ENVIRONMENTAL AUDITS & SITE ASSESSMENTS DURING COMMERCIAL & INDUSTRIAL PROPERTY TRANSFERS
Today’s real estate market is largely influenced by environmental concerns. Existing federal and state environmental laws have placed substantial potential liability on buyers and sellers of properties contaminated by hazardous or toxic substances. The extensive environmental liabilities resulting from leaking underground storage tanks, buried industrial waste, poor quality fill material, improper handling of hazardous and non-hazardous materials, historic PCB usage/disposal, and onsite discharges or spills have significantly changed the way business is conducted with regard to the ownership, management, and transfer of real property. Anyone having a financial interest in real estate needs to know if potential environmental problems may involve them in expensive cleanup and lengthy litigation.
It should be noted though that in addition to the contamination concerns there are several emerging areas, such as risks related to climate change, water shortages associated with droughts, environmental, social, and governance issues and vapor intrusion.
CERCLA (SUPERFUND)
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund, imposes liability on responsible parties, including but not limited to: present owners and/or operators of the facility, and prior owners and/or operators who owned or operated the facility at the time of disposal of any hazardous substance. There are only three defenses available to CERCLA liability, with the most common being the “third party defense.”
INNOCENT LANDOWNER DEFENSE & APPROPRIATE INQUIRY
In 1986, Congress increased the scope of this defense, creating a special class of the third party defense sometimes called the “innocent landowner defense.” Innocent landowners can escape CERCLA liability if they acquired the property after the disposal of hazardous substance (among other qualifications), and at the time of the property acquisition, the defendant must have undertaken all appropriate inquiry into the previous ownership and uses of the property. This is where the Phase I environmental site assessments (Phase I ESA) come in.
PHASE I ENVIRONMENTAL SITE ASSESSMENT
Lending institutions (or other entities with a potential interest in secured or unsecured properties that may foreclose on or otherwise assume operational control of contaminated properties) could be made financially liable for clean-up of the properties, whether or not they contributed to the contamination. The burden is on lenders and potential owners of real estate to make a duly diligent effort to research the environmental hazards on the property they acquire title to, foreclose on, maintain a security in, or assist in managing. Prior to the calculation of property or estate taxes, trustees and managers of estates also have a vested interest in obtaining an accurate assessment of an estate potentially contaminated with hazardous or toxic substances. The Phase I Environmental Site Assessment evaluates potential and existing hazards and is an essential element in establishing “innocent landowner” status in property transactions. It is the first step in evaluating a property’s environmental status and can help limit ultimate liability should the property be found to pose an environmental risk.
The ESA, at a minimum, accomplishes three goals: (1) identify sources of contamination; (2) locates pathways of contamination; and (3) identify receptors of contamination.
DUE DILIGENCE, ASTM STANDARD & PRELIMINARY ASSESSMENT
The advent of the routine Phase I audit was the result of this heightened awareness and the evolution of legal liability theory under the Superfund statute. Although there are currently no federally enforceable requirements for conducting a Phase I to establish due diligence, state requirements and industry established guidelines, such as the ASTM Standard E1527-05 and the newly issued ASTM 1527-13 “Standard Practice for Phase I Environmental Site Assessment”, have been developed. For instance, under the New Jersey Spill Compensation and Control Act, a person must perform a Preliminary Assessment, as well as a Site Investigation if potential contaminants or concern are discovered, to demonstrate “appropriate inquiry” in order to qualify as an “innocent purchaser.”
SITE INVESTIGATION & INNOCENT PURCHASER
METROPOLITAN’S personnel have performed hundreds of Phase I Environmental Site Assessments, Preliminary Assessments, and Site Investigations since 1990. Our credentials far exceed the requirements of all major financial institutions and have been refined over the years to accommodate changes in legal guidance, client objectives, and state regulations.
METROPOLITAN’S SITE ASSESSMENT PROCESS
Properties are typically evaluated in phases, beginning with an ASTM Transaction Screening Investigation (TSI) for visual or agency listed evidence of potential contamination on the property. A TSI offers a standardized approach to environmental due diligence that provides a generally acceptable degree of confidence about the environmental conditions of a property.
