Archive for January, 2011

TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA FROM 2006 TO 2010

January 2nd, 2011

Survey Results – What has the trend been in environmental due diligence in Florida since the high water mark in 2006, both from a consultant and lender perspective?   Also, in 2010, who are the dominant users of environmental due diligence in Florida and what has been the average cost of due diligence this year?   Based on an informal survey of consultants and lenders, we are able to demonstrate a dichotomy between consultants and lenders between 2009 and 2010, with increased orders flowing to consultants, but individual lenders undertaking fewer assessments.

[To see the survey chart results that accompany the text, please click on the attached link below]

Lessons Learned 13 – 4Q2010 Due Diligence Trendsv12262010

Chart – Consultant Due Diligence Trend Since 2006 (% change)

With respondent consensus indicating that 2006 was the industry high water mark in terms of assessment requests (our assumed baseline), the data from responding consultants indicate that the 1 year trend from 2009 to 2010 has been positive, with some consultants actually doing volume in excess of 2006 volumes. Consultants attribute this increase to a higher volume of foreclosures by lenders, as well as a number of investors taking advantage of distressed real property.

Chart – Lender FL Due Diligence Trend (% change) from 2006 [use above link for associated chart]

On the other hand, the responding lenders have experienced a marked decline in the number of assessment requests that they are making; in fact, half the responding lenders indicated that they have made NO requests for assessments in the last 2-3 years, eschewing loans on any real property which has the potential for environmental issues (These lenders are not shown on the table above).  (Note: this data reflects that some participating lenders did not report any foreclosure work, as well as a preference for owner-occupied (as opposed to investment) property, therefore, they are not necessarily representative of the trend reported by the responding consultants).

Chart-  2010 Breakout of Due Diligence Users  [see attached link for associated chart]

As the final diagram illustrates, lenders clearly were the largest customer for environmental assessments in 2010 (62% of the market), predominantly associated with foreclosures with a smattering of refinancing, while investors were a distant second (28%) and developers even further back (9%).   According to respondents’ data, the weighted average cost of a Phase I environmental site assessment in 2010 was approximately $1,863.

Trends for 2011 –   Survey participants were asked what they feel the due diligence trend will be in 2011, and what factors they felt will be most influential in that trend.  Respondents all referred to the sputtering economy and tightening of credit standards; specific comments included the following:

–          “Currently, [consultant is] anticipating that there could be another slow down in the financial industry and the uncertainty with the economy.  The most influential trend will be people’s confidence in the banks and if the banks are willing to start releasing funds.  CMBS is rebuilding however, so that market could add to the due diligence arena; however, there are a lot of hungry firms out there that are still willing to give work away.  The key is to find the clients that understand quality and actually having the coverage they need under AAI.”

–          “[Lender] is not a very aggressive commercial lender – even less so in today’s market.  As such, if we perceive of any environmental concern we will often pass rather than pursue the loan with further due diligence… [we] look forward to doing so at some point in the future, although right now that future seems more distant [than] near-term.”

–          “[Consultant] foresee[s] same [activity levels] as 2010 (no increase or decline); but pre-foreclosure ESAs will continue until the banks are free of defaulting loans secured by real estate.

–          [Lender] will continue to de-emphasize development and investor loans.  Most loans will be for owner occupied projects.  Loan demand is currently low, and, for the time being, we do not see much of a change in that trend.  Certainly, if foreclosure activity increases (global market trends suggest that it might), we will need to order more Phase I’s before taking title to the property. Standards are tightening, but for good reason.  The industry was pretty loose before.  The problems are exacerbated by the number of people that are simply deciding to give [real estate] back to the lenders because they are underwater.  Those turn into foreclosures and short sales.  Appraised values are down as a result, so new buyers are unable to finance purchases and unwilling to pay cash as they are uncertain as to whether we are at the end of the cycle….  [certain commercial market loans] may be good loans but because of some sort of quirk, they are not readily marketable in the secondary market.… [It appears that] we have a couple of years of the same sort of situation to look forward in this segment.

–          [Lender foresees] about the same as 2010; maybe more Phase Is will be ordered for foreclosure purposes.

–           [Consultant feels that] the economy will continue to slowly improve during 2011 resulting in lenders making more loans, and as a result, we will see more lenders ordering Phase I ESAs in 2011.  [Consultant believes] that investors will continue to buy properties and buildings in short sales and foreclosures during 2011, and as a result, they may end up being the most active group during 2011.  Developers will slowly come back into the market, thus ordering more Phase I ESAs during 2011 than they did in 2010.  As borrowers adjust to the new interest rates and new terms of loans for 2011, [Consultant feels that] lenders will start to relax and lend money again.

–          [Consultant states that], generally, [current] business appears to be driven by cash deals, refi’s, conversions from construction to permanent loans, and foreclosures; without much changing [ in 2011]. Investors are limited to a few individual deals that are mostly cash; no raw land deals [are foreseen].

In this admittedly limited poll, most respondents, lenders and consultants alike, felt that negative factors like foreclosures would probably represent the largest growing segment of environmental due diligence activity in 2011.   Also, as long as the economy continues to act as a drag on real estate activities in general, and due diligence costs in particular, end users will likely continue to have the upper hand in pricing power.

As other opportunities present themselves to expound on this review of the due diligence terrain, both from a client and service provider perspective, this office will try to provide periodic updates on significant trends and developments.    In the interim, if you have any comments or questions, please do not hesitate to send them along.