Managing Environmental Risks to Our Investment Portfolio
Managing the environmental risks associated with the properties underlying each of our loans has always been a critical component of our investment and asset management processes. As described below, managing these risks requires that we first identify potential environmental risks to the commercial real estate assets underlying our loans, then assess the applicability of potential risks to individual collateral properties, and finally mitigate the effects of those risks over the life of the loans.
Identifying Environmental Risks to Properties
Commercial real estate loans carry differing levels of environmental risk based on a variety of factors, including the size of the loan, the underlying property’s type, and location, and previous property or property-adjacent uses. Key environmental risks currently associated with commercial real estate loans are described below, and we continue to monitor the landscape for other significant risks that could emerge.
Pollution-related Risks
Collateral properties that currently emit pollutants, or that are contaminated from past pollution, can have a lower value and thus pose a credit risk to our investment portfolio. These properties also bring the risks of potential clean-up costs, third-party damages, and legal fees.
Climate Change-related Risks
Given the relatively short time frame of our investments (typically 3–5 years), the most pronounced climate change-related risks to our portfolio are acute physical risks. Extreme weather events, such as hurricanes, represent a credit risk to our portfolio by potentially lowering the value of the collateral properties securing the loans. The value of collateral properties can also be negatively affected by flooding patterns, wildfire conditions or other chronic physical risks in a locale, or transition risks, such as increased regulation or changes in market practices.
Assessing Environmental Risks for Properties
As part of our rigorous bottom-up underwriting process, we assess environmental and other property-related risks for every loan before adding them to our investment portfolio.
Site Inspection
A member of our underwriting team conducts an in-person inspection of each collateral property.
Third-party Environmental Assessment
Each collateral property undergoes an environmental risk assessment by an independent certified environmental professional, the results of which are reviewed and approved by a specialized outside environmental consultant or counsel and our underwriting team. The environmental risk assessment includes:
- Phase I Environmental Assessment and Geotechnical Report evaluates the property and its immediate surrounding area to identify any adverse environmental conditions. This evaluation includes a property site visit, a review of government records, and interviews regarding past and present uses of the property to identify the presence of environmental hazards such as groundwater pollution, polychlorinated biphenyls (PCBs), lead paint, asbestos, drinking water contaminants and radon gas.
- Phase II Environmental Assessment is ordered if the Phase I report indicates any areas of concern. The Phase II assessment consists of detailed inspections and lab tests to determine compliance with local, state, and federal regulatory guidelines and will recommend additional review and remediation as appropriate. All Phase II reports and their findings are reviewed by environmental counsel.
Additional Diligence
Each collateral property undergoes a property condition assessment by a third-party engineer and a flood zone determination. Additional assessments (for example, a seismic report) may be ordered for particular properties as needed.
We also subjectively assess a property’s sustainability and related marketability when making an investment decision by reviewing characteristics and tenant amenities that are environmentally friendly, such as LEED certification, neighborhood walkability ratings, bike storage and repair facilities, and electric car charging stations.
Mitigating Environmental Risks to Our Portfolio
We further protect our financial interest in the collateral properties through measures that mitigate loss or liability related to environmental matters.Insurance
We require our borrowers to maintain insurance on the collateral properties to cover catastrophic events that could damage the properties, including earthquakes, floods and hurricanes, and related business interruption. Our borrowers are also required to carry insurance on certain properties to provide coverage for any potential liability relating to environmental matters, such as emissions or contamination.
Contractual Protections
The loan documents we use for each transaction contain environmental representations, warranties, and covenants to ensure ongoing sponsor compliance with applicable environmental laws and regulations and the completion of any required remediation. In addition, documentation for each of our loans includes an environmental indemnity from a credit-worthy guarantor or guarantors that must satisfy ongoing net worth and liquidity covenants.
Environmentally Responsible Lending
We provide financing to leading commercial real estate owners, operators, private equity funds and developers. The business plans for many of the properties we finance involve renovating and repositioning properties to meet the evolving needs of the tenants and stakeholders, often with a focus on climate and energy usage, pollution and waste reduction, water conservation, and/or the safety, security and wellbeing of tenants. In today’s competitive leasing market, many occupiers are demanding that building owners make ESG initiatives a priority, and actively seek out properties that are environmentally friendly as a key element in their space selection process.
Limiting Our Operational Impact
As a real estate finance company with fewer than 40 employees, the environmental impacts of our operations are relatively modest. We nonetheless strive to limit those impacts through responsible practices.
We lease the space for our two primary office locations in New York and Minnesota in buildings that have many features designed to conserve energy and water and reduce waste. Both buildings are equipped with energy management systems, LED lighting that is controlled by schedules or motion sensors, and low-flow toilets and sinks. The Minnesota building is Energy Star Certified, and both buildings have been certified as WELL Healthy and Safety Rated. The two buildings also facilitate low-energy commutes through their accessibility to mass transit and bike storage facilities.
We have also implemented environmentally responsible practices within our leased spaces to further reduce the impact of our office operations. Our computers and other electronic equipment are configured to use energy-saving sleep modes when not in use. We stock our kitchen spaces with eco-friendly supplies, and we have glass, metal, and plastic recycling receptacles throughout the office, kitchen, and meeting spaces. Filtered water is readily available to encourage the use of refillable containers instead of single-use water bottles. Finally, our flexible/hybrid work model saves energy and reduces emissions by decreasing the amount of commuting our employees do.
As part of our commitment to limiting the negative environmental impacts of our business operations, we have adopted an Environmental Policy. The policy is intended to promote environmentally responsible decision making and to educate our team members about sustainable business practices.
Our Environmental Policy applies to all officers and employees of our company and covers the following topics:
- Office Practices - When looking to lease office space for our operations, we will consider the environmentally friendly furnishings and features of potential buildings and their accessibility to mass transit and other low-impact commuting options. We will also follow energy-conservation and waste-reduction practices within those leased spaces, as described above.
- Business Travel - We encourage our officers and employees to consider attending off-site meetings and events remotely when practical. When team members will be traveling, we encourage them to adhere to the best practices outlined in the policy, which are designed to limit the negative environmental impact of business travel.
- Commuting - We also encourage our team members to reduce the negative environmental impact of their commutes from home to office by using fuel-efficient modes of transportation, including through the use of the buildings’ accessibility to mass transit, the buildings’ bike storage facilities, and the commuter benefits program offered by our company.
We are currently analyzing our greenhouse gas emissions, with the goal of reporting Scope 1 and Scope 2 amounts.