Environmental Industry Secrets: Hidden Conflicts of Interest Seen Through Your Customer's Eyes

Have you ever wondered why there are some parts of some deals that seem to make your customers a bit crabby, but perhaps you couldn't quite put your finger on why? 

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:

1) Vendor Upsell Conflicts

2) Pre-Approved Vendor List Conflicts
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. 

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. 

What are these guys drilling for?

How can you know? It can be tough to tell the difference, and from your customer's point of view, it's a moot question.

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.

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. 

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.

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.

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.

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

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.

CDC/Small Business Lender Environmental Risk Survey Results: IMPORTANT ANNOUNCEMENT

Thanks to those who participated in the recent Environmental Risk Survey. We sent this survey to small lenders and CDC's nationally, and we had a very good response.  

The most interesting responses were these:

• Desktop environmental screening sometimes reveals an elevated environmental risk, necessitating another step: the more costly and time consuming Phase I Environmental Site Assessment (ESA). 
• About 90% responded:
• "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......

• 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 responses indicated:
• "Yes.  Eliminating this "double dip" would save time and money."

We suspected this would be the case, based on our preliminary conversations with some of our clients. However, we were really surprised that the survey supported this so strongly. 

As a result of these survey results, we are introducing a brand new concept in the environmental risk industry.

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

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

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

Your fee will be waived or refunded.  No more fear of being "double dipped".

• We provide personalized, in-house expertise on every project.  
• We don't outsource anything to a "network" of "partners" who may not be qualified to assess environmental risk, and who may have an undisclosed conflict of interest in recommending additional work. 

• If your project warrants additional investigation, we have no conflicts of interest. This is one way you can rest assured that we always have your best interest in mind.

• We've been in business 22 years, 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.

Easily Outsource Environmental Risk Evaluation for Lower Costs, Lower Risks, and Stronger Portfolios

Recently, several of our lending clients have begun to use EZ-Screen as their primary environmental risk screening tool, and it has really paid off for them. I'd like to share two such stories with you today.

1) A refinance deal: the owner was shopping for a large refi loan on a 100 year old factory building, now a profitable restaurant. The owner did not have a previous Phase I done when they bought the property. 

Our EZ-Screen review identified old contamination on the property. Even worse, ongoing operations at the property had been exacerbating the contamination for about 15 years, spreading it around and making it worse. 

It is a huge potential liability problem.

We provided some analysis of the problem to the lending specialist.

Their loan committee discussed our findings for several weeks, and after consulting with their legal counsel, finally decided to pass on the loan. There is probably a million dollars worth of environmental exposure there, and this small lender was smart to pass it up.

2) In a second recent case, we were asked to EZ-Screen a property. 

The lender was told that the property had never been occupied or developed, and that no previous environmental report was available. 

EZ-Screen quickly revealed some important information: there had been several different iterations of a gas station on the property. Eventually, we found some old reports on the property

Surprise!  Nothing to be afraid of. The documentation showed that the property had never been impacted by environmental contamination. 

The loan was quickly made and everyone was happy.

Both of these happy outcomes were facilitated by the bank's decision to use EZ-Screen as their first-line screening tool for all real estate collateral.  At less than $300 and less than 24 hours, it streamlines the process and is painlessly passed on as a closing cost.  No competitor comes close to this value.

• In the first case, the alternative would have been a $2000 Phase I ESA which would have taken several weeks.  
• In the second case, no environmental work would have been done it all, under that lender's policy, since it was a low cap loan.

Both of these lenders now use our EZ-Screen as an across the board means of assessing their risks better and more efficiently. This makes them more competitive and at the same time gives them stronger portfolios.

An additional benefit of EZ--Screen is that the risk decisions are being made by an outside third party trained environmental professional with the resources and background to make the call. Our lender and loan committee clients tell us they are uncomfortable in the role of environmental risk evaluator, especially at smaller institutions. This is an affordable way for them to stay very competitive with the bigger banks, and keep sub par contaminated or risky collateral off of their balance sheet.

