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Environmental Due Diligence: The Path Forward – Summary of ERIS’ Panel Discussion May 7

by ERIS STAFF
May 13, 2020

Click here for the audio recording

As states begin to loosen restrictions and reopen the economy, environmental consultants conducting due diligence are faced with conditions that change every day, requiring them to figure out the new normal in real-time as they navigate the uncertainty resulting from COVID-19.

During an ERIS-sponsored webinar May 7, panelists agreed that transactional business and lending have largely been paused due to the stay at home executive orders in force throughout the U.S. since mid-March. While some Phase I work has moved forward, there have been major issues related to the physical limitations on site visits, challenges related to special PPE requirements, and increased time and costs related to new COVID-19 job hazard analyses and safety plans before work can begin.

The webinar speakers included Tina Huff, Principal Regulatory Specialist with Farallon Consulting; Alan Rogney, Senior Vice President, Transaction Advisory Services with RPS Group; and Aliza Stern, Executive Vice President with Bureau Veritas North America.

Lending, Transactions Paused
Aliza Stern works with lenders and owners in all sectors, from hotel to multifamily. She noted that in the debt markets, most lenders are taking a pause and being very careful with financing, and the same is true in the ownership groups. “Folks are trying to figure out how to play in the new normal,” she said. Tina Huff, who works primarily with developers, the industrial segment, and private equity M&A, explained that developers and industrial had an immediate slowdown and are anxious to proceed with transactions.

Alan Rogney, who has primarily a transaction based and M&A business, said everything has basically gone on pause. Between mid-March and April 1, he said, 75 percent of all due diligence projects went on hold or died related to COVID issues. While there is plenty of cash to deploy, the finance side is “sitting this out at this point” to understand where things are going. They’re trying to figure out if this is the bottom, he said. Specifically, M&A activity in the U.S. is down 40 percent in Q1 compared to Q4 last year, and Q2 will be much worse when those numbers come out, Rogney explained. Value is down 50 percent from where we were at this time last year, he added.

Being Creative, Adapting in Real-Time
For work that is still coming in, Rogney said the biggest issue is the physical limitations related to access to sites and facilities. Travel restrictions, quarantines, and shelter in place have made it hard to schedule work. It’s hard to figure out who can get where, and if plant managers get sick, you have to stop travel plans, he said. “We’ve had to adapt in real time what we can and can’t do.”

As a result, RPS has become very creative, Rogney said. Consultants are doing as much as possible up front for due diligence, such as conducting interviews and desktop assessments before site visits. When physical access to a site is not possible, RPS has been doing virtual site inspections with a representative from the facility who walks them through a building in real-time on Skype or Zoom.

Stern echoed the challenges of day-to-day work. Things change every day, she said, noting the daily uncertainty of who will be available and/or if site access will be granted. Also, some sites now have special PPE requirements for employees that go above and beyond the standard equipment, which brings up considerations like who is supplying the equipment and if the employee will wear that equipment. Virtual inspections have been very helpful to get past some of these issues, Stern said.

Huff noted social distancing requirements and the need to come up with alternative schedules to accommodate work and protect their own workers as well as those occupying the spaces. Also, in some areas, a job hazard analysis must be conducted before accessing sites. COVID health and safety plans also are needed. As a result, it takes more hours and time to get things moving. Despite these challenges, clients are happy to have the site inspections done, Huff said. She noted that the costs of the hazard analysis and safety plans are not being recouped as part of Phase Is at this point, but going forward, these costs may need to be factored in.

Virtual Inspections, Future Trends
As to whether virtual inspections comply with the ASTM 1527 Phase I standard, the consensus is they do. However, Huff explained, the fact that you are not able to access the site must be identified as a data gap. Consultants then need to comment on the significance of that gap and how it impacts the conclusions in the report.

Stern pointed out that the U.S Department of Housing and Urban Development has issued guidance to allow virtual site visits to help deals get done. Some of the transactions being completed are multifamily and nursing home transactions that are having virtual site visits, she said.

It is likely the industry will see more virtual inspections going forward. Although it’s not yet clear how much the industry will move in the direction of virtual inspections, COVID-19 will spark some changes in the market, Stern said. It remains to be seen how much people will be traveling due to potential increased costs and continued safety concerns.

Huff agreed that clients will consider virtual assessments. The ASTM standard has a provision that you don’t have to access properties if there is a threat to human health or a safety issue at a site, she said, and COVID falls into that category. It will be interesting to see if this will be taken advantage of more frequently if this continues for months and months, Huff said.

Recovery, Distressed Assets, Opportunistic Buyers
Uncertainty looms in predictions about recovery. Rogney anticipates that in M&A there will be some return of normalcy, probably in distressed deals, in June and July, with a likely uptick of transactions in Q3 and Q4. But he cautioned that there are so many external factors that need to hit before this can happen. “We think we are in the bottom of a U,” he said, noting he expects a U recovery. “How long the horizontal part of the U goes is the biggest question for us and the biggest threat we face as an industry.”

Huff noted that with the shutdowns, many redevelopment projects came to a screaming halt, but as soon as orders began loosening, those sectors immediately hit the ground running. Developers are purchasing properties right now, too, she explained, taking advantage of properties that are out there. Similarly, in industrial, things are slowly picking up, but Huff said this market might wait until Q3 to take advantage of the failing businesses and empty warehouses, as was the case in 2008 when the industrial market took advantage of businesses that went bankrupt.

In the retail and CMBS space, Stern emphasized the need to get to a place where folks understand the timeline. Understanding the timeline of how everyone gets back to work, back to shopping centers in person, will make a big difference in the confidence in the market, Stern said. She predicts activity in distressed deals similar to what occurred in 2008, with a wave of distressed debt, distressed asset sales, and opportunistic investors that will hit the market before a real recovery. Stern hopes in Q4 we will see more of a return to normal with respect to deal flow but admits that’s a wild guess.