Archive for August, 2014

Lessons Learned – Environmental Consultants’ Limits of Liability

August 24th, 2014

31 March 2014

Recently, a consultant delivered a phase I environmental site assessment (“Phase I”) to a lender client which included a limit of liability of the lesser of $50,000 or the value of the Phase I assessment contract. For a number of reasons, clients should avoid accepting contracts with such limits of liability, which limits are not in the clients’ best interest and may easily be negotiated to a much higher level, often at no charge.

While the Phase I did meet the basic ASTM E1527-05 due diligence standards, it was missing certain elements that the client requires in Phase I’s, including visual examination of structures for mold, asbestos containing materials, emergency power generators, elevators and onsite/adjacent product pipelines, among other things. This type of situation may be avoided if the consultant is following a scope of work included in a specifically tailored environmental Master Services Agreement (“MSA”).

In this particular situation, a loan officer of the client ordered a Phase I from an environmental consulting firm which was somewhat unfamiliar with the client’s typical scope of work requirements, since that consultant did work for the client rather infrequently. Therefore, the consultant’s office was unaware of the usual practice of other consultants providing an expanded/additional set of elements in Phase I reports for this client. The Phase I had to be returned to the consultant for revisions and updating, which delayed the final report. As indicated above, one way to prevent inadequate report deliverables is to use an MSA with every consultant, in order to provide a uniform product platform from the same scope of work.

Many lenders have a number of service providers on pre-approved bank vendor lists. These lists identify service providers which the lenders feel provide acceptable levels of service, availability and pricing for products required by the lenders. For example, it is not uncommon for a lender to have 4-7 environmental consultants on a pre-approved vendor list. These consultants may have different geographic coverage capabilities, pricing structures or average turn around times. However, what they should not have are varied Phase I products. The client needs to know that a Phase I will cover the same issues and elements no matter which consultant is selected.

An MSA provides a way for the client to ensure uniformity of Phase I (or other specified) report deliverables no matter which consultant is retained. The MSA would include a specific scope of work which sets forth all the elements expected by the client, including the typical Phase I elements. The MSA scope of work can also, and often does, include some additional elements, including such things as mold, asbestos containing materials, emergency power generators, elevators and onsite/adjacent product pipelines. These are elements that are beyond the scope of the ASTM E 1527-05 scope, but if not identified during pre-loan or pre-purchase due diligence, may lead to significant unexpected and avoidable delays, costs and expenses.

The MSA also allows the client to require items such as specific recommendations on further action, like whether additional investigation or Phase II testing is appropriate (a Phase I done solely to current ASTM E 1527-05 standards only requires a environmental conclusion, as to whether there are or are not Recognized Environmental Conditions impairing a property; it does not require that a consultant make a recommendation on a further course of action).

The MSA also ensures that all consultants are operating on the same contractual basis, such as similar liability requirements, professional liability coverage and amounts, project staffing criteria, delay penalties and so forth. Finally, having an executed and operable MSA gives lenders/clients the right to have a non-conforming Phase I (or other covered) deliverable updated and corrected at the consultant’s expense. As an added consideration, lenders only have to create a single model or template MSA, since the idea is to have all parties agree to uniform terms and conditions, which does not happen if lenders execute standard General Terms prepared by individual consultant groups. Therefore, it is both prudent and efficient for clients to consider implementing MSAs in situations were clients are ordering multiple, standard deliverables from a class of service provider.

TRANSACTIONAL DUE DILIGENCE TRENDS IN FLORIDA FROM 2006 TO 2013

August 24th, 2014

31 December 2013

Lessons Learned 25 – 4Q2013 Annual Due Diligence Trends

Survey Results – This is the fourth annual Survey of consultant and lender trends in environmental due diligence in Florida. The Survey topics included (a) who were the dominant users of environmental due diligence, (b) what was the average cost of due diligence this year, and (c) what trends were identified for 2014. After a brief convergence of activity in 2012 between consultants and lenders, for 2013 we appear to have returned to a state where lender activity continues to decline, while consultant activity has increased in the assessment arena. This is may be attributable to both continued tightened credit policy, a moderate upward trend in borrowing rates, and the continued influence of all cash deals by investors and developers.

