Securing a commercial real estate loan is complicated, but what often causes unanticipated, eleventh hour delays are simple issues that could have been avoided if the proper scope of work was followed in preparation of the due diligence reports. It is often thought that the components of a Phase I Environmental Site Assessment or a Property Condition Assessment are the same regardless of the lender and can be “pre-ordered” prior to securing financing for use by that lender. This is not the case and too often a report gets to the lender with a required item missing. This invariably holds up the deal.
A prime example of this involves Fannie Mae or Freddie Mac deals. While much of the information collected and presented in the aforementioned reports is the same regardless of the lender, and typically follows the standard ASTM scopes for these assessments, when dealing with Fannie and Freddie, there are some very specific requirements which vary between the two entities. These items must be properly addressed or the reports will not be accepted. Additionally, both Fannie Mae and Freddie Mac can be more stringent in their review and analysis of the reports, and are generally more risk adverse resulting in additional scrutiny if the reports are not sufficiently thorough.
Some key items that must comply with the lender specific scope include how many units and types of units must be inspected, where those units are located within the building(s), sampling and documentation requirements regarding asbestos, lead based paint, PCBs (transformers) mold and radon, who is interviewed and what information must be obtained, past capital expenditure information, maintenance practices, and earthquake risk assessment. Each lender has their own “hot button” issues that if not properly addressed will guarantee last minute problems. Both lenders have specific required report formats and forms which are not easily converted from one lender’s format to the other and require that the field inspector obtain this information while onsite at the property.To assist in avoiding transaction delays, it is advisable to discuss report requirements early in the process, involve the right people and determine the scope of work that best meets the anticipated needs of all involved parties.