Entry by JoeDerhake
The winter Environmental Bankers Association (EBA) meeting just concluded in Orlando, Florida. The EBA is celebrating its 20th year as an organization. Thank you to Jeff and Tacy Telego for running this business for 20 years!
A few highlights from the meeting:
Bank Regulators and Environmental: The new OCC Commercial Real Estate Lending (CREL) Regulators handbook published in 2014 discusses environmental policy far more than past versions. As regulators begin their 2014 audits, more and more lenders will be required to revise their underwriting policies to more thoroughly address environmental issues. One big issue is that the OCC regulations require that the bank have a trained person read and interpret the environmental assessments and reports. While the EBA member banks all have this covered, smaller banks struggle to identify the appropriate person and may lean on an external risk management company.
Appraisal and Environmental: We heard from appraisers on several panels. The regulators, including the OCC, are asking appraisers and appraisal managers to be more careful with the assumption that the property is not impacted by any environmental liabilities. To do this, some sort of environmental report must be completed in conjunction with every appraisal. If the regulators were to require this, more environmental reports would be necessary.
Green Appraisals: Sandra Adomatis presented on how to perform a green appraisal. Ms. Adomatis presented a method to give green buildings a higher price by the Discounted Cash Flow method and by finding strong green building comps. Ms. Adomatis also discussed the importance of energy modeling.
Property Condition Assessment: For the first time in a long time the EBA addressed Property Condition Assessments (PCA). The panel went through a series of benefits to ordering a property condition assessment. My partner, Bruce Dalton, was one of the panelists and he drew out the importance of working with consultants with deep bench expertise on staff. He also discussed shelf life issues associated with PCAs. Buildings change and a one-year-old PCA would not necessarily represent the current condition of an asset.
Pricing Environmental Risk: Professor Thomas Jackson from Texas A&M presented a paper on how to price environmental risk showing data where contaminated properties sold for a discount beyond their cleanup cost. He showed that the value of these properties returned to market value once the sites were given case closure from the appropriate regulatory agency. Professor Jackson also demonstrated that the risk premium has been going down over time—this data is generally consistent with what I have observed in my practice.