It could be related to a real or perceived conflict of interest in your environmental process.
Conflicts of interest in environmental lending policy are certainly not confined to SBA deals by any means. Every real estate deal can be affected, and many are.
As a lender or CDC, you may not even be aware of these hidden or inadvertent conflicts in many cases.
However, just because you may not be aware of them doesn't mean they aren't sometimes giving you a poor reflection in the eyes of your customers. And that poor reflection is something else you may not be seeing.
Examining these topics is a more fruitful exercise if we do it through our customer's eyes. With this in mind, we're going to dive fairly deeply into four common - but often hidden -conflicts of interest. These can have a big impact, especially on small lenders and CDC's, where building a relationship of trust with the customer is everything:
We're also going to discuss some easy things that can be done to prevent these problems. Here we go:
Conflicts of interest in environmental lending policy are certainly not confined to SBA deals by any means. Every real estate deal can be affected, and many are.
As a lender or CDC, you may not even be aware of these hidden or inadvertent conflicts in many cases.
However, just because you may not be aware of them doesn't mean they aren't sometimes giving you a poor reflection in the eyes of your customers. And that poor reflection is something else you may not be seeing.
Examining these topics is a more fruitful exercise if we do it through our customer's eyes. With this in mind, we're going to dive fairly deeply into four common - but often hidden -conflicts of interest. These can have a big impact, especially on small lenders and CDC's, where building a relationship of trust with the customer is everything:
1) Vendor Upsell Conflicts
2) Pre-Approved Vendor List Conflicts
3) "Outsourcing" and "Partnering", and
4) "Updating old reports"
3) "Outsourcing" and "Partnering", and
4) "Updating old reports"
We're also going to discuss some easy things that can be done to prevent these problems. Here we go:
Conflict 1) Vendor Upsell Conflicts
Have you ever ordered an environmental screen or a Phase I Environmental Site Assessment (ESA) only to learn that additional work is needed?
Of course.
Of course.
From your borrower's point of view, the engineer or consultant that does this initial work has a conflict of interest in performing additional, and more lucrative, investigation.
Sometimes this conflict is only a perception, but sometimes it's real.
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| What are these guys drilling for? |
Most of us know of cases where there has been at least a suspicion of additional work recommended on specious grounds. The scenario happens often enough that it's common knowledge in business circles.
Whether a conflict of interest is real or perceived, this potential is inherently built-in to every single deal.
The vendor may be competent and honorable and honest, and yet the appearance of conflict - in your customers eyes - is tough to avoid.
Even in cases where your consultant is willing to roll the cost of an "elevated risk" RSRA Screen into the Phase I, they still get to do the Phase I, don't they?
The borrower can often perceive this as a very big upsell.
Even in cases where your consultant is willing to roll the cost of an "elevated risk" RSRA Screen into the Phase I, they still get to do the Phase I, don't they?
The borrower can often perceive this as a very big upsell.
The customer doesn't know these vendors. He doesn't deal with them regularly.
In fact, your customer has likely never been through this process before, and may never again. It's often unfamiliar territory to him, and he's relying on you to guide him through it.
In fact, your customer has likely never been through this process before, and may never again. It's often unfamiliar territory to him, and he's relying on you to guide him through it.
Thus, when your customer sees this unfamiliar (to him) environmental process unfold before him, it can look like dominoes: one Phase to the next Phase to the next Phase of expensive environmental investigations!
Recommended by a vendor - and then performed by guess who?
That same vendor. All with the lender's blessing.
His eyes roll back in his head and he's thinking:
"Are you kidding me? What a racket!"
In the eyes of your customer, this process can look like a gravy train of conflict for some lucky engineer or consultant, whom your customer may assume you have a cozy relationship with - since YOU are the one who recommended them.
Recommended by a vendor - and then performed by guess who?
That same vendor. All with the lender's blessing.
His eyes roll back in his head and he's thinking:
"Are you kidding me? What a racket!"
In the eyes of your customer, this process can look like a gravy train of conflict for some lucky engineer or consultant, whom your customer may assume you have a cozy relationship with - since YOU are the one who recommended them.
Your customer probably won't say anything to you about this out loud because it won't do him any good, but it can cause him to feel a lot of resentment toward the entire financing process - and you specifically - because in his eyes, you are the one requiring it.
Conflict 2) "Pre-approved" lists of third party vendors
To your customer, this list often just doesn't feel right.
Limiting the customer's freedom of choice to your list - however long or short - makes them feel boxed in, and can simply pile on to the conflict of interest they already perceive, outlined in #1 above.
In the borrower's eye, not only are you requiring him to jump through unforeseen and expensive hoops, he now has to choose from your list which - from his point of view - is often seen as a limitation on his choices.
Limiting the customer's freedom of choice to your list - however long or short - makes them feel boxed in, and can simply pile on to the conflict of interest they already perceive, outlined in #1 above.
In the borrower's eye, not only are you requiring him to jump through unforeseen and expensive hoops, he now has to choose from your list which - from his point of view - is often seen as a limitation on his choices.
Given recent events in politics and banking, the news reports have been full of "corporate cronyism" stories - and this has obviously included banks. As a small lender or CDC, you obviously don't want your customer to mentally lump you in this category.
It can look and feel like a conflict of interest to your customer, even if it's really not one.
Again, it's most likely not something he'll bring up to you, because it won't help his case, but he'll remember it.
It can look and feel like a conflict of interest to your customer, even if it's really not one.
Again, it's most likely not something he'll bring up to you, because it won't help his case, but he'll remember it.
I know, I know, some will say that providing a list simply gives the customer a way to feel confident that these engineers and consultants have been "screened for quality".
The problem is, that's too often just not the case.
Firms change personnel constantly. Sometimes they even change ownership, and you typically might not be aware of it.
Obviously such a change can make a huge difference. But there are many, many other considerations.
Do they still have insurance? Have they been sued recently? Have they raised their prices? Have they kept up with recent changes in the industry? And the biggest question of all: are they really qualified and credible? We've heard of environmental firms being run by former hot dog vendors, convicted pedophiles, and pig farmers. Falsified credentials and fake "professionals" abound in the environmental industry, as I've written about before.
Your organization can't possibly know all these things and keep up with them on every vendor. If it turns out that there's a vendor on your list which has one of these problems, and it blows up for your customer, who will your customer look to?
Should you and your organization bear responsibility - fairly or not - for that vendor's issue?
Customers are smart and sophisticated and perfectly capable of making good vendor choices on their own.
As long as you clearly lay the bar out for them in your environmental policy as to what they need to do, they will generally find the most efficient way to get it done.
Maybe you keep an approved list or maybe you don't, but ask yourself this question:
Is there any need to limit the customer's choices to a specific list of vendors, as long as applicable standards are met?
Again, the key here is to look at this through the customer's eyes. This can go a long way toward building trust with him.
Thanks for spending a minute on this important topic today. We hope you've found your time well spent so far, but the best is yet to come.
In Part II of this series, we cover hidden conflicts that you probably were not aware of in "Outsourcing" & "Partnering" arrangements as well as "Updating Old Reports".
Best of all, we'll also discuss some easy-to-implement recommendations to avoid all of these problem areas.
About Us
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Give us a try on your next project and find out what they mean.
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