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September 2024 / Published in Environmental Due Diligence

Commercial Lenders Need 3rd Party Environmental Reviews

3rd Party Environmental Review

Commercial lenders who rely on Phase 1 Environmental Site Assessments (ESAs) will inevitably face the challenge of determining whether they can trust the work presented by an environmental consultant. Trust in these reports is critical, as the findings directly impact the lender’s risk assessment and decision-making process. There are several reasons why a lender might question the reliability of a Phase 1 ESA, which I’ll outline below.

Unfamiliar Environmental Consultants

Lenders often work with a select group of trusted environmental consultants. However, when a potential borrower provides a Phase 1 ESA from a consultant the lender doesn’t know, it raises a dilemma: Should the lender trust this unfamiliar consultant, or require the borrower to invest in a new Phase 1 ESA from a known, trusted consultant? This decision is challenging—accepting the unfamiliar report could pose significant risks, but insisting on a new assessment might lead the borrower to seek financing elsewhere.

Questionable Practices by Environmental Consultants

Even with familiar consultants, there can be reasons to question the reliability of their reports. Some consultants may downplay or overlook Recognized Environmental Concerns (RECs) to maintain a steady flow of work from banks. By avoiding findings that could trigger costly Phase 2 ESAs, they minimize disruptions to real estate transactions, appease loan production staff, and ensure their continued engagement. However, this practice introduces significant unrecognized risks for the lender, potentially compromising the collateral that secures a loan.

Conversely, other consultants may adopt the opposite approach, identifying excessive RECs in every assessment. This can lead to unnecessary Phase 2 ESAs, driving up costs for clients and derailing deals, ultimately frustrating the lender’s loan production team. Both extremes—overly lenient or overly strict—create challenges for lenders in trusting the assessments that inform their lending decisions.

3rd Party Environmental Review Reports

A3 Environmental Consultants offers third-party reviews of environmental reports from other consultants, providing an unbiased evaluation of whether a report accurately represents the risks to the commercial lender. We offer this service at a price that is minimal for the banking client, helping lenders identify and work with top-performing consultants who align with their risk tolerance. Our reviews help ensure that environmental assessments are neither overly cautious nor dismissive, protecting lenders from hidden risks without alienating potential borrowers over minor issues.

We Fix Gnarly Environmental Problems

We Fix Gnarly Environmental Problems

 

What you can read next

Environmental report
Are Phase 1 Environmental Reports Public Information?
Environmental REC
What is an Environmental REC?
Environmental Site Assessment
What is an Environmental Site Assessment?
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