The economy is not out of the woods yet, but the seemingly long slow recovery has led to some new trends in the Phase 1 Environmental Site Assessment Due Diligence world. Phase 1 ESAs post-recession are seeing “tightening” on several fronts – risk tolerance, turnaround time, pricing – as well as some different players in the market, leading to a new landscape for environmental due diligence.
Environmental Risk Tolerance
During the recession, many banks were burned by fast and loose underwriting, as well as lean environmental due diligence policies. Many found themselves asking “How did this contaminated site end up in our portfolio?” and “What do we do with this risk now?” As a result, many portfolio lenders are tightening their due diligence policies and have a much lower risk tolerance. Agency lenders have also revised and tightened their Phase 1 Environmental scope of work, and the re-emerging CMBS market is taking a second look at their policies and procedures. We have seen this first hand manifested as higher scrutiny of particular environmental concerns, such as asbestos and vapor intrusion.
In particular, risk tolerance during the foreclosure process is extremely tight as lenders are requiring new due diligence be completed to help avoid liability not just from CERCLA/Superfund, but from a range of new issues (or rather, issues new to lenders) such as stormwater management. We are still seeing a lot of pre-foreclosure Phase 1 ESAs of raw land that was slated for residential development. Foreclosure on these sites requires attention to whether the lender could be subject to fines for uncontrolled erosion/sediment run-off.
The timeframes for many deals has shortened, in particular for investors snapping up distressed assets. Thus we are seeing increasing requests for quick turnaround Phase 1 ESAs – often one week as opposed to three. This creates some challenges for environmental consultants as we must gather the same amount of information in a much shorter timeframe. Good client-provided information and support in contacting the on-site personnel can help greatly to expedite the process.
Phase 1 ESA Pricing
Pricing for Phase 1 Environmental reports dropped sharply during the recession, as competition in the marketplace scrambled to compete for less transaction volume. Pricing pressure has eased up a bit, and the quick-turn requests are also allowing for price increases for rush fees. Generally though, pricing is still a little less than the “heyday.”
Environmental Consultants – Who’s Still Standing?
The players in the Phase 1 ESA world have also changed. In the midst of fierce competition, many mom and pop environmental consulting firms have gone under, some large firms like LandAmerica have merged (Partner acquired LandAmerica Assessment Corporation in 2009), and some large firms have stopped competing in the ESA world. Though there still are some chop shops out there who are doing low quality work on the cheap, generally the firms who have weathered the storm are more stable, reputable firms. This can offer some comfort to institutions who want a partner who will be around for years to come.
There is good news on the horizon. New purchases are definitely increasing. We’re seeing more due diligence for loan originations. Lenders are also working their way through REO portfolios and non performing loans, and bank failures in 2011 are slowing. News of the FDIC Irvine office closing by the end of the year also seems promising that we are trending in the right direction.
As we return somewhat to normalcy, I have to wonder if the lessons of the past will be forgotten and pressure will begin again to skimp on environmental due diligence. My advice is to Beware! You get what you pay for: misses, mistakes, fines and all.