Most professionals involved in commercial real estate transactions – developers, commercial real estate agents, lending institutions – are familiar with the practice of performing due diligence or environmental site assessments as part of the transaction process. ESAs, often called Phase I Environmental Assessments, are routinely performed to minimize the risk of unknowingly acquiring property that is tainted by hazardous materials, petroleum products or other environmental issues caused by previous uses of the property itself, or even nearby properties. Because of the way environmental laws work, even if you did not cause the problem, as the current owner of the property you may be liable for cleanup costs or, worse yet, third-party liability claims.
Typical environmental issues addressed during a Phase I ESA include the present or past use of petroleum products, cleaning solvents or other hazardous materials on the property. Leaking underground storage tanks on the property or at nearby properties are another common concern. On-site septic or lagoon systems in a commercial or industrial setting also are addressed.
Cleaning up contaminated soil or groundwater can be an expensive and lengthy process. While not included in a standard Phase I ESA, prospective purchasers often supplement the Phase I with asbestos, wetlands, endangered species and cultural resource surveys – all issues that, if not addressed in the planning phase, can add time and expense to a development or even make it economically unattractive. For residential (and certain commercial) property transactions, additional areas of concern are radon, lead-based paint and mold.
Under federal law, there are provisions known as the “innocent landowner defense” that protect the landowner from liability for pre-existing contamination, provided they have performed “all appropriate inquiry.” Currently the standard used to qualify for the innocent landowner defense is the Phase I ESA using the American Society for Testing and Materials Standard Practice for Phase I Environmental Site Assessments (the most recent revision is ASTM E 1527-00).
In April 2003, the U.S. Environmental Protection Agency named a 25-member stakeholder group to prepare the first federal standards for conducting “all appropriate inquiry” to not only meet the needs of the innocent landowner defense under the Superfund law, but to satisfy broader protections to encourage the redevelopment of so-called brownfield properties.
The soon-to-be published AAI rule adopts most of the practices required by ASTM 1527-00 and expands on the current standard in several important ways. Among the key changes proposed are more rigorous requirements for the qualifications of the assessor, more extensive documentation and an expansion of which government records must be reviewed. The public comment period for the proposed rule closed on November 30, 2004.
Currently, the EPA is reviewing the
comments received in response to the proposed rule. After considering all issues raised within the public comments, the EPA will respond to the comments and develop a final rulemaking. The EPA projects it will publish the final rule sometime in 2005.
While many purchasers or lenders decide to back away from the transaction when environmental issues are discovered during the due diligence phase, many savvy commercial real estate developers are knowingly purchasing slightly contaminated properties at a discount. They take advantage of brownfield redevelopment incentives, risk-based cleanup strategies, and cleanup cap insurance products to bring abandoned or underdeveloped lands back into productive use, and often realize healthy profits.
Regardless of your tolerance level for dealing with properties with environmental issues, don’t buy more than you bargained for. Retain an experienced environmental professional to evaluate and help manage the inherent risks associated with transacting commercial and industrial real estate.
Bill Lindsey, PE, is a principal with Midwest Environmental Consultants.
