase I Environmental Hazard Assessments.
Phase II Environmental Hazard Assessment Description
A Phase II assessment provides a more detailed review of the site. It includes specific physical sampling for each hazard that was not acceptable under the Phase I assessment, as well as a review of historical records. It determines the presence or absence of specific environmental liabilities (such as asbestos or leaking underground storage tanks) or quantifies the extent of an observed or suspected environmental liability (such as soil or groundwater contamination).
Who Should Complete the Phase II Environmental Hazard Assessment
The specialized nature of the investigations conducted under a Phase II assessment requires the knowledge and experience of a qualified consultant.
Lenders must use care in choosing firms to perform environmental hazard assessments. Lenders should confirm that the consultant it plans to use is not affiliated with the buyer or seller of the property or a firm engaged in a business that might present a conflict of interest. Lenders should also evaluate whether the consulting firm’s personnel have adequate and appropriate education and training to carry out the required duties.
Phase II Environmental Hazard Assessment Report Forms and Requirements
Fannie Mae does not specify an exact format for the consultant’s report. Any report that is thorough and professionally prepared will be acceptable.
The table below provides the requirements for the Phase II Environmental Assessment Report.
✓
The consultant’s report for a Phase II environmental hazard assessment report must
include a full description of the sampling procedures
include the laboratory results
include the consultant’s recommendations
follow all regulatory standards and good management practices at all times, especially when physical sampling and laboratory analysis are involved
include a certification in the report that:
include the signature of an officer of the consulting firm that conducted the work
Kinds of Testing or Sampling Under Phase II Environmental Hazard Assessments
Examples of the kind of testing or sampling that occur under a Phase II assessment include but are not limited to the following:
investigating the status of any enforcement actions related to neighboring properties under the Superfund or Resource, Conservation, and Recovery Acts;
testing for underground storage leaks;
sampling and analyzing the soil;
sampling and analyzing the groundwater;
testing soil or facilities that are suspected as being contaminated by polychlorinated biphenyls; and
sampling and analyzing bulk asbestos and developing related abatement and maintenance programs, if necessary.
Results of an Environmental Hazard Assessment
Lenders must evaluate the results of the assessment and determine if the conditions are acceptable to be remediated. Refer to B4-2.1-05, Unacceptable Environmental Hazards and B4-2.1-06, Remedial Actions for Environmental Hazard Assessments Below Standards.