If the Transaction Screening Investigation identifies an issue of concern, or if sufficient information is not available to eliminate a potential issue of concern, then a Preliminary (Phase I) Property Site Assessment for visual or historic indications of potential contamination would be conducted.
If a Phase I Property Site Assessment does not identify existing or historic evidence of contamination, the site assessment is usually concluded without further investigation.
However, if evidence of potential contamination exists, then additional investigation may be recommended, including second-phase sampling and analysis programs or more rigorous historic and agency record investigations (Phase II Property Site Assessments).
If Phase II investigations confirm the presence of hazardous substance contamination, then further assessment and site remediation (Phase III) are typically recommended either to be completed prior to closing the property transfer transaction or to be adequately provided for in the valuation of the property.
METROPOLITAN also provides environmental consulting services to facilitate timely and cost-effective assessment of properties. Among these services are technical review of third-party consultant reports (Environmental Record Reviews) and comprehensive reviews of client facilities and operations for compliance with environmental regulations and permits (Environmental Audits).
We recognize the importance of adapting our services to meet the unique requirements of our clients.
Environmental Auditing
Environmental auditing has emerged as an important and integral part of environmental management systems.
Audits serve as a management tool to help measure a facility’s or company’s environmental performance against environmental regulations, as well as internal company policies and operational procedures.
In addition, environmental audits can provide a level of assurance to senior management that the activities at their facility or organization do not pose an unreasonable risk to the company or the environment.
The process can assist a corporation and its officers in limiting liability by identifying potential problems and recommending corrective actions.
The auditing process is designed to
1. verify compliance with corporate environmental requirements;
2. evaluate the effectiveness of existing environmental management systems; and
3. assess risks from regulated and unregulated materials and practices.
Environmental audits are also typically performed prior to acquisition of an operating business.
As part of an environmental audit, METROPOLITAN can evaluate a facility’s regulatory compliance status and advise corrective actions. The regulatory compliance aspect of the environmental audit includes:
· A detailed walk-through inspection of the facility;
· Review of all environmental records made available from the client;
· Review of applicable management practices, federal, state and local laws, rules and regulations, and standards; and
· Interviews with persons responsible for implementing the environmental programs on site.
Specific components of a typical METROPOLITAN Environmental Audit, which are based upon these elements, include:
· Summaries of the items reviewed;
· Discussion of environmental issues and audit results including historic and potential problems and noncompliance areas; and
· Recommendations for actions which would bring the facility into regulatory compliance and resolution of environmental problems.
After the initial environmental audit, METROPOLITAN can perform periodic audit updates to assist in keeping the facility in regulatory compliance, or undertake supplemental activities necessary to bring the facility into regulatory compliance
Environmental Record Review (ERR)
Third-party environmental documents are frequently submitted to our clients. These documents may present complex findings, incomplete documentation, or conclusions for further investigation or site remediation.
METROPOLITAN can interpret the technical findings and evaluate adequacy of the documents with respect to the concerns or interests of our clients.
One frequently requested peer review service provided by METROPOLITAN is an Environmental Record Review (ERR). An ERR includes a review and written summary of third-party environmental reports to provide our clients with an independent opinion of technical adequacy and findings of the reports.
We give particular attention to evaluating evidence of hazardous or toxic substance contamination.
The ERR typically includes a chronology of significant findings, a summary of identified issues or potential problems, recommendations for further investigation or causes of action, and a statement defining the limitations and assumptions of the analysis.
Transaction Screening Investigation
A Transaction Screening Investigation is usually undertaken to provide a scoping level of environmental assessment for virtually all property transfer transactions.
A Transaction Screening Investigation may also be initiated when a client has made a preliminary determination that the value of the property or other circumstances contraindicate initiating a full Phase I Property Site Assessment unless sufficient cause for further investigation can be demonstrated.
Findings of the Transaction Screening Investigation report may dictate that a Phase I Property Site Assessment is required or may provide sufficient information that a lender may decide to discontinue further environmental assessment activities.
In some circumstances, Transaction Screening Investigation reports may be appropriate for updating earlier Phase I Property Site Assessments to confirm that conditions have not substantively changed on a given property.
The scope of services for a typical Transaction Screening Investigation includes a site inspection; review of historical information from site records; and preparation of a written technical report with findings of the investigation, as well as conclusions and recommendations for further investigation, if necessary.
