March 2008

Environmental Due Diligence

Phase I Environmental Site Assessments: a background check of your property

Kyle Hansen
General Manager
Geotechnical & Environmental Services
Las Vegas, Nevada

It's a litigious world we work in. Fast food companies are sued because their products make people fat. This mentality has led most companies to put as many protections in place as possible. Employees are now screened before hiring and vendors are investigated before signing important contracts. However, land was historically overlooked in the background check process.

The winds of change began to blow in 1980 when Congress gave the Environmental Protection Agency (EPA) power to investigate and remediate the most contaminated sites in the country. Since then the federal government has put in place a number of protections for land purchasers as well as standards for property investigation. Potential purchasers of property benefit by gaining an understanding of the risks associated with a given property. The assessment reduces the probability of discovering the property is worth less than originally believed due to environmental impairment, or worse, to be found liable for cleanup cost from a previously unknown release.

Historical Background
As early as the 1970s, sophisticated purchasers of property in the U.S. undertook studies to assess the risk of ownership of commercial properties. The primary goal of the research was to access the nature of impacted property and the potential cleanup costs to redevelop or change the use.

1980: Demand increased dramatically in the U.S. for this type of study when Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or Superfund to investigate and remediate the worst contaminated sites in the country. This investigative process was the precursor to the Phase I ESA.

CERCLA contained a concept called "strict liability" or, in other words, liability without regards to fault. This meant that an "innocent purchaser" of a property could be held liable for environmental contamination based solely on property ownership without regard to fault or negligence.

1986: Congress passed the "Superfund Amendment Reauthorization Act." In this act Congress created the "innocent landowner defense" to liability.

Innocent Landowner Defense Components

• Property must be acquired by inheritance, bequest, involuntary transfer or acquisition, or through exercise of eminent domain authority by purchase or condemnation;
  
  
• The owner did not cause or contribute to hazardous substances;
  
  
• After completing an "all appropriate inquiry," the landowner did not know and had no reason to know of the release or threatened release at the time of acquisition;
  
  
• The owner must take "reasonable steps" to control any continuing releases if discovered.

1993: American Society for Testing and Materials published ASTM E-1527 Standard Practice for Phase I Environmental Site Assessments. These were generally accepted as the minimum levels of environmental due diligence within the environmental consulting, legal, and financial services industries.

2002: Congress passed the federal "Brownfields Amendments," amending CERCLA which required EPA to develop standards and practices for conducting "all appropriate inquiries (AAI)."

The Brownfields Amendments added potential liability protections for "contiguous property owners" and "bona fide purchasers." For the first time since the enactment of CERCLA, a person may purchase property with the knowledge that the property is contaminated without being held potentially liable for the cleanup of the contamination. The advantage for lenders is that these landowner exemptions protect the borrower and the collateral in commercial real estate loans.

For the Bona Fide Purchaser Defense:

• The purchaser completes the "AAI" requirements;
  
  
• Acquires ownership after January 11, 2002;
  
  
• Any hazardous substance releases must have been before purchase;
  
  
• There must be no potential liability or connection with the Potentially Responsible Party other than through a purchase agreement;
  
  
• The purchaser must meet the continuing obligation to control hazardous substances by compliance with land use restrictions, institutional controls and prevent further exposure, etc.
  
  
• Must cooperate with regulatory agency's mandated remedial work, contractors, etc.

For the Contiguous Landowner Defense:

• This defense protects parties that are essentially victims of pollution incidents caused by their neighbor's actions;
  
  
• The landowner did not cause, contribute, or consent to release or threatened release;
  
  
• After completion of the AAI, the owner did not know and had no reason to know of release or threatened release at the time of purchase;
  
  
• There must be no potential liability or connection with the neighboring Potentially Responsible Party;
  
  
• The contamination comes from property contiguous to or "similarly situated with respect to" the subject property;
  
  
• The landowner must fully cooperate and grant authorities full access to the property; and
  
  
• Meet a continuing obligation to take reasonable steps to stop/prevent further release and exposure.

2006: On November 1, the EPA finalized the ruling that defines the standards for conducting AAI, a new level of rigorous examination under which environmental consultants are required to gather more extensive information prior to property transfers.

AAI and the Phase I ESA ASTM E1527-05 Standard
The AAI Rule is a performance-based standard allowing flexibility for site-specific circumstances. The new regulations require a broader scope of environmental inquiry and an extensive reliance on the Environmental Professional's judgment. Any and all data gaps must be identified and explained and the reliability of the gathered data must be justified.

The ASTM Standard is the prescriptive approach to the AAI Rule. It is intended to synthesize and standardize the reporting format for all consultants and is accepted by the EPA as being consistent with the statutory criteria of the AAI Rule.

What Must be Done to be Protected?
The property owner must supply certification that the inquiry into the property and the resulting report was prepared by (or under the responsible charge of) a qualified "Environmental Professional" with requisite experience in accordance with the final AAI Rule.

Phase I ESAs must cover the following criteria:

• Interviews with past and present owners, operators, occupants and the prospective purchaser; for abandoned properties, owners or occupants of neighboring parcels is mandatory;
  
  
• Reviews of historical sources back to the first obvious use of the property or 1940, whichever is earlier;
  
  
• An inquiry by the purchaser of the property for any environmental cleanup liens filed against the property;
  
  
• Review of government records;
  
  
• Systematic evaluation of the property and adjacent properties by the Environmental Professional to determine contamination/other conditions that can create liability, remedial obligations, development restrictions or any other "recognized environmental conditions";
  
  
• Whether the user has any specialized knowledge or experience material to RECs must be communicated to the CEM;
  
  
• The relationship of the purchase price to the fair market value of the property, if the property was not contaminated;
  
  
• An evaluation of commonly known or reasonably attainable information;
  
  
• Identify the degree of obviousness of the presence of releases and the ability to discover by investigation such contamination.

Shelf Life and Cost
AAI must be conducted within one year and interviews, inspections and record searches no more than 180 days prior to the date of acquisition of the property. The average cost of a Phase I ESA nationwide as determined by the EPA should be approximately $2,190.

Without a Phase I ESA, most purchasers of property cannot know with certainty what lies beneath the surface. However, with a proper assessment, the new owner and any financial backer can gain a substantial amount of protection at a relatively small price.

Kyle Hansen is the General Manager for Geotechnical & Environmental Services, a geotechnical engineering firm based in Southern Nevada. He can be reached at (702) 365-1001 or kyle.hansen@gesnevada.com.

Note: This article was written based upon Nevada law. While other jurisdictions may have similar regulations, Geotechnical & Environmental Services cannot be held responsible for any differences.