Abstract

This study analyzes the risk perceptions of commercial and industrial mortgage lenders related to environmental contamination. Two research questions are addressed. The first is whether perceived risks vary with a property's remediation/ cleanup status. The second is whether market conditions have an intervening effect on environmental risk. An analysis of national lender survey data found significant differences in perceived risk before, during and after cleanup, with most lenders unwilling to make a loan before cleanup and a majority willing to lend at typical rates and terms after cleanup. The study also found that strong market demand significantly reduces environmental risk while weak demand increases these risks.

Introduction

Environmental contamination can potentially impact real estate by increasing the risks of providing mortgage loans secured by such properties. As explained by Jackson (1998), increases in these risks reduce the value of the contaminated property. In many cases, it is the perceptions of risk by lenders and other key market participants that underlie the effects on value. Accordingly, research focused on understanding how lenders perceive contamination related risks, which is essential to understanding how and under what conditions environmental contamination affects commercial and industrial real estate.

This research is directed at commercial and industrial properties. Much of the existing published research on the effects of contamination and other environmental disamenities on real estate has focused on residential properties. Income-producing commercial and industrial properties have different markets and different market participants than residential properties. The transactions are generally larger and the level of due diligence is typically higher than for residential properties. In addition, commercial and industrial properties are more likely to be the sources of contamination. Residential properties affected by contamination are not the source in many cases but may be impacted by their proximity to a contamination source.