Archive for January, 2013


January 28th, 2013

1 January 2013

Lessons Learned 21 – 4Q2012 Annual Due Diligence Trends

2012 Survey Results – This is the third annual Survey of the trends in environmental due diligence in Florida from both the consultant and lender optics.   The Survey topics included who were the dominant users of environmental due diligence in Florida, what was the average cost of due diligence this year, and what trends were identified for 2013.   After a divergence of activity in the past three years between consultants and lenders, we are finally able to see in 2012  that, on the whole, both locally active consultants and lenders appeared to have increased activity in the assessment arena.  This is attributable to both special asset resolutions and more assessments associated with new loans, especially in the refinancing area.

As stated in prior Surveys, the respondent consensus indicating that 2006 was the industry high water mark in terms of assessment requests; therefore, we use 2006 as our assumed baseline of 1.0.  This year’s data from responding consultants continues to show a growth trend since 2009, with half of surveyed consultants actually doing volume in excess of their respective 2006 volumes (although the weighted average is still lower than 2006 levels). Consultants continue to attribute this increase to a combination of continued high volume of foreclosures and special asset dispositions by lenders, as well as an increasing number of owners taking advantage of lower mortgage rates to refinance. Additionally, investors appear to be taking modest advantage of depressed real property values in the state, even as the market appears to be stabilizing.

[ See chart 1 in attachment]

On the other hand, the activity of responding lenders continues to be below the high water mark of 2006, athough this year (2012) reversed the prior downward trend with a modest general gain overall.  As noted above, the upward trend reflects an increase in owners taking advantage of low mortgage rates to refinance their properties.  As was the case last year, however, one of the responding lenders indicated that they have made NO requests for assessments in the last 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 continued to report a relatively tight credit policy, which translates into fewer commercial loans.  (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).

[ See chart 2 in attachment]

As the third diagram (below) illustrates from consultant responders, lenders remain the largest customer for environmental assessments in 2011 (at 36% of the survey, although continuing a decline from 56% in 2011 and 62% in 2010), predominantly associated with foreclosures and owner refinancing.  Property owners doing refinancing came in at 33% in 2012, replacing investors as the second biggest group of due diligence service users.  Investers dropped 1 point to 21% from 22% in 2011 (and down from 28% in 2010), while the Developer/Other/REIT category registered at 10% in 2012 (down from 16% in 2011 but way up from 1% in 2010).

[ See chart 3 in attachment]

Finally, according to respondents’ data, the weighted average cost of a Phase I environmental site assessment in 2012 was $2047, which is a sizable increase from both the 2011 level of $1,781, and the 2010 average of $1863.


Trends for 2013 –   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 a generally (modest) optimistic tone in the market.  The bases for this feeling included that (a) additionally foreclosure activity would generate business; (b) “bargain” prices that might be perceived to be too attractive to pass up, and (b) that refinancing activity will continue to be a strong driver.

Specific comments included the following:

[Consultant] “Currently, in Tampa they are expecting an increase in the number of ESAs.  Orlando, [we] hope, gets back to where it was five years or so ago.  Currently, [we] anticipate the market to pick up the second quarter based on the uncertain (still…) in the economy..

{Consultant}- Upward trend.  The foreclosure game is not up yet and our national clients appear to be positive on new business opportunities in Florida..

<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) – It certainly FEELS like things are on the upswing based on the second half of 2012.  We are hopeful that with the national elections in our rear view mirror and with favorable interest rates and improving availability of mortgage funding, that this up-trend will continue into 2013.

[Lender] We expect higher volume due to the bank’s continued growth as well as continued economic growth.  We expect bank growth due to expansion into new markets and continued acquisition of new Relationship Managers.

[Consultant] Increase in environmental due diligence as related to traditional lending. Less foreclosure-related work. Reasoning relates to state of the lending market and significant percentages of distressed assets that have already been “worked through”. Also, general state of slowly improving economy..

