As a commercial real estate owner and investor, do you routinely work with engineers who understand your business? Or do you settle for a “robo-consultant” who generates generic reports, without regard for your risk tolerance and business objectives? There is a crowded field of environmental engineering firms, and identifying the one that most closely aligns with your risk management and strategic planning process is critical.
When undergoing a CRE transaction, the due diligence period is a finite time horizon where you have one opportunity to evaluate your future asset for risk and growth. Taking prudent, timely, and efficient steps in this finite window to assess potential environmental and physical risks along with potential growth and returns can be a critical advantage in the market. As a potential investor, owner, or operator, you need to know at the outset what you are acquiring, and whether there will be deferred maintenance and/or capital needs items to be addressed during the period that you intend to own or “hold” the asset.
Working with a competent and trusted regional consultant can avail you of both liability protection and significant cost savings down the road. Knowing early in the due diligence period that there may be potential concerns allows time for further research and/or itemized quotes from engineers or contractors to remediate issues. It also allows you time to leverage and negotiate with the seller to ensure that you pay a fair price for the asset, and if there are significant expenses identified, that proper escrows are established. Should there be a potential environmental liability, this also allows time for you to ascertain the nature of the liability, its regulatory status with the applicable Federal and state regulatory agencies, and most importantly, to work with a skilled group of environmental scientists, consultants and attorneys to establish appropriate liability protection.
Below are two recent examples that showcase the immediate client benefits of thoughtful, case-specific due diligence.
Prioritizing Liability Protection
We work closely with a client who is a securitized lender, based in the Greater Boston area. We had replaced their previous consultant, who was both unresponsive, as well as not definitive in their analysis (lacking geographically/regional competency). Within a short time period we conducted more than 30 third-party reviews for this client’s risk management program, and have established a dynamic and client-specific evaluation criterion. A recent project that stands out to me was one where the client and development partners, a developer and their primary lender, represented that a potential site was development ready with no outstanding issues. However, during our review, we identified a change in property boundary configuration revealing the presence of onsite underground storage tanks (USTs) that were present in the 1950s, prior to regulations and permitting processes. Leaks from old USTs are a common contamination issue and can often require emergency response actions for cleanup and containment.
The developer insisted that these tanks were a “non-issue.” They were either removed or closed in place due to former official State office use/occupancy, but certainly nothing that anyone should be concerned about. We were on a somewhat tense call with all parties, but we kept the good counsel that our client has come to expect of us as their trusted advisor. We held our ground presenting substantiating evidence, and the developer agreed to a ground penetrating radar (GPR) survey and subsurface Phase II Environmental Assessment in the area identified as the former UST locations.
Not only were the tanks still present onsite, but they had leaked, causing potential underground soil contamination. We were grateful that we spared the client the future project delays that this surely would have resulted in when the leaking UST (or LUST) was encountered during site work. A short amount of time and money invested up front spared them significant delay and expense in the future. Plus, it really cemented for our clients that we are looking out for their best interests.
Long-Term Cost Savings
Our team consistently endeavors to identify areas where we can bring benefits to our clients. One important strategy we have cultivated is a focus on thought leadership – ensuring that Partner understands the pulse of the marketplace and providing guidance on market changes, new service areas, and opportunities for our clients to reduce operating costs and increase shareholder value. A good example of this is representing the best needs of our client relative to the necessities of their transaction.
Recently, a long term real estate investment trust (REIT) client of mine asked if we could do an Insurable Replacement Value (IRV) analysis. Building owners provide this estimate to their property insurance carriers, who use the estimates to calculate insurance premiums on a specific building or property. These analyses are essential for equity clients, who almost always pair them with Property Condition Assessments. My colleague Marc Bourdages, a technical director with over 25 years of experience in equity due diligence, conducted the IRV analysis. His client-specific prepared IRV along with a critical analysis of the lender prepared IRV allowed our client to negotiate with their insurance provider for a reduction of their insurance premiums on an annual basis for which the delta was multiples of our fee. It was a tremendous value for the client and a successful outcome for our team to know that we made a difference. We looked beyond the short term to get a deal closed, and as a result, the client will reap the benefit of the reduced insurance premium for the next 10 years, essentially their entire hold period.
In a competitive CRE marketplace, attention to detail and thorough due diligence can be the difference between a successful transaction and a costly liability. Be wary of the robo-consultant and their associated limitations. Protect your investment by working with a geographically regional and trusted consultant who understands your business.