TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA 2006 – 2011

January 11th, 2012 by Geoffrey di Mauro Leave a reply »

Survey Results – What is the trend in environmental due diligence in Florida since the high water mark in 2006, both from a consultant and lender perspective?   Also, in 2011, 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 this informal survey of consultants and lenders whose offices focus on the Florida market, we are able to demonstrate a continuing dichotomy between consultants and Florida-based lenders from 2008 through 2011, with increased orders flowing to consultants (again, as last year, mostly attributable to special asset resolutions), while individual Florida lenders are undertaking fewer assessments associated with new loans.

With respondent consensus indicating that 2006 was the industry high water mark in terms of assessment requests (therefore, using 2006 as our assumed baseline of 1.0), the data from responding consultants indicate that the 3 year trend from 2009 to 2011 has been positive overall, with some consultants actually doing volume in excess of 2006 volumes. Consultants attribute this increase to a continued higher volume of foreclosures and special asset dispositions by lenders, as well as an increasing number of investors & REITs taking advantage of depressed real property values in the state.

To view chart entitled Consultant Due Diligence Trend Since 2006 click on attached doclink below:

Lessons Learned 17 – 4Q2011 Annual Due Diligence Trends

On the other hand, the responding lenders have experienced a marked decline in the number of assessment requests that they are making; in fact, one of 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 (As shown on the table immediately below).  The lenders which responded have experienced an overall tightening of credit policy, which means fewer commercial loans, and on generally more risk-free properties.  (Note: the lenders surveyed have not reported any foreclosure-based due diligence, therefore, that kind of lender issues are not reflected in the trend reported by the responding consultants).

To view second chart entitled Lender FL Due Diligence Trend from 2006, click on doclink above.

As the third diagram (below) illustrates from consultant responders, lenders remain the largest customer for environmental assessments in 2011 (56% of the market (down from 62% in 2010)), predominantly associated with foreclosures with a smattering of refinancing.  Investors are the second biggest customer for due diligence at 22% (down from 28% in 2010) while the Other/REIT category has increased from 1% in 2010 to 16% in 2011.  Developers have dropped from 9% to 6% of the total, as new construction continues to lag well behind historical highs.

To view third chart entitled 2011 Breakout of Due Diligence Users, click on attached doclink above.

Finally, according to respondents’ data, the weighted average cost of a Phase I environmental site assessment in 2011 was approximately $1,781, which is a modest decrease from the 2010 average of $1863.

Trends for 2012 –   Survey participants were asked what they feel the due diligence trend will be in 2012, and what factors they feel will be most influential in that trend.  Respondents all referred to the moribund economy and continued stringent credit standards.  However, there was some speculation that side-lined investor money might come back into the market.  The bases for this feeling included (a) “bargain” prices that might be perceived to be too attractive to pass up as well as (b) a determination (or perhaps hope) by institutional and private investors/owners that the market would not fall materially any further.

Specific comments included the following:

[Consultant] “We believe that Florida continues to be attractive to investors [once] the economic indicators [become] stable or improve. This would lead to an increase in Phase I ESA activity. Foreclosure backlog, if worked though, could act to reduce volume of Phase I ESAs. However, (and unfortunately) this does not appear to be likely (meaning that there appears to be a large volume of properties which have not yet entered the foreclosure process).

{Consultant}- Financial institutions, REITs and investors were among the frontrunners this year [2011].  Banks were looking at more foreclosures, and REITs and investors were taking advantage of the struggling/ sluggish economy [to act on bargains].  For 2012, as a company, an increase in transactions is always the hope.  Currently, the feeling is that the arena will be steady with some small growth; however, given it is an election year things may get sluggish nearer to that time.

<Lender> – We feel that there may be a slight loosening of credit, and, if so, our numbers should increase, [up to]  25%.  [We] would envision a mix of 33% investors and 67% owners (refinancing).

(Consultant) – About the same as 2011 to maybe slightly improved in 2012 [attributable to opportunistic purchases if buyers feel the downward trend has moderated or stabilized].

<<Lender>> Our environmental due diligence continues to depend on the type/use of property we are financing, as well as the amount financed.  We continue to concentrate more on  residential lending efforts, as is consistent with our history.  Continuing uncertainty regarding economic conditions in the commercial sector will likely result in a cautious approach to commercial lending.  Therefore, the need for environmental due diligence will be minimal [in 2012].

While this is an informal and non-scientific poll, most respondents, lenders and consultants alike, felt that negative factors like foreclosures would probably represent the largest growth segment of environmental due diligence activity in 2012.   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.   This firm echoes the general consensus that until the capital sitting on the sidelines feels that the CRE market has reached its nadir, transaction volumes will remain stagnant and credit requirements will continue to be conservative.

We thank the participants for their feedback and candor. If you have any comments or questions, please do not hesitate to contact me at your convenience.

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