STATE OF THE ENVIRONMENTAL SITE ASSESSMENT INDUSTRY

1
STATE OF THE ENVIRONMENTAL SITE ASSESSMENT
INDUSTRY

• by
• Anthony J. Buonicore, PE
• CEO, Environmental Data Resources
• for presentation at
• Environmental Bankers Association Conference
• Portland, Oregon
• June 15, 2004

2
Overview

• Market and Pricing
• Trends
• Emerging Developments
• Predictions on the Future of Environmental Due
  Diligence

3
Market and Pricing
4
Phase I ESA Activity
Number of Phase Is Conducted Annually (1997 to
Present)
(thousands)
5
Estimated Breakdown of Phase Is Conducted in 2003

Buyer due diligence Bank due diligence
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Factors Driving Phase I Activity Today

• More stringent due diligence resulting from the
  relatively weak commercial real estate market
  over the last 3 years
• ReFi activity driven by record low interest rates
  
• Opportunity buying at the perceived bottom of the
  commercial real estate activity cycle
• Smaller lenders increasing outsourcing of
  environmental due diligence (to environmental
  consultants)
• Commercial real estate market on the verge of
  recovery (following the economy)

7
Phase I Pricing
Average National Phase I Price (1997 to Present)
8
Trends
9
Trends

• Focus of ESAs beyond CERCLA concerns to include
  any environmental conditions that can materially
  impact the value of property
• More customized scopes of work
• Price and turnaround time pressure

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Trends (Contd)

• Increased efficiency driven by automation
• 5. Environmental risk included in more and more
  bank policies guiding due diligence for all CRE
  loans, driven by

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Has your bank faced losses attributed to
environmental factors? (EDR 2003 Bank Survey)

• One in ten banks has experienced losses due to
  environmental factors
• Typically involved two loans annually that
  defaulted
• Resulting in an average total loss of
  1.2 million

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EDR 2003 Bank Survey Statistics

• 2,750 surveys sent out
• 228 responses (8)
• Response distribution by asset size
• - 41 lt 250 million
• - 22 250 million - 1 billion
• - 21 1 billion - 10 billion
• - 12 10 billion - 100 billion
• - 4 gt 100 billion

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Loss Projection to Total Bank Market

• 8,990 banks doing CRE lending
• 1,798 loans defaulted in the last 12 months,
  principally due to environmental reasons
• 1.1 billion in defaulted loan value in the last
  12 months, principally due to environmental
  reasons

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Distribution of Banks Responding to Losses
Attributable to Environmental Factors Question

• 43 lt 250 million in assets
• 29 250 million - 1 billion in assets
• 28 1 billion - 10 billion in assets
• 0 gt 10 billion in assets

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Breakdown of Losses by Bank Asset Size

• No. Banks () Asset Size Total Losses
• 6,828 (76) lt 250MM 473MM
• 1,618 (18) 250MM - 1B 319MM
• 445 ( 5) 1B - 10B
  308MM
• 99 ( 1) gt 10B
  ------
• 8,990 (100) Totals 1.1B
  

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Breakdown of Losses at Individual Bank Level

• 
  Avg. Loss/ Est. Number CRE
• Asset Size No. Banks Bank/Year
  Loans/Year
• lt 250MM 6,828 69,274
  53
• 250MM - 1B 1,618 197,157
  150
• 1B - 10 B 445 692,135
  229
• No banks with assets greater than 10
  billion who
• responded to the survey indicated defaults
  due to
• environmental reasons
• Estimated from FDIC Data 9/02 - 9/03 (800,000
  
• CRE loans valued at 1.1 trillion) and EDR
  Survey Data

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Average Loss Per Bank Per CRE Loan

• Asset Size Avg. Loss/Loan
• lt 250MM 1,307
• 250MM - 1B 1,314
• 1B - 10B 3,022

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Conclusions From Survey Projection

• Almost 75 of loan losses due to environmental
  reasons are associated with banks having less
  than 1 billion in assets (community and smaller
  regional banks) likely reason is poor
  environmental due diligence
• Loan losses clearly justify reasonable
  environmental due diligence
• Large national banks have negligible loan losses
  due to environmental reasons probably because
  of excellent environmental due diligence programs

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Emerging Developments 1. EPAs AAI Rule
20

• Emerging Developments
• 2. Mold

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Driving Force for Mold Screening

• Lawsuits and claims make mold a business issue,
  not just health or structural issue
• Mold issues can devalue property, interrupt cash
  flow, increase insurance cost and expose property
  owner to costly liability
• Mold exclusion from PC policies
• Regulatory activity increasing, particularly at
  the state level (20 states working on
  mold-related legislation)
• ASTM Mold Assessment Standard under development

22
Mold Assessments Driven by Lenders

• One in three banks reported more demand for
  mold assessments on commercial property loans in
  2003 vs. 2002

Of the 70, half expect to add some level of
mold screening on commercial loans in the near
future
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Future of Environmental Due Diligence Predictions
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Predictions

• The economy should continue to improve with
  commercial real estate activity lagging by about
  six months
• Interest rates will rise slowly, and not as fast
  as the economy will improve, resulting in higher
  rents/occupancy/NOIs for CRE owners, more than
  offsetting higher debt service (due to higher
  interest rates) attractive for CRE
• ReFi activity will slow down considerably as
  interest rates begin to rise (expected this
  summer)

25
Predictions (contd)

• CRE will remain the most significant risk
  exposure category to lenders, with the impact
  much greater at the smaller banks
• Risk management will play a greater and greater
  role at financial institutions
• Environmental risk will be integrated more fully
  into the overall risk management process
  associated with CRE lending
• Environmental due diligence will expand
  considerably at community and smaller regional
  banks

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Predictions (contd)

• More and more smaller sized loans will be
  scrutinized for environmental conditions as part
  of due diligence
• ESA market will experience significant growth as
  environmental due diligence expands to smaller
  and smaller sized loans and expands at community
  and smaller regional banks
• Lenders, particularly smaller lenders, will rely
  more and more on environmental consultants to be
  responsible for their environmental due diligence

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Predictions (contd)

• ASTM E 1527 will be revised to reflect new AAI
  requirements and remain the de facto standard
  practice for environmental due diligence
• AAI will result over time in higher quality Phase
  Is because of the more stringent EP definition
  and the price of Phase Is will increase slightly
  (10-15)

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Predictions (contd)

• ASTM will eventually have a mold assessment
  standard
• Mold screening in property due diligence will
  grow, similar to the way of asbestos screening
• Over the next few years, at least 20 states will
  have mold regulations, with as many as 20 of
  these states requiring some form of registration
  for mold inspectors
• Many of these states will have mold disclosure
  requirements for property transactions

29
Predictions (contd)

• Environmental consultants will become even more
  efficient in the conduct of Phase Is by
  incorporating new technologies for data
  collection (e.g., PDAs) and report writing
  (automated platforms)
• Phase I reports will be delivered electronically
  to clients because clients will demand this
  (driven by improving their efficiency)