Ensuring Quality – Questions to Ask Your Environmental Professional

Making headlines this summer in the world of environmental due diligence was the news out of California that the state was discontinuing its Registered Environmental Assessor, or REA, program, effective July 1st. This news has, once again, brought the issue of who qualifies as an “environmental professional” to the forefront.

Heightened by the competitive pressures of the downturn, concerns about the declining quality of Phase I ESA reports have given rise to questions about the best way to certify professionals as “qualified” to assess a property’s potential for environmental risk. Not all consultants are created equal. This latest news out of California, a bellwether state, has already intensified the argument of those pushing for a nationally-recognized program that may help draw a line of distinction between the qualified and the unqualified. Even if an organization takes the lead on establishing a national certification—and one that is widely embraced by the user community—it seems likely that such a program will be years away, given the controversy surrounding the topic.

EnsureQuality---Image

In the meantime, that leaves risk managers at financial institutions grappling with the best way to screen consultants. Although cost is an important consideration when choosing any vendor, the selection of an environmental consultant should not be made on the basis of price alone, particularly not at the expense of quality and technical expertise. Before adding an environmental professional to your institution’s pre-approved consultant list, this brief lists the types of questions lenders can ask to ensure that an outside consultant has the appropriate experience and training to exercise the professional judgment upon which the U.S. EPA’s All Appropriate Inquiries rule, and the ASTM E 1527-05 Phase I ESA standard, are based:

  1. In its AAI rule, the U.S. EPA established what has become a widely accepted set of specific education, training, and experience requirements for environmental professionals. Do the individual(s) who will supervise the Phase I ESA meet the minimum qualifications of an environmental professional under the federal AAI rule? This is particularly important if the bank is seeking CERCLA liability protection for itself in the case of foreclosure or for the borrower.
  2. Does the consultant meet the AAI rule’s requirements specifically for years of “relevant experience,” which the EPA defines as:
    “participation in the performance of environmental site assessments that may include environmental analyses, investigations, and remediation which involve the understanding of surface and subsurface environmental conditions and the processes used to evaluate these conditions and for which professional judgment was used to develop opinions regarding conditions indicative of releases of hazardous substances?”
    Also look for consultants with proven longer term due diligence experience (e.g., 8-10 years minimum) specifically in the transactional and financial institution arena.
  3. Does the consultant have reputable credentials (e.g., P.E., P.G., CHMM, etc.) and experience in performing Phase I and Phase II environmental site assessment activities, including: interviewing owners, operators and occupants; reviewing historical sources of information and federal, state, tribal and local government records; performing visual inspections; conducting multi-media sampling and analysis; interpreting geologic, hydrologic, and chemical data; and preparing site assessment reports?
  4. Can the consultant demonstrate experience within the industry associated with the property being assessed (e.g., aerospace and defense, chemicals, electronics, energy, manufacturing, metals/mining, petroleum, pharmaceuticals, real estate, telecommunications, transportation, etc.)?
  5. Does the consultant have documented experience with local, state and federal regulators? Can he/she demonstrate knowledge of applicable federal, state, tribal, and local environmental laws and policies, particularly those related to the industry with which the property being assessed is associated?
  6. Ask what kind of training their firm provides to Phase I staff, and how they ensure that staff is up-to-speed on the latest environmental due diligence regulations, standards and technical know-how.
  7. Ask to see a sample Phase I report for your most common loan or property type, and review it for completeness, quality, thoroughness, technical expertise and data gaps. Specifically ask for reports in the format that matches your institution’s due diligence needs (e.g., SBA, HUD, FNMA, ASTM standard, etc.). Be sure the consultant understands the lender’s role in the transaction well and can discuss the appropriate scope in depth.
  8. If you are an SBA lender, ask for evidence that the consultant understands the environmental guidelines in the SBA’s latest SOP 50 10 5 (E) (and be sure they’re aware it was updated as of June 1, 2012). Also ask upfront if their firm is comfortable signing the SBA’s required reliance letter.
  9. Ask for credible references in the local market. A qualified consultant should be able to provide references from real estate or environmental attorneys as well as leading banks in the area. For SBA lenders, a reference from the local CDC should demonstrate the EP was able to contribute to getting projects completed with all hurdles cleared.
  10. Ask for proof of a consultant’s errors and omissions insurance. Look for a minimum limit of $1-2 million. (As a benchmark, the SBA’s policy requires at least $1 million.)
***

The old chestnut “caveat emptor” applies before committing to a due diligence provider. And when a bank’s own liability is at stake, more than a little upfront research is warranted–especially in today’s cut-throat market–to ensure that only qualified environmental consultants are on your institution’s pre-approved list.

NOTE TO READERS: EDR Insight would like to thank Sean Dundon, Principal, Blackstone Consulting LLC and Mike Kulka, Founder and CEO, PM Environmental for contributing to this Technical Brief.