TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA FROM 2006 TO 2012

January 28th, 2013 by Geoffrey di Mauro Leave a reply »

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.

 

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