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New federal rule for environmental property inspections could affect real estate transactions

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The U.S. Environmental Protection Agency (EPA) recently finalized new federal due diligence standards for "all appropriate inquiry" (AAI) as it applies to environmental property inspections known as Phase I site assessments. The rule has resulted in the revision of the American Society for Testing Materials (ASTM) Phase I site assessment standard, potentially affecting every real estate transaction in the United States.



The new rule, which took effect Nov. 1, establishes specific regulatory requirements for conducting all appropriate inquiries into the previous ownership, uses and environmental conditions of a property for the purposes of qualifying for certain landowner liability protections under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also called the federal Superfund.

In essence, the EPA's new AAI rule requires purchasers and borrowers to conduct a more involved Phase I assessment than is required under the interim ASTM standard to avoid liability for hazardous substance releases when acquiring or making a loan on a property.

Over the past year, prior ASTM Phase I standards have been acceptable. Recently, ASTM revised its standard to conform to the new AAI, and now both AAI regulations and the ASTM standard will satisfy the statutory requirements for the conduct of all appropriate inquiries.

Under the AAI rule and the ASTM Phase I guidelines, innocent landowners, bona fide prospective purchasers of brownfield sites and contiguous landowners will qualify for liability exemption under CERCLA if inquiries are conducted properly and certain other criteria are met.

The new EPA rule, however, poses both more and less strict Phase I assessment requirements for purchasers, borrowers and lenders. First and foremost, the final AAI rule is much more performance based, allowing for more discretion on the part of the environmental professional conducting the Phase I assessment on the purchaser's behalf.

On the other hand, the environmental professional is required to meet much more detailed criteria under the "all appropriate inquiry" umbrella as part of an active investigation to detect any existing and/or threatened releases of hazardous substances at or near the property. The Phase I assessment must be based on very specific information relative to the property's former uses, hazardous substances management and disposal and other data. Moreover, environmental professionals performing Phase I assessments are required to have certain experience and education compared to what has been required in the past.

If, under the final AAI rule, the environmental professional does not detect any hazardous substance releases during the Phase I assessment, then the purchaser of that property is considered an "innocent landowner." If releases are found, the purchaser could still acquire the property and be considered a "bona fide prospective purchaser," and thus not be held liable as long as he takes "reasonable steps" with respect to hazardous substance releases. Reasonable steps include containing releases, preventing future threatened releases and preventing or limiting human and environmental exposure to hazardous substance releases.

The EPA's final AAI rule is not perfect but does further refine CERCLA liability for a purchaser of real property and developers of environmentally impaired sites. The rule will result in more thorough investigations into past uses and occupancies of property and potential sources of hazardous substances that could affect such property. Prospective purchasers can expect that it will likely take environmental professionals more time to complete environmental due diligence in compliance with the proposed standard than it takes to prepare an ASTM-compliant Phase I ESA report. In addition, the new standard may result in increased costs for environment due diligence activities. Phase I providers and both the financial and real estate communities at large would be well served to stay as informed as possible on the latest developments, and to take a proactive approach toward compliance. More information and updates on AAI rules can be found at www.scsengineers.com/aai.html

Johnson is vice president and founding principal of the San Diego office of SCS Engineers, and Kesling is vice president and national partner for due diligence on behalf of SCS Engineers.

10 criteria for conducting all appropriate inquiry 1. Interviews with the past and present owners and operators of the facility to gather information regarding the potential for contamination of the facility

2. Review of historical sources, such as the chain of title documents, aerial photographs, building department records and land use records to determine previous uses and occupancies of the real property since the property was first developed

3. Searches for recorded environmental cleanup liens against the facility that are filed under federal, state or local law

4. Review of federal, state and local governmental records (including tribal records), waste disposal records and hazardous waste handling, generation, treatment, disposal and spill records concerning contamination at or near the facility

5. Visual inspection of the facility and adjoining properties

6. Specialized knowledge of experience on the part of the defendant

7. The relationship of purchase price to the value of the property, if the property was not contaminated

8. Commonly known or reasonably ascertainable information about the property

9. The degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect contamination by appropriate investigation

10. Results of an inquiry reported by an environmental professional

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