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Primary InformationSecondary Information
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ED MORALESSENIOR VICE PRESIDENTGLOBAL ENVIRONMENTAL PRACTICE
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AGENDA• Market Overview
• Risks – borrowers and lenders
• Solutions – borrowers and lenders
• Q&A
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Panelist Introductions
DIANNE CROCKEREDR InsightPrincipal Analyst+1 203 783 [email protected]
SAMANTHA RUNYONSenior Vice PresidentMarsh’s Global Environmental Practice+1 213 346 [email protected]
JARED DUBROWSKYVice PresidentMarsh’s Global Environmental Practice+1 212 345 [email protected]
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ENVIRONMENTAL RISKS ON PORT & TERMINAL FACILITIES
DIANNE CROCKER PRINCIPAL ANALYSTEDR INSIGHT
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• COMMERCIAL REAL ESTATE IN 2015• THE STORY IN PROPERTY LENDING • NEAR-TERM FORECAST
1Q15 MARKET UPDATE
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ALL THE KEY DRIVERS FOR PROPERTY DEMAND ARE TRENDING IN THE RIGHT DIRECTION: • HOUSING MARKETS RECOVERING NICELY. • JOBS ARE BACK PAST PRIOR PEAK LEVELS.• INTEREST RATES STILL EXTREMELY LOW.• PROPERTY INVESTMENT CONTINUES ITS SLOW CLIMB.• MORE NEW CONSTRUCTION/DEVELOPMENT.• NEW ACTIVITY IN A NUMBER OF SECONDARY MARKETS.
THOUGHTS ON REAL ESTATE IN 2015
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Small cap property sales:+22% in 2014: 7-year high
Large property sales: +45% in 1Q2015 (YonY)
PROPERTY TRANSACTIONS GROWTH
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EXPANDING UNIVERSE OF U.S. BUYERS
• THREE TIMES AS MANY BUYERS IN ‘14 VS ‘09 IN THE DEPTHS OF THE CRISIS.
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• SMALLER SECONDARY MARKETS WITH STRONG GROWTH PROFILES ARE SEEING INVESTOR INTEREST.
• COMMON DENOMINATORS:• Strong job growth• Growing technology sectors, healthcare and financial services
industries…
BEYOND NYC AND SF: MIGRATION TO SMALLER METROS
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MIGRATION TO SECONDARY METROS
TOP 10 HIGH-GROWTH METROS FOR PHASE I ESA GROWTH:
1Q2015 (YonY)
Las Vegas, NV 52%
Columbia, SC 42%
San Antonio, TX 38%
Charleston, SC 26%
Milwaukee, WI 22%
San Francisco, CA 19%
Sacramento, CA 19%
Stamford, CT 16%
Portland, OR 14%
Raleigh, NC 13%
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• 2015 FINANCING MARKET IS INCREASINGLY COMPETITIVE.
• REGIONAL/LOCAL BANKS ARE GAINING MARKET SHARE.
• LENDING STANDARDS HAVE NOT CHANGED MUCH IN THE LAST YEAR.
• UPTICKS IN LENDING VOLUMES SUPPORT POSITIVE INVESTMENT TRENDS…
LENDING TRENDS THIS YEAR
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• A POSITIVE TRAJECTORY IN LENDING.• 6.5% GROWTH IN 2014 (FDIC)• ORIGINATIONS IN 2014 ABOUT 25% PERCENT BELOW
2007 PEAK.• Multifamily 25% higher than those 2007 volumes. • Absolute levels of multifamily lending should remain
strong.
LENDING: SLOW PACE OF GROWTH IN ORIGINATIONS
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• WIDE VARIATION IN LENDING BY BANK SIZE.• STRONGEST GROWTH AT THE LARGEST REGIONAL BANKS AND
MID-SIZED BANKS.• SIGNIFICANT PULLBACK BY COMMUNITY BANKS. • GROWTH ESPECIALLY STRONG IN CONSTRUCTION/DEVELOPMENT
AND MULTIFAMILY CATEGORIES.
