Part II - Environmental Industry Secrets: 4 Hidden Conflicts of Interest Seen Through Your Customer's Eyes

Today we'll finish our examination of 4 major conflict areas within the environmental due diligence industry which can have a big impact, especially on small lenders and CDC's, where building a relationship of trust with the customer is everything.

In Part I, we covered  Vendor Upsell Conflicts and  Pre-Approved Vendor List Conflicts.

Today, we're going to take a look at "Outsourcing & Partnering", and "Updating Old Reports".

We're also going to discuss some easy things that can be done to avoid these problems. Here we go:

Conflict 3) "Outsourcing" and "Partnering" in the environmental industry

While they may not mention this up front, big players in the environmental industry now often rely heavily on outsourcing and "partner agreements". 

These arrangements can have some advantages - primarily for the environmental company. 

However, for you and your customers, there can be some hidden downsides. In the environmental due diligence industry, there are currently several popular business models:

I) The RSRA company you order from could be essentially a national database and marketing firm. These firms "partner" with regional consulting/engineer firms.  It usually works something like this:

• The database company provides all the data for the RSRA and assembles the report, and the "partner" firms review and sign off on this report for a small fee. 
• The "partner" firms don't make much for certifying these RSRA reports - a nominal fee - but if it comes back "elevated risk" thus necessitating a Phase I, it is now referred back to that very same regional "partner" as a much more profitable upsell for them. 
• Can you see it now? Conflict of interest.

Remember that since A) your customer probably has never been through this process before, and B) his relationship is with YOU - not the environmental company, he may well see this conflict of interest as a reflection on you and your organization.

II) The Phase I company you order from might position itself as a "national player" by contracting with regional "partner firms" or even worse - a loose network of independent subcontractors.  It usually works something like this:

• These subcontractors or "partners" are hired for a nominal fee to provide the most important part of the assessment: the walk-through and photographs of the site for the report.
• Again, these subcontractors don't make much for the inspection, but if there's any additional work recommended (Phase II sampling), this is usually referred to them, or else a "partner" firm in the area. 
• See the conflict of interest?
• Under the EPA and ASTM Standards for Phase I ESA performance, these subcontractors ARE NOT required to be qualified environmental professionals. Believe it or not.
• They only need to be "under the direction or supervision of" a qualified environmental professional.  This can mean by telephone or email.
• As we've already discussed, sometimes these people are qualified, and sometimes they are not. 
• All of the other functions of the ESA are added by clerical staff back at the main office and the report is signed off by an "environmental professional" who has never been to the property. 
• As you might imagine, we've seen many problems stem from this system.

III) The environmental company you order from might be some combination or variation on the above themes.

Conflict 4) Updating old reports

Truth is, in the environmental business, there is very little savings to be gained in the update of an old report. 

The standards for these reports change every 5 or 10 years and usually everything has to be done all over again. So there's not much savings for the environmental company, really. The vendor may show some discount in consideration for their previous report, but it's not a huge benefit to them. 

No, that's not the problem we're talking about here. 

The real problem is, there are times when environmental companies make mistakes.

I know, I know, shocking, right? Yes, it's true. Believe it or not.

There have even been cases of fraud, where a company has made a property appear clean when it's dirty, or vice-versa. 

I know, I know, this could never happen with your vendor, right? 

Guess again. It happens more often than you think, and most cases probably never get caught.

Asking a environmental company to update something that they did five or ten years ago gives them an opportunity to cover their tracks if there was a "mistake". They can simply gloss over it or ignore it or get around it in a hundred different ways.

It's a potential conflict of interest.

We've seen this more than once, and it's really unfortunate. Here's an example:

• A recent case we reviewed involved a very large and well respected regional engineering firm.  They did a Phase I ESA in the late 1990's on a large nationally recognized restaurant in an old factory building.  They had done an update in the mid 2000's as well.
• The Phase I ESA from the 1990's revealed several geothermal HVAC wells which have been sucking in contaminated groundwater from off-site sources and then re-injecting it into the ground water in a different location.  
• Unfortunately, the report failed to frame the matter as an environmental concern in any way, and..... 
• .....Neither did the 2000's update.
• This collateral now has a very, very serious environmental defect which could result in devastating liability.  And the problem is ongoing to this day.

The situation with these wells is called "exacerbation of contamination".  It can potentially be the basis for the loss of any liability exemptions which may have otherwise been obtained for the property in the first place.

To paraphrase a well-known politician, "it's kind of a big deal".

• The first Phase I's failure to identify the situation as a problem in the first report may have been a mistake (negligence) but......
• The second failure in the update could have been either a a repeat of the first mistake - or else a conflict of interest.  
• We'll probably never know, because our client (the bank) declined the loan based on our review, and another lender probably took on this risk.

Aside from collateral value problems, obviously there can also be serious liability exposures for everyone involved in this example, such as:

• the environmental company who did the original Phase I ESA and also the update, and never identified this problem, 
• the restaurant owner who paid for the Phase I ESA's and relied upon them, and
• potentially the lender, who recommended this vendor - twice - and ordered the reports as a mandatory part of the financing and refinance process. 

What to Do?

