R. Scott Kurtz
Director, Environmental Sciences – Ninyo & Moore
Industrial property purchasers, developers, borrowers and lenders have been aware of the liabilities associated with the acquisition of contaminated real estate for several decades. In 1972, the federal Superfund law (Comprehensive Environmental Response, Compensation and Liability Act), known as CERCLA, introduced new requirements regarding clean up responsibility for contaminated commercial properties. This law made it possible for purchasers of contaminated properties to be held liable for the cleanup of the property. CERCLA does provide for some liability relief for “innocent landowners” who performed “appropriate inquiry” prior to purchase. In response to the CERCLA law, in 1993, the American Society for Testing and Materials (ASTM) developed a standard for conducting preliminary environmental assessments of commercial properties. The standard was titled E1527 Standard Practice for Environmental Site Assessments: Phase 1 Environmental Site Assessment Process. This standard described the process for performing a preliminary environmental site assessment of a commercial property, often referred to as a “Phase I ESA”. The standard was developed to establish appropriate site assessment practices that satisfy the due diligence responsibilities of participants in commercial real estate transactions. Since 1993, ASTM E1527, to which minor revisions were made in 1994, 1996 and 2000, has become the industry standard for performing environmental due diligence to support an innocent landowner defense under CERCLA, and is the minimum scope of work typically required by many lenders prior to financing commercial and industrial property transactions.
Now there is a new standard on the way for conducting preliminary environmental site assessments. The Small Business Liability Relief and Brownfields Revitalization Act (Brownfield Act) was enacted on January 11, 2002. This law was developed to provide conditional liability protection for certain landowners to lessen the environmental liability impediments to redeveloping significantly contaminated “Brownfield” sites. One requirement of the Brownfield Act is for the United States Environmental Protection Agency (USEPA) to develop due diligence standards and regulations that will define “All Appropriate Inquiry” (AAI) as it relates to Brownfields sites. The regulation (referred to as a Rule) has been developed, and is currently a draft standard describing the activities that constitute AAI. The AAI standard will effectively change the landscape of environmental due diligence. In response to this shift in the definition of what constitutes appropriate inquiry, ASTM is currently in the process of updating the E1527 standard to incorporate the requirements of AAI, therefore, the AAI standard will be the litmus test for environmental due diligence.
While Phase I ESAs conducted in accordance with E1527 standards address many of the steps included in the AAI standard, the AAI standard incorporates some additional requirements. The current ASTM standard takes a prescriptive, relatively objective approach to performing environmental due diligence. The AAI standard is much more subjective, requiring that professional judgment and opinions be provided by the author of the report. One new key issue included in the AAI standard is the requirement that the assessment be conducted by an “Environmental Professional” (EP). The AAI standard includes a definition of an EP, whereas the current ASTM E1527 standard does not require or define an EP. There is a general feeling in the environmental industry that this requirement of AAI may serve to raise the bar for Phase I ESAs and help to minimize the number of sub-standard reports that are produced.
In total, the Brownfield Law established 10 criteria that must be addressed to meet the definition of AAI. These criteria are:
(1) the results of an inquiry must be provided by an Environmental Professional (EP),
(2) interviewing past and present owners/operators/occupants,
(3) reviewing historical information (chain of title, aerial photographs, building dept. records, etc.),
(4) performing a search for recorded environmental cleanup liens,
(5) reviewing federal, state and local records concerning contamination at or near the property,
(6) performing a visual inspection of the property and of adjoining properties,
(7) identifying specialized knowledge or experience on the part of the defendant (purchaser),
(8) establishing a relationship between the purchase price of the property to the value of the property were it not contaminated,
(9) obtaining commonly known or reasonably ascertainable information about the property, and
(10) identifying the degree of obviousness of the presence or likely presence of contamination at the property through appropriate investigation.
The AAI standard will require a new, modified approach to performing Phase I ESAs. The standard will require performing a broader scope of environmental inquiry and taking a performance-based approach instead of a prescriptive approach. Also, the standard relies heavily on the EP’s professional judgment to determine whether appropriate inquiry has been conducted. The AAI standard requires the EP to identify any data gaps encountered during the investigation, and to explain the steps taken to resolve the issues raised by missing or unavailable information. Identification of data gaps may result in an increase in the number of recommendations made for follow-up Phase II assessment at sites in order to satisfy AAI.
The draft AAI rule is available for public comment. It can be viewed at http://www.epa.gov/swerosps/bf/regneg.htm. The public comment period recently has been extended until November, 30, 2004. It is anticipated that the rule will be adopted formally in mid-2005. Until then, ASTM E1527 is the current industry standard for performing Phase I ESAs that address the liability limitations introduced by the Small Business Liability Relief and Brownfields Revitalization Act.
(Scott Kurtz is Director of Environmental Sciences at the environmental and geotechnical consulting firm Ninyo & Moore. Scott can be reached at (949)753-7070 and by email at skurtz@ninyoandmoore.com)
SOME SIGNIFICANT CHANGES
This article was written in 2005.