Before we start we should get on the same page as to what constitutes a “bad” environmental report. You might think bad is the same as saying that your environmental consultant found a Recognized Environmental Condition (REC). A REC generally means issues for buyers, sellers, and lenders while casting a shadow over the transaction. This isn’t the “Bad” I’m talking about.
I’m talking about bad quality.
We need to remember why we get hired by commercial banks to begin with. An Environmental Consultant’s job is to limit downside risk on a commercial loan. So “bad” in our context is paying an environmental consultant to limit risk and having them do the exact opposite because they were encouraged to do so by the commercial bank that hired them in the first place.
How can this be, you ask?
- Low Bidder Issues
I can hear you groan. “Really?” this is where you tell me I need to pay more or I’m going to get bad quality? Alright, settle down. Let’s talk through this strategy, you can tell me how much of this you already knew at the end.
We work with commercial banks that believe they are doing best by their clients by driving down closing costs by making a rotating handful of environmental consultants duke it out, biding on Phase 1 ESA projects. Low bidder wins and everyone is happy, right?
Not so fast.
Bidder pools encourage several outcomes. First, talented environmental companies leave the pool, head for higher-margin projects in different sectors of the industry. That leaves three types of groups bidding on your projects; really efficient consultants, really crappy consultants, and really small (low overhead) consultants. To be fair, really efficient consultants are a good thing. Really small consultants can be hit or miss, let’s assume the best and they are working at home in their spare bedroom. Their capacity to handle high volume is going to be limited so if your volume fluctuates you’re going to have issues. But the worst kind of environmental consultant is the kind that is small with low overhead and by default does a quick and frankly, crappy job on your reports. If you don’t know you are getting bad science, you also don’t know you are taking an increased risk with your lending.
Low bidders have their strategy too.
You probably have your hunches that some consultants call things that aren’t concerning, RECs, because they want to make more money by doing a Phase 2 ESA. I hate to say it but that does happen and we see it all the time. They bid low for Phase 1, all the while planning to find the smallest thing wrong so they can make money on the Phase 2 ESA
- Repeat Business Issues.
The flipside of consultants that find the tiniest things wrong to make money on a Phase 2 ESA is the environmental consultant that finds a repeat client (like a high volume commercial bank) and NEVER finds a problem even when there is one.
Why would this happen?
There’s pressure in our business to never blow up a deal. We know that finding environmental issues seriously impacts the odds that the transaction will close at all. Lenders and Commercial Real Estate agents don’t want to work with consultants that blow up their sales. Consultants, when they find a high volume buyer, want to hold on to that buyer for as long as they can. Not taking the risk of delivering bad news to a loan officer is one way to keep a client. Unfortunately, it substantially ramps up the risk the commercial bank (and the consultant) are taking.
So how do you protect your commercial bank from bad environmental consulting?
First, continue to bid projects out. There’s nothing wrong with that per se. However, you need to double-check the work you are getting back in from the consultants you are using. This is going to cost money for someone to third-party review the work of your consultants. You need to make sure you double-check the work of BOTH environmental reports that say a property is clean AND the ones that say there are RECs. You should demand total honesty and candor from your third-party review consultant. You need to take the information they tell you and weed out the consultants you are using. Don’t let bad consultants bid. Or, if you don’t have the heart to boot them from the bid process, don’t let your bad consultants win. Your costs per project will undoubtedly creep up but your quality will improve too. Eventually, third-party reviews can be throttled back to spot-check reports instead of doing every one of them.
In addition, make it a policy that bidders on a project which goes from a Phase 1 ESA to a Phase 2 ESA WILL NOT be allowed to do the work on Phase 2. This way, they know if they are bidding on a Phase 1 ESA they can’t factor in getting money from whatever tiny issues they dredge up. This will drop your overall transaction costs to lend and substantially lower the odds that your environmental consultant will blow up your deals. If your Phase 1 Environmental Consultant calls for a Phase 2, they should also provide a scope-of-work outlining exactly what needs to be done so the bidders on the Phase 2 ESA are all bidding apples-to-apples.
A3 Environmental Consultants can help you weed out the low-quality environmental consultants and decrease the risks you are taking from poor quality environmental reports.
If you need third party reviews, give A3 Environmental Consultants a call. We’ll work to get your Environmental REC removed with the utmost in confidentiality, we’ll meet or exceed ASTM Standard E1527-13 on any sort of commercial or industrial property. Our reports meet the requirements of all lenders and government agencies such as the Small Business Administration (SBA), Housing and Urban Development (HUD) and the United States Department of Agriculture (USDA). A3 Environmental Consultants can be reached at (888) 405-1742 or by email at Info@A3E.com.