[CONSULTANT] We anticipate seeing a general steady to increasing trend in due diligence for 2013, particularly as development appears to be increasing in the western part of Orange County.  Wekiva Parkway, Sunrail, the creative village, and medical city developments are all likely to play a key role in the Orlando Metro area.

<<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 factors like refinancing and a leveling off of prices bringing money off of the sidelines would probably represent the largest growth segments of environmental due diligence activity in 2013.  This firm shares this general consensus.


Phraseology regarding Recognized Environmental Conditions in Phase I Assessments

January 28th, 2013

1 October 2012

Recently, a lender client received a Phase I Environmental Site Assessment from the consultant of a prospective purchaser for review and (the borrower hoped) use in a proposed loan transaction.  The subject property had been used, both historically and at present, as a recycling and salvage yard.  The consultant’s report identified that there had been environmental impacts at the property associated with historical discharges; however, the impacts had been fully addressed and remediated sufficient for the Florida Department of Environmental Protection to issue written Site Rehabilitation Completion Orders (SCROs) and No Further Action determinations (NFAs).  The consultant’s phase I stated that all known impacts had been addressed, and that the consultant did not advocate undertaking any additional environmental assessment.

The consultant’s conclusion was written as follows: This phase I assessment revealed no evidence of significant recognized environmental conditions (RECs)  in connection with the property ; other than the historical and current operations of the site as a recycling and salvage yard, these activities may be considered an  REC.”   The lender had concerns with the way this conclusion was written.  First, what did the consultant mean by “significant” RECs, and second, how did the consultant justify stating that the lawful and permitted use of the site, as a recycling and salvage yard, itself constituted a REC.   With regard to the first issue, the American Society for Testing and Materials (ASTM) defines the term “recognized environmental condition ” as the presence or likely presence of hazardous substances as defined by CERCLA, and petroleum products on a property under conditions that indicate an existing release, a past release or a material threat of a release into the ground, groundwater or surface water.   The term “significant” is subjective and is not identified by ASTM as a legitimate qualifier of the term REC; either there are RECs at a site or there are not.  Furthermore, if the consultant considered the ongoing operation of the site as a REC under its permitted use, what specific elements did the consultant identify that was resulting in a release (not already addressed to the satisfaction of FDEP) or material threat of release – the lender therefore sought clarification from the Consultant, to either list out the current RECs (significant or otherwise) or to rephrase the conclusion.

The consultant initially responded that they could withdraw the word “significant” from the conclusion, agreeing that the ASTM standard did not provide for graduated levels of RECs; there either were “RECs” or there were not. However, the consultant was initially resistant to revising the text to drop the characterization of the current use of the site as a REC, stating that the current operation was inherently risky, with the potential for releases present on a daily basis.  The Lender responded that, under that interpretation, any lawful business operations following normal industry business practices, and which used or handled hazardous substances, such as gas stations, pool supply stores selling liquid chlorine or muratic acid, or manufacturing facilities, would always be considered as having RECs.  The lender acknowledged that the potential for a REC to occur at such facilities might be higher than at other types of commercial facilities, like a professional office complex or shopping mall.  However, the lender also understood that just because normal business operations might involve compliance with standard industry practices, but if there was no evidence of negligence or willful misconduct, such operations should not meet the definition of a “material threat of release.”

The consultant ultimately agreed that the prior impacts, having been addressed and received SRCOs and NFAs, could be identified as merely historical/resolved (not current) RECs, and that the current operations only represented a potential for creation of a REC.  Therefore, the consultant agreed to revise its conclusion as follows: “This phase I assessment revealed no evidence of recognized environmental conditions (RECs)  in connection with the property.  Because of the historical operations of the site as a recycling and salvage yard, these activities may be considered an historical REC, and as a potential REC based upon current operations- [no further assessment warranted]”.  This new text allowed the lender to meet its underwriting criteria and the loan closed.  

The takeaway here is that intended recipients of Phase I assessments have a legitimate right to ensure that the report accurately reflects the current state and status of a property and its current uses, and that relying parties have the right to raise questions about how the author of the report is interpreting and characterizing the data.