COVER STORY, JULY 2010

Q&A ON TOPIC: ENGINEERING & ENVIRONMENTAL CONSULTING

There are many challenges to marketing a property in today’s market, and even more obstacles to ensure sellers receive the best price. Heartland Real Estate Business spoke with Chicago-based Pioneer Engineering & Environmental Services to learn how engineering and environmental consulting can benefit a property. Wayne Smith, president and CEO of Pioneer, lent his expertise and insight on the topic.

HREB: What is the current climate like for engineering and environmental consulting companies?

Smith: Similar to the current business climate in general. At Pioneer, we really specialize and focus in the transactional due diligence market so the slowdown of commercial real estate activity across all sectors is challenging. There is a distinct lack of commercial real estate transactions and even when deals happen, their pace is much slower than the hectic get-it-done-yesterday mentality of the boom times. Having said that, the last few months have offered signs for optimism as our overall workload has steadily increased and our Phase I/due diligence work is up more than 30 percent over the previous quarter and year-ago period. That is a good sign and one that we hope points to a sustainable pick up in activity going forward.

HREB: Has the recent economic downturn affected your company and business? If so, how is your company overcoming any challenges and what is it experiencing?

Smith: As I mentioned, the challenges of the economy in general and real estate in particular have made it difficult on most businesses including ours. We have been buoyed somewhat by a nice backlog of work, contracts with general contractors involved in government and public building projects, and by a diversified, and loyal, client base. Luckily, since not all work has come to a standstill, we were able to make it through what we all hope was the worst of it through some belt-tightening. The new reality requires us to work harder for less these days, but the payback in the long run is worth the effort.

HREB: How is your company, in an environmental/engineering capacity, working with lenders, banks, private investors and distressed owners?

Smith: The opportunities in the distressed marketplace have been slower to come than what we expected or hoped. Just the sheer volume of distressed assets that we read about in the press suggested there would have been more of this work to do for lenders by now, but that was apparently an uninformed expectation. The time-consuming and arduous nature of the foreclosure process coupled with stringent government regulations has stifled what we all expected would be a flood of new work. However, recent rumblings that now banks and lenders may be ready, willing and able to dispose of their troubled loans at a greater pace than before is a very positive sign. Pioneer’s increased flow of work for special servicers and lenders’ REO projects is further evidence that there is growing optimism on the distressed assets front.  

HREB: Are you seeing a lot of distressed or half-built properties that need your services? If so, how does your company help and what benefit is gained for the property owners?

Smith: More now than before. What we do in these cases is similar to what we do normally on any site. We identify potential environmental concerns, evaluate their significance, and develop solutions that take into account the regulatory considerations of the current conditions and likely future uses of the property. For one of our bank clients, they are actually having us continue with the remedial action plan approved by the Illinois EPA but not implemented by the prior owners due to market and financial problems, which led to the site becoming a distressed asset. Now that the bank has foreclosed, it recognizes that to get the property into its best sellable condition, and also to realize the most value once the site is sold, they will have to spend some money to resolve the bigger environmental issues. A business decision was made to spend the money now because they could achieve a greater return on the increased sale price that resulted from performing the work. 

HREB: Are you working with foreclosures, distressed or half-built properties that need to be environmentally assessed before being sold? What are the benefits of an environmental assessment? How does it help or hurt the sale or property owner?

Smith: Just as it is important to understand what the issues are affecting marketability, tenancy or physical condition of any structures on the site, the environmental assessment will determine the potential for contamination, which could then affect the marketability and potential uses of the site. If contaminant conditions are severe enough, there are the attendant cleanup costs to consider as a piece of the overall value puzzle. We’ve also assisted a number of lenders with stormwater management services at residential developments that went bust. Fines for improper stormwater run-off at these types of properties can be severe.

HREB: What should investors be concerned about from an environmental perspective in the current economy?

Smith: Since more emphasis, and uncertainty, is placed on trying to understand the real value of a piece of real estate, the potential environmental liabilities of a site are more important to understand now than before. During the previous 5 to 8 years, when land values were so high, there was usually enough margin to undertake environmental actions, whether it was full cleanup or risk-based remediation. In today’s economic and real estate conditions, that spread has been reduced significantly so it limits the ability to have the land value absorb the costs of environmental work, depending on its severity. Consequently, we feel the environmental assessment is an especially critical component of the due diligence process of today because knowing and understanding that part of the value puzzle can, in some cases, be the determining factor of whether to go forward with the deal or not. 

HREB: Have any banks engaged your company for assistance? If so, how and in what capacity is an engineering and environmental consulting company able to assist?

Smith: Pioneer is assisting many lenders, as well as their attorneys and court-appointed receivers, in the disposition of distressed assets and troubled loans. We’ve come across many sites where the bank didn’t even require a Phase I during loan origination, presumably in an effort to limit fees and do the deal during the highly competitive atmosphere of the boom times. Typically, we’re doing Phase I and Phase II (i.e. soil/groundwater testing) assessments, but in several cases, we’ve provided oversight for the disposal of hazardous and petroleum substances that were abandoned by former industrial tenants. Currently, we’re working on a project that, in addition to numerous drums and storage tanks, has waste requiring special disposal, as a result of the former wastewater treatment plant, and the presence of residual materials in pits and trench drains. Obviously, trying to sell a property filled with abandoned hazardous wastes is a challenge.

HREB: What do you expect to see in the near future? A recovery, continued foreclosures, etc.?

Smith: The recovery will continue and will continue to be slower than hoped, but steady nonetheless. Foreclosures in the commercial real estate sector are inevitable as we move forward but there is a real sense of energy and desire to make things happen again, especially in the Chicago area. I keep hearing that there is capital available to make deals, that the REITs will be very active again, and that banks are going to be unloading assets sooner than later. And while new construction projects and residential developments are likely to still be a few years away from getting off the ground, I believe that commercial real estate activity in certain submarkets and price ranges will gain momentum and show sustainable growth in the next 6 to 9 months.

HREB: Any additional information that you’d like our readers to know or was overlooked in the above questions?

Smith: It’s hard to get a clear picture of a property’s worth, particularly an industrial one, without quality environmental assessment work. If a site’s contaminated, it will impact its collateral and overall value. However, it’s often in the best interest of the seller to deal with the situation upfront and control the process if a “No Further Remediation” (NFR) letter is to be pursued. For instance, in the majority of cases where an NFR letter is sought, some contamination is left on-site and managed in-place with engineering and/or institutional controls. I have seen buyers demand exorbitant sale price reductions for the removal of contaminated soils, when the material could have been managed in-place much more cost-efficiently. Typically, once the site has an NFR letter, the purchaser doesn’t care what means were used to obtain it. Being proactive and in control of the closure process creates the opportunity to save a lot of money at sites with environmental problems by taking the environmental costs out of the negotiations between buyer and seller.

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