If you believe that this low level screening process can be beneficial for your lending process, feel free to give us a call. 

EZ-Screen is specifically designed to avoid all 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.  
• 
  

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.

Thanks so much for your order!

Other resources that may be helpful for borrowers, lenders, and sellers of real estate:

• Legal service plans are a huge value for anyone involved in the real estate and lending industries. These plans provide unlimited access to high quality attorneys in every state without ever having to worry about getting a bill!  Find a plan for your business or family starting at less than $20/month.

• Our blog shares free helpful tips and anecdotes about successfully avoiding risk and saving money on real estate transactions.

• Return to our website.

BOO! Lessons from experience: Buying gas stations/Cstores right!

As a professional in environmental and business risk mitigation for 25 years, I have seen many "boo-boo" scenarios in commercial real estate, some many times.  Some of the more painful ones involve gas station/convenience stores.  Some of this pain is simply a result of the nature of the business involved. Often, the buyer is so excited by the reward side of the equation that he or she is blind to some of these risks.

Another factor is sometimes because these types of businesses are often acquired by folks who may have emigrated here from another country and culture, and who may not understand some of the subtleties of doing business here in the US.  When these two factors are combined, it can really create some problems if someone isn't able to help keep things on a good course.

In a great article on LinkedIn, my friend Habib Shah goes into many facets of this scenario.  After reading his analysis, I felt compelled to add my own perspective which sadly has been hard-earned, sometimes by having to try and help people pick up the pieces after they've made a big mistake!

Here's my additional perspective:

1) A high percentage of Underground Storage Tank (UST) system leaks are caused by leaks in the transfer piping.  Habib's estimate for piping replacement at $50,000 is reasonable. If the underground tanks need to be replaced, you can add $100,000 to that.

2) Stay away from single-walled piping and tanks except for in very specific circumstances. Insurers sometimes don't like to underwrite single-walled systems, and when they do, it can be more expensive. I usually recommend working with an environmental insurance specialist like Chris Bunbury who knows the tricks of the trade to mitigate these risks.

3) The older the underground tank system is, the more risk it has. Other factors which increase risk include the care with which the system was originally installed, the local geology, the diligence with which the system has been maintained and tested over the years, and the integrity, calibration, precision and accuracy of the testing methods and equipment.

4) Don't overlook the risk of existing or historical  contamination liability. If not handled correctly, this can cost a buyer much more than the property is worth.  Regulatory agencies are always looking for revenue, including fines and cleanup costs levied against liable parties, even if they didn't cause the contamination!

5) Don't rely upon the environmental report (or other reports for that matter)  provided by the seller unless it is certified also to the buyer with their name on it.

6) Environmental reports are only good for a limited amount of time. A five year old report has little value.

7) Just because you are buying on a land contract or cash and there is no bank involved to require an environmental report does not mean you should not do your own environmental due diligence.  The consequences for the buyer are the same either way. When a bank or SBA requires environmental work, they are actually doing the buyer a favor that he should be equally willing to do for himself even if there's no bank involved.

8) The sellers assurances that "everything is fine" may make the buyer feel good, but in business terms, this means little. In some cultures around the world, a handshake still means everything in terms of trust. Here in the United States, it is best to follow Ronald Reagan's sage advice to "trust, but verify". Make sure that as a buyer you hire your own professionals, and don't rely upon assurances by the seller or of people contracted only to him.  They have fiduciary responsibility to the seller alone.

9) "Let the butcher cut the meat." This adage is never more true than when it comes to buying commercial real estate. 

Don't try to do your own environmental due diligence or your own legal review.

