On today’s monthly call of the Environmental Bankers Association, I shared the thoughts expressed by our lender panelists during last week’s Due Diligence at Dawn workshops in Chicago, Oakland and Irvine. The six panelists represented the full range of banks from large international institutions to growing regional players right down to small community banks. During these moderated sessions, the collective sentiments expressed by our panelists were as follows:
The impact of the downturn on risk management:
It has brought increased regulator scrutiny to banks. It has brought more emphasis on compliance issues. It has brought the opportunity—good or bad—to revisit decisions we made during the good times….to rethink our approach to due diligence. The downturn gave us the ability to test hypotheses on risk decisions we have made in the past. It has brought real life examples of the cost to remedy large and small issues. And what is happening today that was not happening back in 2006 and 2007 is that loan closings are being delayed for environmental issues, simply because our bank is no longer willing to take on risk like it once was.
Vapor intrusion is not a new issue, but the attention being placed on it is. The impact of vapor migration on a target property from offsite sources becomes particularly cumbersome for the borrower who needs to address the potential risk. Some consultants today routinely incorporate a vapor migration screening into their Phase I ESA, and some do not. On multifamily properties, in particular, lenders have a very aggressive (i.e., risk averse) approach for vapor, giving the potential for tenant lawsuits and owner liability due to potential vapor exposure.
Expectations for environmental professionals
All six lenders had a lot to advice to share on what they expect from their environmental consultants. Below are some of the responses:
- “Help me manage expectations. I don’t want any surprises in the 11th hour about some environmental risk that’s going to hold up the loan.”
- “Connect the dots for me. Lay it all out on a platter and include conclusions that are clearly presented and logically substantiated.”
- “Give me detailed reports so that those who are not familiar with the property (e.g., underwriter, loan officer) can understand the logic behind the findings.
- One said beautifully, “Communication on key information is the money!”
As a headline read just last week “Economically We’re in Recovery; Mentally We’re Still Stuck in Recession.” Despite market improvements, the prevailing mindset is still one of caution and a focus on “What could go wrong with this property?” This sentiment is driving lenders to more risk aversion in commercial real estate lending, and an important role for environmental professionals to play.