Although requirements for individual site studies vary, and supplemental assessment activities may be prescribed by individual clients, minimum standards have been established by the American Society for Testing and Materials (ASTM) standard practices for a Transaction Screening Investigation (E 1528-96, Transaction Screen Process).
The Transaction Screening Investigation specifically would not include
· review of historic property ownership records;
· review of historical aerial photographs and city directories;
· communications with agencies for available records of past spills, discharges or disposal of hazardous materials;
· communication with utility companies; or
· review of hydrogeologic data or other supplemental activities typically conducted during a full Phase I Property Site Assessment.
If the Transaction Screening Investigation were to reveal evidence of contamination or potential contamination or conclude that insufficient information was acquired during the Transaction Screening Investigation to adequately address an environmental issue of potential concern, recommendations for a Phase I Property Site Assessment would be provided in the Transaction Screening Investigation report.
Preliminary (Phase I) Property Site Assessment
A Preliminary (Phase I) Property Site Assessment is an investigation undertaken to evaluate properties for the existence, reasonable potential existence, or future potential for hazardous or toxic substance contamination.
The scope of services for a typical Phase I Property Site Assessment includes
· A specific on-site investigation consisting of a pedestrian survey be performed. Representative photographs of the subject property and adjacent properties will be taken to document conditions at the time of the on-site investigation.
· review of historical information from site records and regulatory agencies;
· preparation of a written technical report with findings of the investigation; and
· conclusions and recommendations for further investigation, if necessary.
Although requirements for specific sites vary and individual clients may require supplemental assessment activities, minimum requirements have been established by practicing professionals and have been institutionalized in pending legislation.
Minimum standards have also been established by the American Society for Testing and Materials (ASTM) standard practices for a Phase I Environmental Site Assessment (E 1527-97, Phase I Environmental Site Assessment Process).
Phase I Property Site Assessments do not typically include soil or ground water sampling or analysis activities unless specifically requested prior to the investigation, or mutually agreed upon during the course of the investigation.
If the Phase I Property Site Assessment were to reveal evidence of potential hazardous substance contamination, recommendations for further investigation (Phase II Property Site Assessment), mitigation, and/or remedial actions would be recommended in the Phase I report.
Phase II Property Site Assessment
Previous investigations or activities, including Phase I Property Site Assessments or accidental discovery of suspected contamination, may require a sampling and analysis program (Phase II Property Site Assessment) to confirm or characterize the suspected areas of contamination.
Phase II programs usually include subsurface investigations for the purpose of collecting soil and/or ground water samples to be analyzed for suspected contaminants; however, Phase II investigations may also include sampling of surface waters, interior or exterior emission sources, soil gases, or multiple other focused assessment activities.
METROPOLITAN’ Phase II field investigations are designed and directed by geologists and professional staff with expertise in environmental site characterizations of all kinds, both above and beneath the ground water table.
Our professional staff adheres to rigid quality assurance and control guidelines set by industry, regulatory, and METROPOLITAN standards.
Field investigations are conducted in compliance with federal, state, and local regulations, including notification of appropriate regulatory agencies, acquisition of all necessary permits, and preparation of a field safety program.
Representative soil and ground water samples are obtained following strict sampling protocol. The samples are transferred by standard chain-of-custody to certified laboratories for analyses.
Coordination with the client is maintained throughout the entire investigation to assure that any difficulties or unsuspected findings are resolved as soon as possible.
After completion of field and laboratory data analysis, a final report is prepared to summarize the investigation and to make recommendations and conclusions based upon the findings.
If the Phase II investigation were to confirm the presence of significant contamination on the property, then recommendations are typically provided for further investigation, if necessary, to delineate the vertical and lateral extent of contamination or to implement site remediation alternatives for cleanup of the contamination in conformance with the requirements of responsible agencies.
Site Remediation
If site remediation is indicated from the Phase II investigation, METROPOLITAN can assist clients with site characterization and management of remediation activities.
Site remediation may include any of the standard or innovative techniques such as
· granular activated carbon adsorption,
· oil-water separation and free product recovery,
· biodegradation,
· solidification and stabilization,
· vapor extraction,
· incineration,
· barrier walls (either passive or active),
· in-situ chemical injection treatment,
· waste reduction/filtration techniques, or
· excavation and off site treatment and disposal.