Here are some cost saving resources to help you in these two key areas:

Environmental Due Diligence: Depending on your needs and the situation involved, there are environmental due diligence products available which start at less than $300. Contact me through LinkedIn (http://www.linkedin.com/in/daveversluis/) to find out more, or visit www.sierraconsultants.net

Attorney Review of Sale Documents: When it comes to attorneys, obviously they can be very expensive. However, there is a growing trend towards accessing legal legal advice through inexpensive service plans. These simple plans enable unlimited access to an attorney for virtually any matter without worrying about receiving a bill! Family plans start at $20 per month.  Small business plans are more robust and start at about $40 per month. I've been using these services myself for years and have found them to be an unbelievable value! Contact me through LinkedIn (http://www.linkedin.com/in/daveversluis/) to find out more, or visit www.davidversluis.legalshieldassociate.com

Credential plagiarism? Big problem. Here's how I handled it.

Crazy as it sounds, just last week (March 20 2014) I caught someone stealing my professional credentials on Linkedin!  

I documented the experience, and then shared it with some colleagues in an environmental consulting group on Linkedin where I am a member. The response was very supportive.

As a result of that feedback, I was encouraged to share it here with you, my clients, as an object lesson.  There are some important takeaways from this experience:

1) If this kind of fraud can happen to me, it can happen to anyone - including you. So be vigilant, and if you catch someone, don't be afraid to call them out like I did!  In this case, I consulted with my attorney on the matter, and he encouraged my action.  The fraudster disappeared from LinkedIn within a few days.

2)  The feedback I received from my colleagues really confirmed the extent to which this fraud hurts the perception of our entire profession! Again, this goes for your profession too.

3) When you hire a professional (in this case an "environmental professional) demand to see proof of credentials, references, and liability insurance if you have any question whatsoever about the veracity of the person you are dealing with.  

4) Remember that the results you get are only as good as the people who do the job for you.  Price (high or low), the size of the company (big or small), and claims made about experience and capabilities in marketing materials may be a good indicator - or - may have ZERO relevance to reality in the "information age".

5) There can be very serious and substantial legal liabilities for those who employ, hire, or recommend someone who is using false credentials, and damages later result.  In the case of environmental contamination, the damages can run into the hundreds of thousands or even millions of dollars!

"Caveat  Emptor" has never been more important than it is today.

How High - or Low - Are Your Standards?

"We KNOW the difference
between a Mountain and a Molehill!"

Standards? What Standards?

The environmental consulting industry came about in the wake of the Comprehensive Environmental Response, Compensation, and Liability Act  (CERCLA) of 1980, commonly known as “Superfund”. 

The Superfund Amendments and Reauthorization Act (SARA) amended CERCLA in 1986, and reflected EPA's changes based upon experience in administering the complex Superfund program during its first six years.

One of the important concepts put forth from these laws was “strict, joint and several”  liability for environmental cleanup costs. This meant that liability for environmental damage was apportioned without consideration as to whether or not a party acted carelessly or unreasonably; 'joint and several' meant that any liable party can be forced to pay for all of the damages, even in cases where all the damages attributable to each party cannot be determined.

While CERCLA intended liability to be strict, SARA intended in a limited way to reintroduce concepts of negligence. SARA introduced reasonableness concepts into its guidance. One of these concepts was "appropriate inquiry" - invoking the time-tested standard of a "reasonable person" with the same requisite knowledge as the purchaser, and involved in the same type of transaction

From there, the courts began to apply the "reasonable person standard" in determining what level of due diligence was adequate. For several years, the "standard" for the adequate level of due diligence was simple:

Whatever it took to find a problem.

Remember this.  We will come back to it later.

This high standard - "whatever it takes" - put a great deal of risk on to the burgeoning environmental consulting industry, comprised of mostly retooled civil engineers and a few geologists at that time.

Enter ASTM - Pros and Cons

In 1993, the American Society for Testing and Materials (ASTM) put out their first E 1527 standard for Phase I Environmental Site Assessments (ESA's).  

This standard did a good thing: It standardized report formats, which heretofore had been highly variable. This makes processing the information easier for the user.

