Environmental Assessments for the Freddie Mac Optigo SBL Program
Property appraisals and property condition reports aren’t the only third-party reports that a Freddie Mac SBL borrower will need to successfully apply for a loan– they will also need a Phase I Environmental Site Assessment (ESA). A Phase I ESA is designed to ensure that a property is not in violation of any environmental laws and will not put residents or the surrounding community at risk.
Phase I ESAs should generally be performed in compliance with the requirements listed in the ASTM Standard E1527-13. The ASTM, formerly referred to as the American Society for Testing and Materials, is an international body that sets standards for a variety of systems and services, including many types of environmental and engineering tests. ESAs should also meet all requirements in the Freddie Mac Seller/Servicer Guide.
In addition to these guidelines, Freddie Mac has issued a variety of additional recommendations for best practices when it comes to environmental reporting. While the lender and the testing firm will generally take lead on this part of the process, borrowers should still remain informed, as the results of the environmental assessment can have a significant impact on whether their loan will be approved. Specifically, Freddie Mac recommends:
- That lenders and borrowers thoroughly read and check an environmental report before submitting to Freddie Mac (perhaps getting the opinion of a second party)
- Creating a thorough line of communication between all relevant parties, including the borrower, the lender, and the environmental testing firm
- Choosing the most highly-qualified and experienced testing/consulting firm, not just the fastest or least expensive option
Freddie Mac also issues recommendations about mistakes that consultants make (which lenders and borrowers should check for), including:
- Failing to make recommendations (and cost estimations) for any issues
- Failing to follow specific instructions involving asbestos or radon gas testing/sampling
- Failing to gauge overall risk or following up on issues
- Failing to recommend/suggest if any further examination is required
- Failing to include cost analysis for work in progress
- Not accurately including reserve analysis
- Failing to justify waivers
Additional Freddie Mac Environmental Requirements
In 2011, Freddie Mac introduced additional updates and changes to their environmental reporting requirements. Specifically, these changes involve requiring that the environmental testing consultant indicate if there is a State Super Lien Law in the state where the property is located. State Super Lien laws permit state governments to place a first priority lien on the property if serious environmental contamination has occurred, which increases risk for lenders and Freddie Mac.
In their update, Freddie Mac also increased the strictness of their asbestos testing requirements. A consultant can no longer decide whether asbestos testing should be required by only looking at the date when the building was constructed; they must incorporate other factors, as well. As asbestos is still being imported into the U.S., construction date restrictions are not particularly relevant.
Inspection requirements for asbestos have also been changed relative to the number of units and the number of phases of a building’s construction. In general, Freddie Mac has been concerned that consultants are not testing friable (crumbling) material such as building insulation. It should be noted that any friable material with an over 10% concentration of asbestos will need to be replaced.
Additional, for Phase II Environmental Assessments (assessments that are generally mandated if a problem is discovered in the initial assessment), Freddie Mac says that it will likely require sampling for underground storage tanks (USTs), as well as areas where a recorded spill has occurred involving a dry cleaning machine.