The feasibility of any particular site remediation technique depends upon site specific conditions such as the nature of contaminants, regulatory requirements, and other factors such as cost, potential future consequences, pending regulations, and community concerns.
Key Changes to ASTM E 1527-13
The All Appropriate Inquiries Rule at 40 CFR Part 312 (“AAI Rule”) protects prospective purchasers of property from liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) for certain environmental conditions if the prospective purchaser conducts an investigation that meets the requirements of the AAI Rule. The AAI Rule provides that prospective purchasers who comply with specified industry standards issued by the American Society for Testing and Materials (“ASTM”) are deemed to have complied with the AAI Rule. On December 30, 2013, the U.S. EPA formally recognized a new standard (ASTM Standard E1527-13) to demonstrate compliance with the All Appropriate Inquiry (AAI) Rule when conducting Phase I Environmental Site Assessments. The ASTM E1527-13 Standard is similar to the previous ASTM E1527-05 Standard and was issued by ASTM International in accordance with its protocol for review of its standard practices and guides. The EPA recommends that environmental professionals and prospective purchasers use the ASTM E1527–13 standard; however, the old standard is not yet invalid for purposes of AAI and won’t be until EPA formally amends the AAI Rule to remove the current reference to it. The new Standard introduces several changes to the Phase I assessment process.
Key Changes to the Standard
There are three major changes in the new Standard:
Changes to the definitions of Recognized Environmental Condition (REC) and Historical Recognized Environmental Condition (HREC), and the introduction of the term Controlled Recognized Environmental Conditions (CRECs).
1. Clarifications regarding vapor migration/intrusion assessment requirements.
2. Requirements pertaining to Regulatory Agency File Reviews.
The major changes are summarized below.
REC, HREC, CRECs
The new Standard revised the definition of the terms regarding Recognized Environmental Conditions. The new Standard simplifies the definition of a REC, to align more closely with the AAI rule, as a release, a likely release, or a material threat of a release of hazardous substances to the environment on the property. The revised Standard also modifies the definitions of “release” and “environment” to more closely track the definitions of those terms as set forth in CERCLA. Although the definition of a REC has been simplified, its application in practice should be largely unchanged.
The definition of an HREC has been modified to apply only to historic releases, which have been remediated to the satisfaction of regulatory authorities for unrestricted use. Thus, the new Standard limits an HREC to past releases that do not subject the property to any use restrictions, activity and use limitations (AULs), or other engineering or institutional controls. The new definition also requires that the environmental professional evaluate whether releases that were addressed in the past may be subject to revised cleanup criteria that could require further remedial action (if residential criteria has become more restrictive the HREC could potentially become a REC). Although some environmental professionals routinely conducted an analysis of current regulatory cleanup standards for HRECs, the new Standard makes this exercise mandatory to comply with the AAI Rule for the first time.
Following the revised definition of an HREC is the new category of releases called a CREC. This term is newly added to describe releases that have been addressed to the satisfaction of regulatory authorities, but from which residual contamination has been permitted to remain in place subject to the implementation of use restrictions, AULs or other institutional or engineering controls on the subject property. Because a CREC is a new type of REC (whereas the new definition of an HREC is no longer considered a REC), the new Standard requires that the condition also be identified as a REC in the conclusions section of the Phase I report. Under the prior standard, these types of controlled, known conditions were often characterized as HRECs, since regulatory closure had been achieved. These conditions are now considered RECs, and may have a practical impact on transactions in the form of financial holdbacks or escrow demands, insurance coverage exclusions or limitations, or requests for sale price or lease concessions.
Vapor Migration
The new Standard indicates the need to clarify that the potential for vapor migration must be considered in the Phase I report. The definition of “migrate” now expressly includes releases that migrate in the subsurface as vapor. Consultants preparing Phase I assessments under the updated standard will need to assess possible indoor air quality impacts from vapor intrusion pathways if there is subsurface soil or groundwater contamination at or near the subject site. The standard explicitly states that ASTM E2600 is not a requirement of a Phase I ESA (E1527). ASTM E2600 is a separate, more comprehensive assessment of vapor migration.