Conflicts might not be very apparent to you sometimes, but from your customers perspective, things can look much different. Here are some things to remember:

• These are not the only hidden conflicts of interest, but they are some of the most common. Once you learn to spot these kinds of things, you will tend to notice them more and more.  Remember, look at it from the customers point of view.  Awareness is key.  

• Every time you order an environmental report, consider these possible conflicts of interest, or even the appearance of a conflict. 

• There is one environmental service on the market specifically designed to avoid all of these conflicts of interest:  
• Using  EZ-Screen™ as the first  step on every deal eliminates the possibility of most or all conflicts of interest, and thus puts you in a better light in your customer's eye.  
• Plus, it's a great value. 
• Learn about EZ-Screen "Clean or Free" advantage here.

• Just keeping these things in mind can make a big difference in your ability to guide the process away from conflicts. 

• Review your organization's environmental policy and make changes where applicable.  
• If your organization does not have a formal environmental policy, consider using the SBA's environmental policy as a template - even on non-SBA deals.  
• It won't address all the conflicts of interest discussed in this article, but it's a good starting point if you've got nothing else.

• If you're uncomfortable reviewing and changing policy on your own, or just want to have a second set of eyes on it, having your attorney review it is a great idea. This can identify and possibly mitigate potential conflicts, among many other things.  

• If a traditional attorney doesn't fit the budget, consider an inexpensive legal service plan. 
• Unlimited access to excellent attorneys in every state, along with many other benefits.
• All plans include document review
• Small Business plans start at less than $40
• Family plans start at less than $20
• No long term contracts
• Take a quick look at plans in your state
• Business owners absolutely love these legal plans. Share this link with with your small business borrowers - they will thank you! http://goo.gl/YcDEi6

About Us

Our clients tell us that they won't entrust their environmental risk decisions with anyone else.  

Give us a try on your next project and find out what they mean.

To EZ-Screen your next deal, simply visit our order portal.

To ask a question, email us here, or call (800) 769-SIERRA

To find out more about us, please visit our website.

What About Contamination Risk? Why Your Next Environmental Report Should Be Clean - Or Free.

In early 2015, we sent an Environmental Risk Survey to lenders and Community Development Companies (CDCs) nationally.  

These two items in the survey sparked the most interest:

1) Desktop environmental screening sometimes reveals elevated environmental risk, triggering the much more costly and time consuming Phase I Environmental Site Assessment (ESA). 

• About 90% responded thus:
• "It would be nice if we could avoid this extra step up front. We're always looking for ways to speed our deals up and have them cost less."

and......

2) If the fee were waived for desktop environmental screens which found an "elevated risk" and then subsequently recommended a Phase I ESA (AKA "Clean or Free Guarantee"), it would be advantageous for our organization and our clients.

• 100% of respondents said:
• "Yes.  Eliminating this "double dip" would save time and money."

While suspected this would be the case, we were really surprised that the survey supported this so strongly.  

The result?  We've introduced a brand new concept in the environmental risk industry.

Here's the "Clean or Free" guarantee, in under 40 seconds:

This revolutionary approach to environmental risk management for real estate collateral has many fundamental and unique advantages: 

• "Clean or Free" means that EZ-Screen quickly clears the property as low environmental risk, or there is no charge. 

That's right.  Your fee will be waived or refunded.  No more fear of being "double dipped" for additional investigations.

• This unique program completely eliminates all real and perceived conflicts of interest in your environmental process.  There are many such conflicts which can be very damaging to customer trust - and you may very well not even be aware of them.

• If there is additional work recommended, not only is there no charge for our effort, but you are free to contract with any local consultant of your choice in order to reap that benefit. 

• Lenders love this program, because:
• it's fast and inexpensive enough to serve as a first level "cut" for every deal, as part of a tiered environmental risk screening approach. 
• This relieves the lender from the burden determining of which level of environmental reporting makes the most sense.
• It paints the lender in a good light with the borrower.
• It frees the lender up to work on other aspects of the deal where they are more effective.
• If a legitimate concern is discovered, sometimes that concern can be investigated on it's own merit (e.g.: Phase II sampling), potentially saving weeks, not to mention thousands in Phase I fees.

• We don't outsource or refer to a "network of partner firms" eager to profit from the upsell.

• In this way, you - and your clients - can rest assured that we always have your best interest in mind.

• Not only does the "Clean or Free" program eliminate all conflicts of interest, it also gives us a built in incentive to work hard to investigate potential environmental concerns and determine whether they truly and elevated threat to the property or not. 

• In cases where other companies might see a potential problem and simply kick it up to a Phase I, we're going to put in that extra effort now, instead.  Your deal will always reap the benefits.

• We provide personalized, in-house expertise on every project.  We never subcontract or "partner" with other firms.  We start your project, and we finish it.

• EZ Screen meets or exceeds the US Small Business Administration's requirements for the Records Search with Risk Assessment (RSRA), but is not limited to SBA deals when used as a sensible component of a tiered assessment approach.

• We've been in business since 1993, and in that time, our experience has taught us how to be the value leader.  At under $300 and 48 hour turnaround, no competitor can beat our value. 

Our clients tell us that they won't entrust their environmental risk decisions with anyone else.  

Give us a try on your next project and find out what they mean.

To EZ-Screen your next deal, simply visit our order portal.

To ask a question, email us here, or call (800) 769-SIERRA

To find out more about us, please visit our website.