LENDING BY BANK SIZE
Growth in CRE Loan Portfolios (2014 vs. 2013)
All banks 6.5%Assets >$50B 4.1%$10B-$50B 16.8%$1B-$10B 10.5%<$1B -1%
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• HEADING INTO NEW ROUND OF REFINANCING, PEAKING IN 2017 • LENDERS VIEW THIS WAVE OF MATURITIES AS OPPORTUNITY TO
INCREASE VOLUMES.• EXCESS CAPITAL LOOKING TO FINANCE SOLID REAL ESTATE
DEALS.• EXPECTED TO FUEL A SURGE IN REFINANCING ACTIVITY FROM
NOW THROUGH 2017.
NEW ROUND OF REFI’S
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• VYING FOR A PIECE OF THE REFI MARKET:• Traditional lenders• Life companies • Conduits • Private equity (non-bank lenders, new this refi cycle)
NEW REFI PLAYERS
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• CONSTRUCTION AND DEVELOPMENT LENDING WAS THE FASTEST GROWING CATEGORY OF CRE LOANS ACROSS BANKS OF ALL ASSET SIZES.
• TOTAL CONSTRUCTION SPENDING IN 2014 HIGHEST SINCE DOWNTURN.
• BEYOND KEY METROS (NY, SAN FRAN, BOSTON):
2015: THE YEAR FOR CONSTRUCTION LENDING
HOT SPOTS: CONSTRUCTION AND DEVELOPMENTDenver
Raleigh-Durham
Suburban VA
Oakland
Las Vegas
Austin
San Jose
Miami
Seattle
Portland
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• STILL A LOT OF ROAD TO RUN IN THIS RECOVERY.• RETURN TO HEALTHY 2005/6 LEVELS.• MODERATE GROWTH IN NEW ORIGINATIONS. • CONTINUED MIGRATION TO SECONDARY AND TERTIARY
MARKETS.
“2015 WILL BE ONE OF THE STRONGEST YEARS WE’VE SEEN IN COMMERCIAL REAL ESTATE SINCE THE CREDIT CRISIS AND IT’S FOR
ALL THE RIGHT REASONS.” KEN RIGGS, RERC
“OPTIMISM IS HIGHEST IT’S BEEN SINCE THE DOWNTURN.” RYAN SEVERINO, REIS
THE MARKET FORECAST
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• MUCH GREATER AWARENESS OF ENVIRONMENTAL DUE DILIGENCE.
• RISK MANAGEMENT IS NOW EVERYONE’S BUSINESS.
• PAST “DEAL KILLERS” ARE NOW BEING MANAGED.
• PROPERTIES AND PROJECTS THAT FAILED ARE COMING BACK INTO THE MARKET.
• MORE DEFERRED MAINTENANCE ISSUES ARISING ON REFIS OR NEGLECTED PROPERTIES.
• PROPERTY CONDITION ASSESSMENTS GROWING IN IMPORTANCE.
THE FORECAST FOR RISK MANAGEMENT
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ENVIRONMENTAL RISKS ON PORT & TERMINAL FACILITIES
JARED DUBROWSKYVICE PRESIDENTGLOBAL ENVIRONMENTAL PRACTICE
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Framework for Addressing Environmental Risks and Solutions
• Individual Interests
• Aligned Interests
• Addressing Conflicts
Owner-Borrowers Lenders
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Common Environmental Exposures and Losses – From an Individual Pollution Condition
Third Party
Offsite cleanup Property Damage Bodily Injury Loss of value
Regulatory and Legal Natural Resource
Damage Toxic Tort Claims
Legal Defense Costs *
Off-site Disposal Legacy
Fines and Penalties
Governmental re-openers
Divested Properties
Business Risks
Borrow Default Business interruption
Loss of Rents Increased
development costs
Defense can be important defending against frivolous and non-meritorious actions.