Agency File Reviews
If a property, or an adjoining property within the required search distance, appears on a federal, state or tribal record, the standard requires, within the environmental professional’s discretion, the review of “pertinent regulatory files and/or records associated with the listing.” If the environmental professional chooses not to conduct a file review, he/she must document the reason(s) for this decision in the Phase I report.
The practical impacts of the file review requirement are likely to be on timing and cost. Agency file reviews can often take several weeks (or months, in some jurisdictions), and could add additional unforeseen costs to the Phase I assessment process. The file review requirement could dramatically increase the probability that a Phase I assessment is not truly complete at the time of closing.
Other Revisions
The Standard also indicates a review of title and judicial records for environmental liens or AULs continues to be a User (Client) requirement that is to be conducted by a title professional. The environmental professional may conduct this work instead of the user, but does not have an affirmative obligation to do so. These user responsibilities are now mandatory, and the user must also consider its own specialized knowledge, commonly known or reasonable ascertainable information about the property, and the degree of obviousness of the presence or likely presence of releases or threatened releases.
Conclusion
EPA 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 liability protections. In particular, the new ASTM E1527-13 standard enhances the previous standard with regard to the delineation of historical releases or RECs at a property and makes important revisions to the standard practice to clarify that all appropriate inquires and Phase I Environmental Site Assessments must include, within the scope of the investigation, an assessment of the real or potential occurrence of vapor migration and vapor releases on, at, in or to the subject property. While this rule does not create additional regulatory requirements, prospective purchasers of property should be aware of the changes and potential impacts.
PROJECT SUMMARIES
ASTM Transaction Screen, Conducted on behalf of a local Commercial Lending Institution (2014) Four-Story Residential Apartment Building, Trenton, NJ
Historical information (Sanborn Maps) indicated that the Site has been occupied by the current four-story residential apartment building since at least 1887. Based on the outcome of the TS, METROPOLITAN concluded that additional inquiry of the property was not warranted.
Environmental Liability Review - Real Estate Investment Trust, Nationwide
For a confidential nationwide real estate investment trust (REIT), METROPOLITAN provides third-party review services evaluating all aspects of potential environmental liabilities associated with the potential property acquisition. Within an aggressive timeframe to complete environmental due diligence, METROPOLITAN reviews environmental site assessments completed by others and evaluates a wide range of environmental information pertaining to the property for this REIT. Environmental reviews of manufacturing, residential, and commercial properties in New York, Miami, Jersey City, and Houston have been completed and environmental issues including historic spill cleanup, oil storage, mold remediation, and compliance with state regulations have been assessed. Because of our independent analysis of site environmental conditions, the REIT has been able to manage potential environmental issues and successfully acquired numerous properties.
ASTM Phase I ESA, Conducted on behalf of a local Commercial Lending Institution (2013) Commercial Property, Newark, NJ
The Phase I Environmental Site Assessment recommended sampling of subsurface soil and groundwater to evaluate potential contamination associated with this Country Club setting for a number of current and/or former USTs.
ASTM Phase I ESA, Conducted on behalf of a local Commercial Lending Institution (2012) Manufacturing Facility, New York, NY
The Phase I Environmental Site Assessment concluded that further assessment of subsurface soil and groundwater was not required to evaluate potential contamination associated with a number of former USTs at the property.
ASTM Phase II LSI, Conducted on behalf of a local Commercial Lending Institution (2011) Trucking Facility, New Haven, CT
Upon conducting Phase II environmental sampling activities at this approximately 22-acre property occupied by a trucking company, METROPOLITAN concluded that additional inquiry was not warranted.
Property Acquisition - Confidential Real Estate Company, NJ
When considering the purchase of an unoccupied former mill building in Harrisburg, PA, this confidential New Jersey-based real estate company hired METROPOLITAN to conduct due diligence research. METROPOLITAN began with an ASTM Phase I ESA, which included a site visit, review of historical records, research at state and local government offices, and interviews with key individuals knowledgeable about site use and history. Research found the mill had been used for various textile manufacturing operations for more than 100 years. METROPOLITAN also reviewed previous environmental assessment activities conducted at the site, including the removal of two USTs. Our investigations concluded that there were no Recognized Environmental Conditions at the site, and the transaction could proceed unimpeded
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