Environmental due diligence is changing in the commercial real estate market in 2013. Here is our list of the top three things to watch in this year’s market.
1. Tenants Conducting Environmental Due Diligence to Qualify for Bona Fide Prospective Purchaser Protection For Contaminated and Formerly-Contaminated Properties
In the past, tenants could only qualify for CERCLA landowner liability protections if the landowner qualified for those protections. If the landowner was unable to qualify for the defenses, or lost the ability to maintain those defenses during the term of the lease, the tenant would likewise lose those protections through no fault of its own.
In order to remedy this harsh effect and continue to spur the development of brownfields, U.S. EPA announced that it intends to exercise its enforcement discretion in a manner that allows tenants to independently qualify as bona fide prospective purchasers (“BFPP”) under CERCLA.
Pursuant to U.S. EPA’s “Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision,” dated December 5, 2012, tenants will now be able to qualify as BFPP even in those instances where the landowner would not otherwise qualify for a defense or where the landowner loses the defense during the term of the lease. As a result, tenants are conducting environmental due diligence in order to qualify for BBPP status, to take advantage of the opportunities that brownfields present, and to protect their investments.
2. Changes Coming to ASTM E-1527 Phase I Environmental Site Assessments
U.S. EPA has recognized ASTM International Standard E-1527-05 for Phase I Environmental Site Assessments as qualifying for the “all appropriate inquiries” required to attain CERCLA’s landowner liability protections. Under CERLCA, in order to qualify for landowner liability protections, parties must show that at the time they acquired the subject property they did not know and had no reason to know of the past disposal of hazardous substances at the subject property that are the current driver for remediation. 42 U.S.C. § 9601(35)(A)(i). In order to establish the lack of knowledge, the parties must demonstrate that on or before the acquisition they carried out all appropriate inquiries into the previous ownership and uses of the subject property in accordance with good commercial and customary standard practices. 42 U.S.C. § 9601(35)(B)(i). U.S. EPA has determined that all appropriate inquires are intended to result in the identification of conditions indicative of a release or threatened release of hazardous substances or petroleum products on, at, in, or to the subject property. 40 C.F.R. § 312.20(e).
In 2002, Congress adopted the Brownfield Amendments, in which it expressly recognized certain defenses to CERCLA liability, including the BFPP defense. Bona fide prospective purchasers, including tenants, may acquire ownership of property with knowledge of contamination after performing all appropriate inquiries and still qualify for the landowner liability protection, provided they bought the property after January 11, 2002 (the date of enactment of the Brownfields Amendments) and meet the criteria set forth in CERCLA § 101(40), 42 U.S.C. § 9601(40).
E-1527-05 is set to expire in 2013. The latest proposed draft to replace E-1527-05 results from numerous debates over the past three years at Task Group meetings across the country, dozens of conference calls attended by environmental professionals and end users, and input from representatives of U.S. EPA. Once the revised draft is approved by the entire ASTM Committee E50, the final version will be presented to U.S. EPA for its review of all appropriate inquiries compliance and approval.
There are several changes coming to E-1527. Some of the most significant changes will include: (1) the clarification of the term Recognized Environmental Condition (“REC”); (2) the clarification of the term Historical REC; (3) the addition of a new term Controlled REC; and (4) the addition of vapor migration as a contaminant pathway to be examined.
Under the latest revised draft of E-1527, the term REC has been revised to more closely follow the CERCLA definition of identifying the presence or likely presence of any hazardous substance or petroleum products in, on, or at the subject property under conditions indicative of a past release, present release, or posing a material threat of a future release to the environment.
2. Historical REC
The clarified definition of a Historical REC comes in connection with the addition of a new term Controlled REC. A Historical REC pertains to a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority, or that meets unrestricted residential use criteria as set forth by the applicable regulatory authority, without subjecting the property to any required controls, such as activity and use limitations, institutional controls, or engineering controls. The key for the environmental professional will be to compare whether the applicable regulatory criteria at the time of closure have become more restrictive and whether the site still meets applicable regulatory closure criteria.
3. Controlled REC
The new term Controlled REC will pertain to those instances where an REC resulting from a past release of hazardous substances or petroleum products has been addressed to the satisfaction of the applicable regulatory authority with hazardous substances or petroleum products allowed to remain in place subject to required controls, such as activity and use limitations, institutional controls, or engineering controls. One such example would be if a site met the applicable regulatory authority’s criteria for no further action but was subject to certain required controls such as a prohibition on the use of groundwater for drinking purposes. The new term Controlled REC will provide environmental professionals with a term to better describe situations where land use restrictions remain. The three categories will be mutually exclusive of one another.
4. Vapor Intrusion
The latest revised draft of E-1527 adopts a new term “migrate/migration” that refers to the movement of hazardous substances or petroleum products in any form, including vapor in the subsurface. Addressing vapor migration is consistent with U.S. EPA’s determination that all appropriate inquiries are intended to result in the identification of conditions indicative of a release or threatened release of hazardous substances or petroleum products that impact the subject property. 40 C.F.R. § 312.20(e).
Vapors from volatile organic compounds and petroleum contaminants are known to be capable of migrating distances of 100 feet and 30 feet, respectively, from the source of contamination. When preferential pathways are present, the vapors may flow much further distances and even travel up gradient.
Some environmental professionals have disagreed over whether the vapor intrusion pathway should be assessed when performing all appropriate inquiries, believing that indoor air is excluded and that such an assessment could potentially raise the cost and burden of performing all appropriate inquiries. On the other hand, some attorneys and environmental professionals would consider it irresponsible to ignore significant contamination on an adjacent or nearby property that poses a risk for contaminant vapors to migrate to the subject property.
While vapor migration is described in ASTM E-2600-10, there is nothing in the latest revised draft of E-1527 that will be construed to require the application of the E-2600-10 standard to achieve compliance with all appropriate inquiries.
3. More Lenders Following SBA’s Environmental Risk Management Guidance
The Small Business Administration (“SBA”) has been actively providing environmental risk management guidance for lenders in connection with SBA loans in regular servicing or liquidation status. The latest SBA guidance comes in Standard Operating Procedure (“SOP”) 50 57, in connection with Section 7(a) Loan Servicing and Liquidation. SOP 50 57 became effective on March 1, 2013.
In SOP 50 57, like in prior guidance, the SBA explains that for secured creditors, the risks associated with contaminated collateral include: (1) impairment to the borrower’s ability to repay the loan due to the high cost of remediation, regulatory fines, and penalties; (2) diminished value and marketability of the collateral; (3) direct liability for tort claims and remediation by becoming an owner or operator of the property (e.g., by acquiring title through foreclosure or taking over the operation of the borrower’s business); and (4) loss of lien priority if a government entity cleans up the property.
We expect to see more pre-loan and post-default environmental investigations by lenders to make informed decisions regarding the risks of contamination, the cost to perform expected remedial activities, and the time expected for the remediation to be completed to applicable regulatory criteria in order to make prudent lending and foreclosure decisions. SOP 50 57 also continues the SBA’s practice of specifically identifying gas stations and dry cleaners as especially environmentally sensitive industries noting that “generally, if a gas station or dry cleaner has been in operation for five years or more, there is a high probability that the property is contaminated.”