This is the inaugural LenderLink Q&A. The purpose of this new monthly column is to touch base with various risk managers at lending institutions across the country to get their thoughts, advice and insights into some of the greatest challenges facing lenders today. We are grateful to Mike Tartanella, Environmental Risk Manager with Capital One Bank in Manhattan.
Mr. Tartanella is responsible for all aspects of environmental risk analysis and policy. He has been with Capital One for five years. Prior to that, he worked for Bear Stearns & Co. in a similar capacity. He previously served as a Director, Department Head, Senior Project Manager and Project Manager at various environmental consulting firms over a 19-year period.
TRENDS AND CHALLENGES:
What’s your take on the overall commercial real estate lending environment in 25 words or less?
Robust deal flow – Higher regulatory scrutiny.
How does your institution handle environmental risk management differently than it did pre-recession?
No difference, other than the inclusion of Vapor Encroachment analysis in our standard due diligence.
As a risk manager, what is the biggest challenge or pressure you face today, and how have you sought to address it?
Exotic deal structures that are not specifically covered in our policy can be difficult. There are times when we are challenged to determine policy requirements for some of these transactions.
We also face internal customer challenges.For instance, the immediate requirement to review large portfolios under very quick deadlines results in “brownouts” in the department during that intense review process.
What advice would you give a risk manager at a small community bank writing a policy for the first time?
A risk manager at a smaller institution first needs to decide if their transactions require—or if the institution is seeking—any of the three CERCLA protections. If the answer is “yes, we need CERCLA liability protection,” then the policy path is clear and straightforward [under the federal All Appropriate Inquiries rule]. If they decide that CERCLA protections are not required at their institution, then they can customize their policy to reflect what they want to accomplish. But the latter choice should still utilize industry standards such as database searches and reviews, transaction screens, Phase I environmental site assessments, etc. The policy should not seek to reinvent the wheel, but rather should be tailored to that institution’s requirements utilizing industry standard instruments and procedures.
USE OF OUTSIDE CONSULTANTS
What is the state of your institution’s reliance on outside environmental experts compared to last year?
About the same. Our policy dictates which deals require third party reports (as opposed to in-house checklists and database reviews) so the only factor that changes year-to-year is the actual number of deals, but the percentages (of third-party reports) stay basically the same.
How do you manage vendors and procure services differently today than in the past?
No change. We have been utilizing the RIMS system six years for our procurement services with excellent results.
How would you describe the greatest benefit you derive from using RIMS? And how has it been received by your internal customers?
The greatest benefit, from my perspective, is the record keeping and central repository aspect of a system such as this. All reports, all communications and all other documents are placed into each deal area thus eliminating potential exhaustive searches for deal documentation and various correspondences at a later date.
What are the key factors you consider in vendor selection for the environmental due diligence consultants you use?
Technical expertise – First and foremost,our consultants must be very good at what they do.
Timeliness – This goes without saying – in our industry there are basically two main priorities: (1) produce a technically proficient report;and (2) get it to us in time.
Communications – We want timely responses to our inquiries and want our key senior contacts at the consulting firm available to us at short notice.
Nimbleness – We treasure the nimbleness of our consultants and hold this virtue in high regard. There are occasions when a truly rush turn aroundtime is required or we need a consultant to “kick the tires” of a property or we need assistance to procure an unusual contractor or a spreadsheet of some sort is quickly required. We value the consultants that can help us with the unexpected scenario, quickly and without fuss.
What do you like to see in your Phase I ESAs?
Clear concise conclusions (i.e., no “fence sitting”) and the ability to use and display a consultant’s experience. In our eyes, a bad or inexperienced consultant can label many minor, or de minimis, issues from a Phase I ESA as items requiring further investigation or action,whereas the experienced consultant can produce a logical and acceptable discussion as to why that item is not an issue that requires further action or investigation. This is what we value in our Phase I ESA reports and thus, in our consultants.
Give an example of an environmental issue that held up an origination or refi, and how you resolved it.
Origination – A very typical example is when the Phase I ESA report provides a comment that a underground storage tank was previously utilized, but no closure documentation was provided to our consultant. We will request that the borrower either provide proper closure documentation or that a Phase II ESA be required. This can cause some short term delays in closing.
Refi – Our policy requirement for these transactions is to review the original due diligence. During refinancing of internal deals, we often come across issues that were not issues during the original transaction,but are now considered relevant environmental issues. When these types of issues (i.e. vapor intrusion) come up, we need to complete the gap in due diligence and this can hold up the transaction.
How do you measure the value of environmental due diligence?
Did our due diligence effort result in discovering an actual health & safety risk to the occupants/tenants of a transaction property? Was the mitigant applied to such risk quickly, and in a straightforward and cost-effective manner? Was our customer satisfied?
In summary, the value of environmental due diligence can be measured on transactions where there was an issue requiring further action and the deal closed (on time) and the borrower was pleased with the outcome. That scenario truly indicates that the system, from top to bottom, is effective and efficient.
How does the appraisal process tie in with environmental due diligence at your institution?
1. Our Loan Administration group cannot process a closing without acceptable documentation from both appraisal and environmental.
2. When our appraisal group comes across a suspect environmental issue, they make sure that our environmental group is made aware and vice versa.
3. On occasion, when there is an environmental issue with a significant monetary component, we ensure that the appraisal group is presented with this information, especially if it impacts property usage and value.
How has technology changed your institution’s risk management process, if at all?
The usage of the “street view’ functions of various map programs has been very helpful, especially for low loan amount/low-risk deals where we may utilize internal review procedures for our due diligence.
NOTE TO READERS:
EDR Insight wishes to sincerely thank Mike Tartanella for taking the time to contribute to our first LenderLink Q&A.
If you are interested in participating in a future Q&A, please feel free to send us an email at EDRInsight@edrnet.com