As builders continue default on construction loans, states are increasing turning to banks to ensure that partially completed developments remain in compliance with environmental laws. We have seen enforcement actions brought against banks in California, Georgia, North Carolina with unconfirmed reports in other states.
At the heart of the problem is runoff from abandoned and foreclosed residential projects. Under the federal Clean Water Act (CWA) and state versions of that law, developers and builders are required to obtain stormwater permits and implement Storm Water Pollution Prevention Plans, Best Management Plans and or Erosion Control Measures. These requirements are the reason that construction projects have those ubiquitous black and orange silt fences.
When banks foreclose on these abandoned projects, they may perform phase 1 reports that typically do not address environmental compliance. As a result, foreclosing bank is usually of the need to maintain erosion control or the cost of correcting any violations. The CWA does not have a secured creditor exemption so banks will be considered owners or operators of these properties that are responsible for complying with the full panoply of environmental laws associated with the development. Lenders that foreclose on partially completed construction sites are finding themselves saddled with fines and penalties for unpermitted sediment runoff and costs to bring the sites into compliance.
Normally. fines can range from a few hundred dollars per day to tens or hundreds of thousands depending on the severity of the violations and length of time the properties have been in non-compliance. In addition, the violations run with the land. The costs can only quickly add up and with banks foreclosing on multiple properties, the costs can scale into the millions of dollars For example, at one site near Dawsonville, a foreclosing lender has fines in excess of #4 million for inadequate erosion controls for a site that was valued at $1.97 million in 2006. The Gainesville Bank & Trust foreclosed on the property after the builders and developers of the site were convicted mortgage fraud and abandoned the development. Consequently, some banks are taking proactive steps to minimize their liability. SunTrust Banks Inc. recently implemented a comprehensive environmental compliance program for its foreclosed and repossessed properties. The bank retained two engineering firms to oversee the properties.
Georgia recently issued new General Permits for Storm Water Discharges Associated with Construction Activity for Stand Alone projects, Infrastructure Projects and Common Developments. Existing construction projects must submit a new NOI within 60 days after the effective date of the new permits. New sites that begin construction activities after the issuance date of the Permits must submit the new NOI form at least 14 days prior to beginning construction activities. Proof of submittal of the NOI must be retained at the construction site or other readily available location. Under the revised rules, a lender or other secured creditor who acquires legal title to a construction site must file a new NOI by the earlier to occur of (1) seven days before beginning work at the construction site or (2) thirty days from acquiring legal title to the construction site.
In North Carolina, the heads of the Departments of Commerce ,and the Environment and Natural Resources (DENR) recently issued a joint memo advising banks to contact the DENR immediately upon taking control of property. The DENR will send inspectors to the site to determine its compliance and work with the lender to bring the site into compliance, re-issued expired permits and approve acceptable sedimentation controls. If remedial measures are required, the bank would be expected to enter into an administrative order. However, following the suggested protocol will help lenders minimize fines or penalties.
Meanwhile, in the arid southwest such as Arizona and parts of California, regulatory authorities are focusing on air pollution caused by dust from stalled construction projects. Lenders are being required to implement measures to reduce airborne dust.
The California Department of Toxic Substances has also warned lenders foreclosing on properties that that they properly dispose any hazardous materials at those sites. Abandoned construction projects frequently become dumping grounds and abandoned homes may contain quantities of hazardous materials that may have to be managed as hazardous waste according to the state.
In Florida, a lender foreclosed on six condos in a senior housing complex. One of the unit owners took out all appliances including the air conditioning. The condo association demanded that the foreclosing lender replace the air conditioning but refused. Months later, the entire unit became infested with mold forcing the bank to pay for a gut renovation.
Then we have the ordinances that are sprouting across the country require lenders that foreclose on homes to properly maintain them or pay to demolish the structures. For example, Cathedral City recently enacted a local ordinance requiring owners of foreclosed properties to register the property with the city. Among other requirements, the ordinance requires owners to pay a $70 annual registration fee, secure the property, keep it free of debris, landscape the front and side yards to neighborhood standards, clean or drain the pool, and hire a local property manager to inspect it weekly. The town located in what was once the red-hot housing market of Riverside County has over 2,000 foreclosed properties currently sitting vacant in this California desert community. The empty houses have been vandalized, used a meth labs or simply as bases for criminal activities. Stagnant swimming pools have created breeding grounds for mosquitoes and drowning hazards.
Earlier this week, JPMorgan Chase agreed to pay Oakland, Calif. $35,000 to settle a lawsuit accusing lenders and local agents of illegally evicting tenants under the municipal “just cause” eviction law. Under the just cause ordinance, landlords and foreclosing lenders must have a specified valid reason for evicting a tenant, such as the owner moving into the unit, and give 60 days' notice.
In Rhode Island, the legislature recently enacted the Rhode Island Foreclosed Property Upkeep Act. It requires any financial institution that purchases a foreclosed property to post a bond with the municipality for 25 percent of the property’s assessed value, to be used to correct any code violations if the owner doesn’t take care of it. If the full value of the bond is used in the upkeep of the property, the owner has 10 days to file another bond in the same amount or have the property forfeited to the municipality.
All of these emphasizes how important it is for lenders and their consultants to carefully review the conditions of properties before a foreclosure decision is made and to plan for post-foreclosure activities not only to minimize liability but also to preserve property value.
No comments:
Post a Comment