NOTE: Originally posted at EDR (Environmental Resources Data) blog by Dianne Crocker.

Market Maven

EDR’s Managing Director, Market Research Group, shares her insights on the state of the environmental due diligence market, emerging trends and the strategic challenges faced by environmental consultants in today’s market.

The “Rodney Dangerfield” Syndrome

So, now that investors are petrified of real estate risk and the deal environment has gotten a lot more conservative, that means environmental due diligence is getting the attention it deserves, right? Not so fast. I just received a distressing article from Elizabeth Krol, a valued member of the commonground advisory panel.

The piece, published in the latest edition of M&A magazine, is based on the premise that comprehensive, thorough due diligence improves the risk equation for a potential acquisition. So far, so good. To acccompany his discussion, the author included a due diligence hierarchy (see below). Financial, legal and insurance/risk diligence sit in the coveted top of the pyramid, characterized as the “must do” steps—meaning that transactions simply do not happen without this research. Below them sit the “should do’s” of strategic, customer/market and IT diligence. And then, sadly, sits environmental diligence in the lowest-priority bin, or what the author refers to as the “might do” items. Joining environmental in this category are what the author refers to as “other forms of situational due diligence” like operational, organizational and intellectual property diligence. (In the author’s defense, he does note that these are only “might do” studies if you haven’t been burned in the past by leaving stones unturned.)

Whenever I see things like that, it brings to mind that bug-eyed comedian (sorry, Rodney fans). Environmental due diligence gets no respect. While you’d expect that with risk in the front seat in today’s market, environmental is getting appropriate priority, I’m hearing the opposite from some environmental professionals. Buyers are leaving environmental due diligence as one of the final steps before closing. The problem is that deals are unraveling late in the process as sellers decide to take properties off the selling block, opting instead to wait for the market unrest to settle, in the hopes of securing a better price. (This just happened with the renowned Watergate Hotel in Washington.) As a result of uncertainty about whether deals will advance to closing, some buyers are holding off on having environmental due diligence conducted early in the transaction when it can truly bring value to the table, and saving it for last. This way, they’re not spending money on research they may not need if the deal falls apart. Some of you are lucky enough to serve clients who are savvy enough to recognize the value of thorough due diligence. These are the ones who put “environmental” as a “must do,” or at least a “should do” component of their due diligence pyramid.

As the headlines attest, real estate investors are increasingly nervous about the market, falling property prices, lack of job growth and a domestic recession. Will this uncertainty and attention on risk aversion give environmental a place at the table and environmental research the respect it deserves? We can only hope!

1 Comment

1. By AmyH on 6/10/2008

I, too, read this piece and scratched my head. And I bet everyone on this site who knows what potential environmental pitfalls can befall those who skip environmental due diligence feel the same. It’s up to us to keep educating dealmakers about the importance of environmental due diligence. It’s a shame it’s lumped into the “might do” category.

This entry was posted on Tuesday, August 12th, 2008 at 2:38 pm and is filed under ●Brownfields - Miscellaneous, ●Environmental Engineering.

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