As stated in prior Surveys, the respondent consensus indicates that 2006 was the previous 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 an ongoing growth trend since 2009, with almost all of surveyed consultants now doing volume in excess of their respective 2006 volumes. The weighted average now shows that the average of responding consultants is about 75% higher volume than the last high point in 2006). Consultants continue to attribute this increase to a combination of continued volume of foreclosures and special asset dispositions by lenders, as well as investors continuing to take advantage of discounted pricing availability; it also reflects a material (but slowing) number of owners taking advantage of lower mortgage rates to refinance.

[See Chart One of Attachment]

On the other hand, the activity of responding lenders continues to be below the high water mark of 2006. In fact, this year (2013) showed a moderate downward trend in activity over last year. This may be attributable to a slowdown in owner refinancing due to the fact that rates crept higher throughout 2013 (for example, half percent increase in 5 yr ARM from 2.65% to 3.07% in recent months). Additionally, all cash deals also seem to be attributable to the disparity between consultant and lender activity reflected in the data presented herein.
The lenders which responded continue to report relatively tight credit policy requirements, which also 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 Two of Attachment]

As the third diagram (below) illustrates from consultant responders, for the first time, Lenders are no longer the largest customer for environmental assessments. In 2013, Investors and developers trended up 11% and 9% respectively, while owners and lenders trended downwards 10% and 20% respectively. This data would appear to follow the slowdown in refinancing and the pickup of more all cash or non-lender financing deal trends.

[See Chart Three of Attachment]

Finally, according to respondents’ data, the weighted average cost of a Phase I environmental site assessments in 2013 was $1815, which is a 13% decrease from both the 2012 level of $2047, but slightly above the 2011 average of $1,781.

[See Chart Four of Attachment]

Trends for 2014 – Survey participants were asked what they feel the due diligence trend will be in 2014, and what factors they feel will be most influential in that trend. Respondents referred to a generally (modest) optimistic tone in the market. The factors for this feeling included (a) moderate continued foreclosure activity would generate business; (b) concern that the “bargain” prices will soon disappear, and (c) that the current relatively low cost of credit (while trending higher), which factors will all continue to be market drivers.

Specific comments included the following:

[Consultant] “We anticipate an increase in due-diligence-related requests. There has been a significant increase in REIT and CMBS-related requests in 2013. We expect that trend to continue. This likely relates to the return of RE investment as a viable investment option and the return to prominence of the CMBS market…
{Consultant}- Unstable. Economic factors and lack of confidence in economic outlook.
<Lender> – Due diligence of all kinds, inclusive of environmental due diligence, will only be more important going forward. The need for comprehensive, reliable due diligence continues to be the trend in banking in general. And for that reason many financing opportunities that may have otherwise been explored in the past are now being passed up on account of the amount of work and cost required to consider a commercial deal – let alone one with considerable potential for issues.
(Consultant) – with the new ASTM-1527-13 now in effect there will be a trend of consultants recommending Phase II ESAs more often than usual on properties (i.e., former gas stations) that already received regulatory closure (i.e., No Further Action, Site Rehabilitation Completion Order, etc.), due to the new addition of Vapor Intrusion Non-ASTM Scope Item to the previous ASTM 1527-05 Phase I ESA standard..
[Consultant] If the second half of 2013 is any indication, real estate (at least in South Florida) seems to be coming back strong for both residential and commercial projects. We feel that this trend will continue in 2014 and will influence the demand for Phase I’s from lenders, purchasers of commercial properties and development parcels.
[Consultant] We believe the due diligence trend will continue to increase in 2014 as residential development is increasing, particularly in the western/southwestern and southeastern parts of the Orlando metro area. The increased residential development should also lead to increased commercial development. Development and redevelopment in and around Downtown Orlando should also factor into the increased due diligence needs, along with other local area projects such as SunRail and construction of the Wekiva Parkway.

While this is an informal and non-scientific poll, most respondents, lenders and consultants alike, felt that factors like concerns about the continued upward trend of the cost of credit and a modest upward trend in RE prices, will continue to move money off of the sidelines this year. This firm shares this general consensus.

Thank you to all the participants for their feedback and candor. If you have any comments or questions, please do not hesitate to contact me at gbdimauro@yahoo.com at your convenience.