Navigating Lender Status Uncertainty in a Robust Ohio CRE Market

The Ohio CRE market is sizzling! The State is enjoying continued economic recovery from the Great Recession and attracting major business and employee talent. CRE growth is largely being driven by industrial repurposing, new retail outlets and e-commerce distribution centers, big box businesses, and multifamily properties for an influx of new residents. Ohio is at the epicenter of cutting-edge CRE technology innovation that will make it a retail and industrial hub for years to come. Amazon’s announcement that it is building a $1.5 Billion cargo airport hub at the Cincinnati international airport came with a lease of a 264,000-square-foot building to be used as a distribution and logistics warehouse center. Others will follow in the State. Kroger has also announced that it plans to build the first-ever fully automated robot warehouse in Ohio. In Columbus, a developer is converting the Easton Town Center mall into a virtual mini-city, with 700 apartment units, an additional 230,000 square feet of retail space, 300,000 square feet of office space and a new hotel.

With so many deals to be had in a highly competitive market, Ohio developers and investors are looking to multiple available sources of lending as they negotiate transactions. For multifamily and student housing sectors, the biggest is Fannie Mae, as well as other agency lenders. But a rising number of CRE projects are funded by alternative lenders and small regional or local banks, which are the fastest-growing lenders in the commercial real estate industry.

In situations with many funding options and competition to close on hot opportunities, clients will often engage Partner’s due diligence services for projects and portfolios where a lender is yet to be identified, or where multiple lenders are in play. The client wants to begin the process of producing environmental assessment and physical building assessment reports that encompass a broad range of due diligence requirements, but isn’t sure how to . If you start your due diligence before you know where your funding is coming from, the most economical and efficient solution is to engage with a highly experienced consultant that understands different lending platform requirements and risk tolerances to produce flexible reports that can then be adapted to the necessary scope. This saves clients the headache of having to potentially start the due diligence process over again, and prolong or jeopardize closing deals.

As a minimal requirement, most lenders will need a basic Property Condition Assessment (PCA) and Phase I Environmental Site Assessment (ESA). Scope requirements and risk tolerances are nuanced and tend to vary. Certain lenders or platforms may place emphasis on a specific environmental issue and prefer an aggressive remediation timeline, while another may be comfortable with a longer-term passive approach. Likewise, for PCA reports, one lender’s approach may be insistent on an item like a roof replacement simply based on useful life, whereas a different lending platform may place more emphasis on observed and reported conditions. For PCA reports, we recommend performing the most stringent scope in the field to produce an equity-level report, then converting our report once we know where the funding is coming from.

As a market leader in Environmental and Engineering due diligence, Partner Engineering and Science works with numerous sources of capital, many of which are home to multiple lending platforms. Knowledge of platform tolerances, paired with the physical and environmental attributes of a variety of property types, is integral to our ability to consult a client or borrower while providing the flexibility in a deliverable that will be acceptable to multiple sources of capital. Lender specific requirements could require modification of reports and additional backend work in some form. However, utilizing forethought and detail in assessment scopes, knowledge of what is essential to potential capital sources and communication with your consultant can go a long way in addressing lender-specific requirements or multiple-lender specific requirements.

When working with an Ohio consultant on “lender TBD” due diligence, back end work could be required at an additional cost and requiring additional time. Ask your consultant to provide as much information as possible about these potential add-ons up front, so that there are no surprises, delays or unforeseen additional costs. Allow for enough time when discussing any change of scope of work with your due diligence service team to manage timing and additional cost.

While this feels like a complex situation to navigate, it doesn’t have to be if you ask the right questions, manage your expectations, and engage with an experienced, knowledgeable, local consultant who knows the Ohio financial and CRE landscapes, and the unique geographic and soil compositions throughout the state that impact environmental due diligence strategy. Our market-leading consultants can guide you toward the product that helps you ensure successful transactions.