Environmental Due Diligence standard spells changes for CRE investors

84 Views

Here’s what you need to know about the new Environmental Site Assessment rules

 

TyHawkinsBy Guest Contributor Robert “Ty” Hawkins| Director of Environmental Due Diligence, HRP Associates Inc.

The financial market has changed drastically in the last five years. When it comes to commercial real estate transactions and getting loans to support these transactions, one new area of focus has been the environmental component of these deals.

Prior to nearly every new commercial real estate transaction, an environmental assessment is required by the lender, the buyer, or both. The standard that environmental professionals use to conduct these assessments changed as of Dec. 30, 2013, creating a learning curve for many lenders and buyers.

Environmental Due Diligence has its roots in the US Environmental Protection Agency’s (EPA) Superfund regulations, or more specifically, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

CERCLA includes certain protections for those who conduct All Appropriate Inquiry (AAI) prior to purchasing a property. Congress passed amendments to CERCLA in 2002 that further define what is meant to conduct AAI as a precondition for CERCLA liability defenses. In 2005, US EPA published its AAI Final Rule that includes a reference to the American Society for Testing and Materials (ASTM) E1527-05 standard for conducting a Phase I Environmental Site Assessment (ESA).

Since that time, ASTM E1527-05 has been the predominant standard used to complete Phase I ESAs. ASTM also reviews and updates its standards on a routine basis. As such, ASTM’s review of the E1527-05 standard first began in 2010. The update to the Phase I standard was approved and released by ASTM on Nov. 6, 2013.

How does this affect you, your clients or your organization?

The primary components of the Phase I ESA process itself have not changed. A Phase I ESA is still comprised of four basic components:

1) Records Review

2) Site Reconnaissance

3) Interviews

4) Report Preparation.

 

So what has changed with ASTM E1527-13?

Number1There is a revised definition of a Recognized Environmental Condition (REC) – most notably, what was omitted in the original definition. The previous REC definition referenced the evaluation of the presence of a release to the “ground, ground water, or surface water.” The new definition doesn’t name a specific media, such as soil or groundwater, but rather incorporates CERCLA’s definition of a “release” and the “environment.”By doing this, all forms of contamination, be it soil, ground water, surface water or vapor, are now clearly a part of the Phase I ESA.

Number2The term “Historical Recognized Environmental Condition”(HREC)has been clarified for consistency. An HREC is a release that has since been cleaned up to the point that allows unrestricted use of the property and its resources.

Number3The new term, a “Controlled Recognized Environmental Condition” (CREC), has been added. CRECs refer to contamination that the regulatory authority has deemed suitable to remain in place, but with required controls and/or limitations on the use of the property.

Number4Regulatory file reviews on the Subject Site have always been a part of Phase I ESAs. The new ASTM E1527-13 standard obligates the Environmental Professional (EP) to review pertinent files on any immediately adjoining property(s) identified in the regulatory database review; otherwise, the EP must state why the applicable regulatory files were not reviewed.

Number5The definition of “migrate/migration” has been revised to clearly include the evaluation of vapors as a potential contaminant migration pathway. Clarification was also added to note that indoor air quality not related to subsurface contamination was outside of the scope of ASTM E1527-13.

Number6ASTM E1527-13 also references ASTM E2600-10, the Standard Guide for Vapor Encroachment Screening on Property Involved in Real Estate Transactions. Most EPs currently consider ASTM E2600-10 the most appropriate tool to use when evaluating the potential migration of vapors into the Subject Site.

Number7The new standard also clarifies that the user of the Phase I ESA is responsible for providing known Environmental Lien and Activity and Use Limitations information to the EP, but the EP is not precluded from searching for these documents as well.

 

On Dec. 30, 2013, the US EPA recognized the newly issued ASTM E1527-13 standard as being compliant with the AAI Rule. The US EPA noted that in its view, the new ASTM E1527-13 provides an improved process for parties who choose to undertake all appropriate inquiries. By endorsing ASTM E1527-13, this standard practice now serves as the preeminent option for conducting AAI for bona fide prospective purchasers, contiguous property owners or innocent landowners who are seeking certain landowner liability protections under CERCLA or Superfund.

The average consumer of a Phase I ESA will not necessarily need to be fully versed in the new ASTM E1527-13 standard. However, he will want to do his homework to ensure he is using the most knowledgeable, educated and versed EP to conduct a compliant ASTM E1527-13 Phase I ESA on his behalf. The old adage that you get what you pay for has never been more true when it comes to ensuring a compliant Phase I ESA is completed.

SHARE

Comments

Related Articles