New rules governing Phase I Environmental Site Assessments may affect the timing and cost of property transactions scheduled to close in 2014.
On Dec. 30, 2013, the Environmental Protection Agency (EPA) issued a final rule (78 Fed. Reg. 79,319) amending its All Appropriate Inquiries Rule (40 CFR pt. 312) to include recognition of ASTM International's E1527-13 "Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process." This amendment allows prospective purchasers to use the new ASTM E1527-13 standard to qualify for protection from liability under the Comprehensive Environmental Response, Compensation and Liability Act's All Appropriate Inquiries Final Rule. Conducting "all appropriate inquiries" may provide a defense to CERCLA liability when the property owner can demonstrate that "all appropriate inquiries" were made into the condition of the property before purchase.
The new ASTM E1527-13 standard has raised questions for lenders about which standard they should require their borrowers to satisfy in a real estate transaction. While the final rule states that parties may use either the older ASTM E1527-05 standard (which is codified at 36 CFR Part 312) or the new ASTM E1527-13 standard, the EPA strongly recommended using the new ASTM E1527-13 standard when conducting a Phase I Environmental Assessment. The EPA indicated that it "believes that ASTM E1527-13 improves upon the previous standard and reflects the evolving best practices and level of rigor that will afford prospective property owners necessary and essential information when making property transaction decisions and meeting continuing obligations under the CERCLA's liability protections."
As such, lenders will have the best information and protection when they require borrowers to use the new ASTM E1527-13 standard to conduct the Phase I Environmental Assessment. Where the Phase I for the property was done in 2013 for a closing to take place in 2014, lenders may wish to have purchasers update existing Phase I reports to meet the new standard. It is also important to remember that a Phase I report generally has a one-year "shelf life," with updates required for some parts that were gathered more than 180 days previously.
There are several key changes between the ASTM E1527-05 standard and the new ASTM E1527-13 standard. These differences include:
- Requiring an evaluation of vapor intrusion risks that may be associated with a particular property.
- Updating the definition of "Recognized Environmental Condition" (REC) to clarify that de minimis conditions are not included.
- Updating the definition of "Historical Recognized Environmental Condition" (HREC) to clarify that HRECs are only conditions where past releases have been addressed to allow for unrestricted use of the site, and do not include Controlled Recognized Environmental Conditions (see below).
- Adding a definition of "Controlled Recognized Environmental Condition" (CREC) to the standard. A CREC is a condition where previous releases at properties were addressed through risk-based closures, but contaminants were allowed to remain in place under certain restrictions or conditions (for example, properties with certain deed restrictions or areas where further monitoring is necessary because unrestricted standards are not yet achieved).
- Updating the definition of "de minimis condition" to clarify that it does not include conditions that are CRECs.
- Adding guidance related to the regulatory agency file and records review requirement. This was done to provide a standardized framework for verifying agency information obtained from key databases.
Our experience so far is that the new rule has resulted in the cost of Phase I reports being a little higher, and it taking a little longer to complete Phase I reports because of the additional requirements found in the new rule.
The new rule does not affect the existing protections that lenders have as mere security interest holders in contaminated properties. But it does provide additional information and protection for lenders in assessing the value of the underlying asset as part of its underwriting process.