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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2016

Green Battle Royal

Consultants can help borrowers avoid pitfalls in the environmental due-diligence struggle

Green Battle Royal

For borrowers coping with complex commercial property deals involving environmental challenges, preparing for the underwriting process can feel like preparing for war. Outside experts are valuable allies in the effort.

A simple, but sinister, cartoon depicts a medieval king engaged in a fierce battle and a salesman offering to sell him a revolutionary product — a machine gun. When the peddler asks for a moment of the king’s time, the king responds: “I can’t be bothered with any new-product salesman. I have a battle to fight.”

Does this sound familiar? The king probably expected the salesman to sell him just another sword — perhaps one that’s a little sharper or with a fancier grip — but he didn’t take the time to even look in order to consider whether this new product could fundamentally change his chances of success in battle. After all, he has not seen anything new in decades. Paying attention to the salesman, however, would have given the king the competitive advantage necessary to fight the battle more efficiently and quickly. 

Although warfare is a grim analogy, this image has a ubiquitous message that can also be applied to environmental due diligence. For commercial mortgage brokers, it’s a message worth sharing with clients whose deals require environmental services: It pays to reconsider your approach from time to time, and to establish the right team with the right tools to most efficiently help you fight your battles.

It is a mistake to get comfortable with good service or good processes, because you will never realize the great service or great processes you could be missing out on. Brokers do well to instill that thinking in clients that must take part in the environmental due-diligence process. If they haven’t recently considered how they handle the process, or believe there’s no better way for them to handle it, it may be because they haven’t seen anything new in decades.

Indeed, working with a third-party partner in battling environmental due-diligence risk provides many advantages:

  • Consistency throughout all projects;
  • Expertise in all aspects of environmental due diligence;
  • Understanding of lenders’ risk appetite and internal environmental policy; and
  • Objectivity in the process of getting the deal done.

The due-diligence battle

In the post-downturn era, the regulations and requirements dictating the level of environmental due diligence required during the underwriting process have become increasingly stringent. Environmental due diligence is seen by many in the lending industry as a necessary evil, or a cumbersome hurdle to overcome on each deal. It stands to reason that the process of navigating environmental risks and regulations in today’s commercial real estate space sometimes feels like a battle that must be waged.

In such a competitive environment, many brokers and clients involved in environmentally complex projects find themselves like the king in the story: They don’t have time to be distracted by proposed new practices that promise to improve things down the road. After all, they have battles to win now, deals to close now and networking to do now. Brokers have to keep their pipelines full, keep their marketing on tract, study charts and graphs, and think about how to build the next business relationship. 

Taking a step back and revisiting internal risk-management policies or relationships with vendors, however, can play a crucial role in improving the prospects for those seeking financing for projects that require environmental due diligence. Having a solid environmental policy in place is critical to ensuring compliance and protecting against liabilities and losses in this regulatory environment.

As the market continues to strengthen and competition grows, it is critical that lenders, brokers and due-diligence providers alike stay abreast of the latest services, products, policies and vendors that fit their businessmodels. Consultants are well-equipped to help select those products, as well as to evaluate the vendors that assist commercial mortgage holders in the environmental-compliance process.

Finding the right partner

Commercial-property owners often have outdated environmental-risk policies and few controls in place, if they have policies and controls at all. Among the most significant savings provided by third-party partners is in the training process necessary to fully comprehend environmental risk. Having environmental professionals with targeted experience and expertise supply a brief synopsis of environmental reports is much more efficient than attempting to interpret every report — along with determining the next steps in due diligence and finding the in-house expertise needed to accurately assess potential environmental liability.

Commercial real estate owners and buyers alike are normally not environmental professionals and frequently don’t have the expertise to interpret environmental site assessments (ESAs), whether they be Phase I ESA’s, Phase II ESA’s, Desktop Reports, or Records Search with Risk Assessment (RSRA) reports. They also may not be familiar with specific environmental policies of agencies such as the U.S. Small Business Administration.

As a result, brokers, property owners and loan applicants require flexible, trustworthy environmental-consulting partners when participating in the underwriting process. Commercial-property investors should insist that the consultants they hire value collaboration and work as an extension of the team. A primary part of an environmental consultant’s job is evaluating ideas and assisting in writing or updating policy, rather than simply taking an order and sending a report back.

Lenders hire experts

Loan applicants considering whether to hire third-party partners should know that those making loan decisions already have their own incentives to hire outside consultants. The experts assist them in the underwriting process, and their expertise is vital in assuring a bank’s compliance with federal regulations.

The Federal Deposit Insurance Corp., for example, requires that lenders’ environmental-risk programs incorporate training sufficient to ensure that the environmental-risk program is implemented and followed within the institution, and that the appropriate personnel have the knowledge and experience to determine and evaluate potential environmental concerns that might affect the institution.

The Office of Controller of the Currency also requires that “lenders … ensure that persons responsible for evaluating environmental risk possess relevant knowledge, skill and competence.” The Federal Reserve mandates that “banking organizations should have in place adequate safeguards and controls to limit their exposure to potential environmental liability, provide training programs for lending personnel, have a structured analysis by a qualified individual and insure that loan policy has been complied with.”

• • •

When it comes to environmental risk management, the greatest deficiency property owners, borrowers, brokers and banks face is the lack of personnel that are qualified to evaluate environmental needs, interpret reports and effectively and consistently protect their interests.

With that in mind, for anyone dealing with environmental due diligence, the story of the king and the machine-gun salesman is a useful reminder that reevaluating policies and establishing the right battle team is a worthwhile exercise. 


 


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