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.
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.
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, 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:
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".
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.
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- 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
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