1st Party Cleanup Known
Conditions: cost overruns for pre-
existing conditions Discovery of unknown pre-
existing conditions New Conditions
from operations Re-opener of “closed” issues
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• Spills (Sudden)
• Leaks (Gradual)
• Contractor Tasks
• Expansion/Mods/Maint.
• Legal Req’ments
• Business Interruption
• Lease terms• Acquisitions• Construction
• Spills (Sudden)
• Leaks (Gradual)
• Legal Req’ments
• Contract Req’ments
Material Arrival On-Site
Material Handling On-site
• On-site Mgmt• Spills (Sudden)• Leaks
(Gradual)• Air/Water• Legal
Req’ments• 3d Party BI/PD
Wastes
• Spills (Sudden)• Leaks
(Gradual)• Legal
Req’ments• 3d Party BI/PD• Chemical
Content• Emerging
Issues
Product
• Waste Disposal Liability
• Natural Resource Damages
• 3d Party BI/PD• Legal Defense• Emerging Issues• Off-site
contractors
Off-Site Exposures
Process/Site
Pollution Conditions Driven by Site UseWhat goes on now? What went on in the past?
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Risks Profile Vary Significantly based on Industry
Agriculture Healthcare
Automotive Industry
Aviation Manufacturing
Chemical Marine
Education Tech & Telecom
Forestry Products Transportation
General Industry
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Environmental Issues in Real Estate Transactions
Storage Tanks
• Aboveground and underground
Asbestos
• Asbestos is a mineral fiber that was commonly used in many building materials prior to being banned in the early 1980’s.
Lead Paint
• Lead was a common ingredient in paint prior to it being banned in 1978.
Mold
• Cleanup and health impacts
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Environmental Due Diligence
• Has evolved for risk identification and to facilitate some protections to“innocent landowners”
• All Appropriate Inquiries (AAI)
• Transaction Screen Reports
• Phase I Environmental Site Assessment
• Phase II limited subsurface investigation report.– “To do or not to do. That is the question”
• Baseline for insurance solutions
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Regulation
• Various governmental agencies either require that banks conduct environmental due diligence or have a procedure in place for addressing environmental issues.
• Office of the Comptroller of the Currency (OCC)
• Federal Deposit Insurance Corporation (FDIC)
• United States Small Business Association (SBA)
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Borrower Objectives
• Unnecessary discovery, action and costs• Governmental reporting
Minimize due diligence particularly Phase II investigations
• Minimize environmental costs to operating financials• Eliminate risks that could be enterprise threatening
Operating portfolio risks
• Initial financing• Refinancing • Securitization impacts
Secure favorable financing
• Costs and Uncertainties• Indemnities
Address environmental obstacles to enable successful acquisitions and divestitures
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Lender Objectives
Dealing with Outstanding Bad Loans
Minimize Loan Credit Risk• Environmental costs to borrower could result in default.• In the event of default, Lender can be responsible for the cleanup .Exercised
significant management control • The cost to remediate the contaminated property can exceed the principal amount of
the underlying loan.• Business Impacts:
Corporate Lending Standards. May pass on otherwise manageable & profitable loans.
Drives due diligence requirements onto Borrower which can be in conflict with Borrower’s goals.
• Facilitating Sale of assets• Dispose of liability at favorable terms• Control Environmental Risks
Unknown pre-existing conditions Known cleanups
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Common Objectives
• Address Costs and Enterprise threating risks from:– Unknown pollutions conditions– Known cleanups
• Complete All Appropriate Inquiry but minimize-eliminate unnecessary Phase II work
• Explore cost-effective alternatives to address environmental risks around objectives
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ENVIRONMENTAL RISKS ON PORT & TERMINAL FACILITIES
SAMANTHA RUNYONSENIOR VICE PRESIDENTGLOBAL ENVIRONMENTAL PRACTICE
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Environmental Insurance
Environmental Insurance Tools
• Pollution Legal Liability / Environmental Impairment Liability
• Lender Liability / Secured Creditor
A Strategic Risk Management Tool
• Can provide coverage for claims related to both historical and operational pollution conditions.
