Appraisals and Environmental Risk Management: “Silos No More”

I attended last week’s Environmental Bankers Association conference, which is always an enjoyable event for networking with environmental professionals and risk managers alike. One of the most interesting topics covered at last week’s show was about the interplay of appraisal and environmental risk management functions at banks. At some banks, it’s the same person who wears the appraisal hat and the ERM hat. At others, these two functions are separate and distinct divisions. In August 2013, the OCC significantly ramped up the guidance given to institutions for managing risk when the agency updated its Commercial Real Estate Lending Booklet (Comptroller’s Handbook). It is worth noting that #12 in the OCC’s list of 18 elements that form an effective environmental policy is “appraisal requirements for disclosing and taking into consideration any environmental risk factors.” Likewise, the appraisal guidance from the OCC recommends that banks establish criteria for assessing whether an existing appraisal is valid based on the consideration 10 factors, including “environmental contamination.” Simple words. Complex issues. There is a great deal of uncertainty about how exactly environmental risk information can feed into the appraisal process and vice versa.

At the EBA conference, Tom Jackson, an Associate Professor of Finance at Texas A&M, and President of Real Property Analytics took us through a detailed look at the process of accounting for environmental issues in an appraisal. A widely-accepted process exists, but appraisers, by and large, aren’t doing it. Part of the problem is a lack of awareness. Another is the lack of data on sales comps for contaminated properties. Jackson himself has compiled databases of valuations before and after contamination using data he’s collected from CoStar as well as by pulling agency records himself.

Appraisal

It was only because of what I heard at EBA that a story this week caught my eye. The Atlantic City Electric Co. petitioned a New Jersey county to reassess its property value to account for environmental contamination. There was a significant $15 million discrepancy between the owner’s land value experts and the county’s, and the dispute hinged on whether remediation costs were accounted for in the value estimate. Contamination related to ASTs and USTs, chemical unloading areas, coal piles, fly ash pools and groundwater was discovered during an environmental assessment in 1995 when ACE was trying to sell the property. The sale fell through. The owner opted to remediate. The owner’s land value experts used comps and subtracted the remediation costs incurred by the owner. The court rejected their request for a re-assessment on the basis of ACE having undertaken the remediation voluntarily. The court also rejected the county’s assessment because its experts did not rely on what the court considers “credible comps data.”

Who knows where pressure from the OCC and other bank regulators will take the fields of appraisals and environmental risk management. We are only in the early stages of establishing practices, tools and approaches to improve integration of the two functions. Appraisers are already starting to say they need to see the property’s environmental data before conducting the appraisal. Who knows? Maybe, as Bill Garber, Director Government and External Relations, Appraisal Institute said in a later EBA presentation, “appraisals will start to incorporate a TSA or desktop screen.”

What is clear is that banks are under increasing pressure to adopt a more holistic risk management process that brings the environmental and appraisal functions closer together. As Brian Ginter, formerly VP, Chief Appraiser, Burke & Herbert Bank and Trust aptly told EBA attendees, “You cannot exist in a silo today. Environmental and appraisal need to be integrated. You need to put the OCC elements in your policy. Whether you’re regulated by the OCC or FDIC, you need to get them into your policy.” Data on the impact of contamination on properties will only become more prevalent and as it does, it will make the job of appraisers in the face of growing regulator pressure a little easier.