However, there were a number of unintended consequences - including but not limited to:

• A checklist mentality began to infect the environmental consulting industry.  As long as the items in the "standard" were met, the consultant's liability was limited. 

• This also meant that consultants relied less and less upon professional judgement and experience in developing their opinions, and began to find ways to hide in the standard in order to reduce their exposure. You may have noticed from time to time that when you read a Phase I conclusion, there is sometimes a great deal of word-mincing about the various definitions, usually related to the ASTM E-1527 standard. Now you know why.

• The value of the environmental consultant performing the work became less important if the deliverables were all ostensibly the same.  

• With the end result becoming more homogeneous, the ESA business began to commodotize, beginning a downward pattern on pricing.

• With the downward price pressure, it became more difficult to employ experienced staff in order for firms to remain profitable.  They began to employ less qualified staff, who were more likely to render judgments which were not accurate or even valid.

• Fast forward to 2014, and we have large Phase I "mills" partnered with large database firms to offer "risk management" services.  These services are often based on nothing more than a database dump of government-listed sites, sometimes coupled with a site visit by a subcontractor working out of their basement.  Many of these "subcontractors" are not qualified and simply show up to take a few photographs for a few hundred dollars.

Meanwhile, ASTM has maintained it's relevancy - and made a tidy living - by promulgating "updates" to its standards every 5 years or so.  The most recent of these (December 2013) caused some debate within the consulting industry as to whether it has any value, since it varies little from the previous version except for a few clarifications.

A Standard Your Mom Would Approve of!

When I first entered the environmental industry in the late 1980's and early 1990's I was taught how to perform environmental investigations based on the "whatever it takes to find the problem" standard prevalent at the time.  

This is a much higher standard than any of the ASTM or EPA standards which were subsequently promulgated.

I've always taught my employees to operate according to this standard, and after 21 years, our firm still operates under this premise to the present day.  Yes, we adopt and conform to the new standards as they come out every few years. And certain banks and governmental agencies have their own standards. But these are always less demanding than our own methods and expectations.  

We believe our professional judgement is much more valuable to our clients than our ability to tick items off of a checklist, and we'd like to believe that this is part of the reason we are still in business 23 years later.

Legal Consequences?

When you are looking for liability protection from your environmental due diligence, make sure your consultant is performing to the highest possible standard. If he/she is dancing around on the head of a pin, relying on narrow definitions in the ASTM standard to avoid having to confront difficult issues, it can be a real red flag to potential problems down the road that all-too-often end up being decided in court.

Sometimes Legal Protection is not the Goal

Complying with a "standard" is not particularly important if the purpose for the environmental assessment is not to qualify for specific legal defenses from potential liability under CERCLA as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser. 

Sometimes due diligence is performed for reasons other than liability protection.  In those cases, 

• There may be no formal, unified standard at all
• A standard may be specific to a particular lender
• A standard may be adopted from an agency (e.g. SBA)
• A scope of work may be tailored to the client's specific request

These situations are all perfectly acceptable based on the needs of the situation and the professional judgement of the Environmental Professional without necessarily requiring an ASTM or AAI Phase I ESA.

• A "standard" in and of itself does not bestow any magic to the quality of the investigation. 
• A "standard" can, however, create liability exposure for both the consultant and the user (the client) that would not have existed otherwise. 
• Remember to use a hammer when you need to pound a nail, but not when you want to wash the dishes!

Future Outlook For Environmental Assessment Standards

Phase I ESAs will likely remain an important component of the due diligence picture, but they will likely decline in number. 

Phase I pricing is probably at or near its floor, between $1000 and $2000 depending on local market conditions. It will likely remain so.

Technology will enable less expensive forms of environmental due diligence to become more widely used.

The marketplace will drive variability in the way environmental assessments are performed, resulting in cost -effective solutions for users.  This is good news for lenders, borrowers and the public in general, as more environmental risk information will be available at an affordable cost.

EZ-Screen is specifically designed to avoid all 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.