• Can provide coverage for “unknown” environmental conditions and regulatory re-openers/changes in regulations. Cleanup costs 3rd party liability (bodily injury and property damage) Legal defense
• Available on both individual transaction and on a portfolio basis.
• Can protect either or both the lender and/or borrower.
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Environmental Insurance Tools Pollution Legal Liability vs. Lender Liability
Feature Pollution Legal Liability Lender Liability
Overview Designed to provide protection for unforeseen / unknown contamination
Designed to provide protection from financial loss due to a pollution event
First Named Insured Typically borrower however can be lender. Lender can be added via a additional insured mortgagee
Lender
Cleanup Costs Yes, for new releases or unknown pre-existing conditions
Yes, for new releases and unknown pre-existing conditions. Can also include coverage for known conditions.
3rd Party Bodily Injury /Property Damage
Yes Yes
Trigger 1st party discovery or 3rd
party/governmental claimDual Trigger: Default on loan and pollution event. 1st party discovery is provided only after lender has foreclosed on property
Claim Payment Cleanup costs and/or 3rd party liability claim(s)
Lessor of outstanding loan balance or estimated cleanup costs
Maximum Term 10 years Can be provided up to maturity of loan
Underwriting Environmental reports Underwrite to financials (collateral, equity, etc.) as well as environmental reports available
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Environmental Insurance Tools Pollution Legal Liability vs. Lender Liability
Feature Pollution Legal Liability Lender Liability
Markets 20+ XL and Zurich
Limits Over $250M+, carriers willing to sit excess of each other
$50M
Known Conditions Excluded Can be covered based on financial risk
Individual Transaction Yes, benefits are:• Addresses environmental concern• Can be used in lieu of financial
guaranty or escrow• Can be placed quickly• Dedicated limits for property
Yes, benefits are:• Addresses environmental concern• Can be used in lieu of financial guaranty or
escrow• Can be placed quickly• Dedicated limits for property
Portfolio Transaction Yes Yes, benefits are:• True risk transfer mechanism• Streamlines the loan process• Cost of insurance is typically less than a
Phase I• Can provide lender a competitive
advantage• Can add sites as necessary
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Environmental Insurance – Known ConditionsCost Cap / Remediation Stop LossInsures cost overruns and controls price uncertainty on Remediation – Cleanup Projects
• Actual extent of contamination is greater than estimated.
• Actual degree of contamination if greater than anticipated.
• Previously unidentified contaminants have been discovered.
• Increased time for remediation (capital implementation and O&M).
• Offsite cleanup of contamination adjacent to the covered site is assumed.
• Changes in Cleanup Standards.
• Governmental change in cleanup requirements.
Coverage available through AXIS and BEAZLEY
• Limits up to $10M - $15M per project.
• Terms up to 10 years.
• Upfront cost is premium and associated taxes.
• Pricing: Rate on line 15-17%, Buffer 30 to 45%, Co-insurance 10%.
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Environmental Insurance – Known ConditionsEnvironmental Liability Buyout or Guaranteed Fixed Price Remediation
Environmental Liability Buyout • Is the contractual transfer of cleanup obligation and other liabilities to a third
party contractor.• Contractor also assumes liability with agencies.• Environmental insurance covers the third party and client.• Requires full funding of remedial costs and associated risk transfer
elements at the time of the transaction.
Guaranteed Fixed Price Remediation • Client retains environmental liability.• Third party contractor provides fixed costs bid to achieve end-point for
cleanup.• Insurance covers client and the third party. • Initial out of pocket costs is the insurance and associated taxes.
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Panelist Contact Information
DIANNE CROCKEREDR InsightPrincipal Analyst+1 203 783 [email protected]
SAMANTHA RUNYONSenior Vice PresidentMarsh’s Global Environmental Practice+1 213 346 [email protected]
JARED DUBROWSKYVice PresidentMarsh’s Global Environmental Practice+1 212 345 [email protected]
ED MORALESSenior Vice PresidentMarsh’s Global Environmental Practice+1 415 743 [email protected]
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