Lender Environmental Protection Hosted by UCPM, Inc. Presented by: Bart Jarman John Farinacci

Discussion Topics Environmental Due Diligence Lender Environmental Protection – Benefits – Lender Coverage – Portfolio Process Alternatives to LE Portfolio Q & A

Environmental Due Diligence Commercial Lenders Require Environmental Due Diligence Needed to preserve certain immunities granted by CERCLA Lenders create their own due diligence protocol Attempt to Minimize Risk Through:

Environmental Due Diligence – Loan Underwriting Guidelines – Transaction Screens/Environmental Database Reports – Phase I ESAs – Environmental Questionnaires – Environmental Policy & Procedures – Financial Collateral (Indemnification, Escrow Funds)

Two Major Concerns Remain with Traditional Environmental Due Diligence: 1.Retention of Potential Liability 2.Compromise of Collateral Historically Lenders Have Retained the Risk of Environmental Loss

Lender Environmental Protection Lender Environmental Liability Developed as an Alternative and/or Enhancement to Traditional Due Diligence and to Address Previously noted Concerns

Lender Environmental Protection Lender policies are intended to provide coverage to protect the collateral value in the event of a loan default and a pollution event that is first discovered on or at the covered location during the policy period

Insurance Benefits Reduce or eliminate the Cost of Traditional Due Diligence Streamline Loan Process Protect Bank Assets by Protecting Against Loss of Collateral Value

Insurance Benefits Insure Lender Liability on Collateral or REO Property Reduce Risk Associated with Financing Commercial Real Estate

Insurance Benefits Provide Cash Flow Management in the Event of a Claim Enhance Capital Market Deals Provide Competitive Advantage

Lender Coverage Structure – Portfolio (New or Existing) – Single Site Policy Payout Options – Lesser Of – Outstanding Loan Balance & Extra Expense

Lender Coverage Insuring Agreements – Default: Pays Lesser of the Cost of Cleanup or Loan Balance Depending on Policy Form – Third Party Claim – Provides Legal Defense and Indemnification – Foreclosure – Pays Cost of Cleanup

Lender Coverage Underwritten to Financial & Environmental Considerations Financial evaluations: – Portfolio assesses Lender guidelines – Single site assesses borrower strength for each deal Environmental Evaluations done for each Loan

Customer Profile Commercial Banks Mortgage Bankers Lenders & Loan Originators Financial Institutions & Investors Life Insurance Companies Pension Funds

Lender Coverage - Portfolio Portfolio Policy – Provides Pre-determined pricing – For a group of loans that grows from inception for a specific period of time – Loans categorized as Non-Suspect or Suspect

Portfolio Process Application – Carrier Application – Sample Loan Documents – Lender Financials – 2 years – Loan Underwriting Guidelines Including Minimum DSCR & Maximum LTV – Environmental Policy/Procedures

Portfolio Process Pricing Considerations: – Number of Loans to be Included – Make-up of Portfolio – Limits (both per incident & aggregate) – Term – Deductible

Portfolio Process Quote/Binding – Quote includes 2 premiums: Non-Suspect Loans Suspect Loans – Premiums good for defined period – Deposit Premium to bind – Deposit Premium is a credit against future premiums

Portfolio Process On-Going Processing – The Lender enters loan specific information electronically direct to the carrier – Lender receives response from the carrier generally within 24 hours – Lender Collects Insurance Premium at Loan Closing – Monthly Reconciliation

Portfolio Process Monthly Reconciliation – Carrier generated monthly agent report – Prior month activity: loans approved for coverage, loans declined – Reconciliation with lender to determine which approved loans have closed – Closed loans reported to carrier

Portfolio Process Monthly Reconciliation – Closed Loans Endorsed to Policy per Monthly Reconciliation – Invoice for Additional Premium After Reconciliation

Other Options Lender Environmental Protection – Single Site Environmental Site Liability with Borrower as Named Insured & Lender as Additional Insured

Lender Coverage – Single Site Process – Application – Copies of Environmental Reports – Borrower Financials – PSA – Loan Documents – DSCR Analysis – Appraisal Confirming LTV

Lender Coverage – Single Site Pricing Considerations Limits Current & Historical Property Use Clean or Dirty Neighboring/Regional Issues Borrower Financial Strength/ Dynamics of Deal Term & Deductible

Borrower Coverage Environmental Site Liability with Borrower as Named Insured Possible Alternative for Some Lenders for Strong Borrowers Lender Included as Additional Insured Also Available When Borrower wants Coverage in Addition to Lenders Coverage

Questions?

UCPM Follow-up John Farinacci (949) Bart Jarman (480)