Environmental Portfolio Reviews are a go-to solution for evaluating groupings of Environmental Site Assessments. Multiple property investments are a streamlined method for lenders to diversify real estate capital under the same loan. However, the requirement for Commercial Real Estate Due Diligence still applies for multi-property lending. According to applicable regulatory guidelines, Banks and Credit Unions must demonstrate they understand and have accounted for the environmental risks to collateral.
Strategic planning and analysis is what sets portfolio management apart from due diligence completed for a single property. LCS has fine-tuned the portfolio review process over the past 25 years by partnering with clients across the nation. If you are a lender who is interested in adding larger groupings of Commercial Real Estate collateral into your portfolio, or has already been involved with this process, we invite you to take a behind-the-scenes look at how LCS completes a comprehensive environmental portfolio review from project initiation to the preparation of a portfolio-wide findings analysis.
What is Environmental Due Diligence?
Environmental Due Diligence (EDD) is a critical step for lenders to adequately evaluate environmental risks associated with real estate lending opportunities. EDD is designed to help lenders assess risk, reduce legal liability, increase financial performance, protect capital, and diversify their portfolios.
What is an Environmental Review?
An Environmental Review is used to demonstrate that lenders understand and have accounted for the environmental risks to the collateral. Whether done in-house or by a third-party consultant such as LCS, the audit of a Desktop, Transaction Screen, Phase I ESA, Phase II ESA, or remediation report ensures regulatory compliance to verify the accuracy of environmental reports.
Portfolios and Environmental Due Diligence
The term ‘portfolio’ applies to an investor’s (borrower’s) collection of assets purchased to achieve a specific financial goal. These groupings of properties can range from two or more sites to over 100 properties or more, owned and operated by the same entity. The following criteria typically apply:
- The properties are separate parcels or are non-contiguous
- Located across a specific geographic region or nationwide
- Serving as collateral by the same borrower
- Financing is being provided by one or more participating lenders
Common examples of Commercial Real Estate portfolios include clusters of convenience store/gasoline fueling stations, hotel groups, fast food restaurant groups, skilled nursing facilities, quick lube facilities, and apartment buildings. Similar to single-site lending, appropriate preliminary environmental due diligence needs to be completed for each site in accordance with the lending institution’s policy.
What is a Comprehensive Portfolio Review?
It is often the case that LCS is engaged to review a ‘portfolio’. This is best defined as a collection of Environmental Site Assessment reports prepared by outside consultants for lenders as part of the same financing arrangement. In this situation:
- Separate ESA reports have been completed to satisfy regulatory and/or lender-specific research requirements
- ESA reviews are needed in order for the lender to adequately evaluate lending opportunities
- A high-level summary of environmental conditions is desired
The goal of a portfolio review is to provide a lending institution with an easy-to-understand comprehensive summary in a time-efficient manner. This is especially true when two or more lenders share in the interests of a real estate venture as part of a syndication deal or participation deal. LCS will often be engaged by the lead lender; however, sometimes a participating lender will engage LCS to review Environmental Due Diligence provided by the lead bank or borrower.
Case Study: Completing a Large-Scale Gasoline Station Environmental Portfolio Review
These complex review portfolios can be broken down into three primary steps. First, the environmental reports prepared by outside consultants are provided to LCS for review. Secondly, the environmental reports are analyzed by Environmental Professionals for potential risks and liabilities. And lastly, the findings are consolidated into a high-level summary based upon lender-specific requirements. However, managing the size and scale of these multiple-site projects is one of the primary benefits of hiring a consultant with decades of nationwide experience.
The best way to highlight the review portfolio process is to provide a behind-the-scenes look into one of the many large-scale reviews completed by LCS each year.
Preparing for a Large-Scale Environmental Review Portfolio
LCS was engaged by a lending institution to review more than 50 Phase I Environmental Site Assessment (ESA) Reports for a syndication deal. The separate properties in this real estate portfolio were developed as long-term gasoline station facilities located across the Eastern Region of the United States. In addition to gasoline stations, the current and historical operations included automotive repair and/or car washes. In this case, our client (a participating lender) asked LCS to review and consult with them regarding the Environmental Due Diligence that was provided by the lead bank to give them an insight into environmental risks that may be present.
A review portfolio of this scale requires meticulous planning and coordination, before and after the receipt of reports. Everyone has their role in completing a large-scale environmental portfolio. With the goal of providing a comprehensive review in the most time-efficient manner, project development starts immediately with the internal selection of qualified Environmental Professionals that will review and understand the expectations of the lender. This is often accomplished via written scope of work requirements and communications with the lender.
Data Collection & Management
The complexity of an Environmental Due Diligence portfolio review is magnified by the number of sites and complex operations. The management of data is what sets portfolio management apart from Commercial Real Estate Due Diligence prepared for a single property. As such, proper data management is one of the primary benefits of hiring a consultant with nationwide experience in multiple-site reviews.
Depending on the particulars, reports for a portfolio review can be provided all at once, or on a rolling basis as due diligence is provided by the outside consultant. In this case, the more than 50 Phase I ESA reports were provided to LCS on a rolling basis (as completed) and reviewed by LCS over a four-week period, with the last report to be reviewed provided two weeks prior to the scheduled due date.
Senior staff members were assigned designated tasks in the management and review processes to ensure communication and collaboration and to help the process go seamlessly.
As part of the comprehensive review process, LCS summarized the conditions of environmental concern, as identified by the details of the reports provided. Summaries of previous environmental studies and the results of tank testing reports were also taken into consideration.
- The report findings across the portfolio were then consolidated into a high-level overview that covered the portfolio background. Important features of this setup include:
- Description of Recognized Environmental Conditions (RECs)
- The identification of common trends and risk patterns
- Numbering of current or historical on-site tanks or other notable features
- Analyzing potential environmental risks and liabilities
- Risk evaluation and recommendations
Challenges in Completing a Review Portfolio
A properly managed review portfolio will lead to project success. However, unexpected hurdles should always be anticipated. Whether it be related to missing reports, additional information, or tight timelines, flexibility is key to managing multiple-property environmental review projects.
tips for success include communicating an appropriate and reasonable timeline for both the lender and consultant to complete the review and providing a specific point of contact with the borrowing entity.
And as always….
LCS listens to your needs to develop products that are right for your lending transaction. Whether that be an individual appraisal, environmental or construction report, or a combination of services; LCS will meet your needs in the most efficient, effective way possible.
To learn more, reach out to Liz Mahoney, Director of Sales & Business Development today.