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23 rd Annual Real Estate Symposium Snowmass Village, Colorado. The New Rules for Environmental Assessments in Real Estate Transactions by John R. Jacus Davis Graham & Stubbs LLP July 30, 2005. Small Business Liability Relief and Brownfields Revitalization Act of 2002.

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23 rd annual real estate symposium snowmass village colorado

23rd AnnualReal Estate SymposiumSnowmass Village, Colorado

The New Rules for EnvironmentalAssessments in Real Estate TransactionsbyJohn R. JacusDavis Graham & Stubbs LLPJuly 30, 2005

small business liability relief and brownfields revitalization act of 2002
Small Business Liability Relief andBrownfields Revitalization Act of 2002
  • Additional CERCLA defenses established
  • Made EPA create a federal standard for “all appropriate inquiry” in ESAs
  • EPA initiated a negotiated rulemaking which led to a proposed rule, published at 69 Fed. Reg. 52542 (August 26, 2004)
  • Final Rule expected by end of 2005
the aai rule
The AAI Rule
  • Substantially alters the conduct of ESAs
  • Affects eligibility for new CERCLA defenses
  • Creates unprecedented “continuing obligations” for owners to retain their defenses
presentation overview
Presentation Overview
  • Compares AAI to current practice
  • Reviews the expanded defenses and criteria for eligibility
  • Reviews proposed revisions to ESA standards and procedures
  • Notes key issues and practice pointers to avoid common pitfalls
esa definition purpose
ESA Definition & Purpose
  • Systematic evaluation of property
  • To determine contamination/other conditions
  • that can create liability, remedial obligations, development restrictions, unanticipated costs and delays.
  • Ouch.
phase 1 esas
Phase 1 ESAs
  • ASTM Standard Practice E 1527-00, most common, a minimum Phase 1
  • Created to satisfy “all appropriate inquiry” standard and invoke “innocent purchaser” defense in SARA amendments of 1986
  • ASTM-equivalent Phase 1 ESAs routinely required by lenders, buyers, etc.
astm phase 1 esas
ASTM Phase 1 ESAs
  • Looks at past ownership and uses of property in a checklist approach
  • To identify “recognized environmental conditions,” or hopefully, their absence.
  • Unless modified, it is limited to CERCLA hazardous substances and petroleum only
items not covered by astm
Items Not Covered by ASTM
  • Wetlands and endangered species
  • Cultural & historic resources
  • Regulatory compliance
  • Industrial hygiene/health & safety
  • Asbestos & Radon
  • Lead-based paint/lead in water systems
  • Indoor air quality
astm phase 1 coverage
ASTM Phase 1 Coverage
  • Includes petroleum
  • Draft Standard Practice E 1527 for 2005 to include mold
  • Buyer/User of ASTM Standard Practice must request add-ons, determine if sampling (Phase 2) is warranted, etc.
  • Be aware of other standards, e.g., for raw land, agricultural lands
why perform esas
Why Perform ESAs?
  • CERCLA liability defenses
  • Lender requirements
  • Insurer requirements
  • Brownfields funding requirements
  • Seller evaluation of sale potential
  • Avoid delays and restrictions (later on)
  • Protect Buyer’s interests
you need to understand esas
You Need to Understand ESAs

Because you…

  • Are on the Front Lines
  • Contract for ESAs
  • Control timing of deal (?)
  • Are in the best position to know proper scope of ESA to meet the client’s needs; and
  • Lenders/insurers/investors will require them.
current practice astm phase 1
Current Practice: ASTM Phase 1
  • CERCLA’s broad liability net prompted need for an “innocent purchaser” defense
  • SARA amendments to CERCLA created it
  • Defense requires that owner show it “had no reason to know” of hazardous substances by
    • Having made “all appropriate inquiry”
    • Prior to or at time of acquisition
    • Into previous ownership & uses of property
    • Consistent with good commercial or customary practice to minimize liability
astm phase 1 standard
ASTM Phase 1 Standard
  • To satisfy original AAI, developed requirements and procedures for:
    • Site public records review
    • Interviews
    • Site inspections
    • Identifying Recognized Environmental Conditions
    • What comprises Final Phase 1 Report
astm a checklist approach
ASTM a Checklist Approach
  • Series of questions about the property
  • Answered in light of information gathered
  • Answers which tend to indicate a non-de minimis Recognized Environmental Condition elevate the inquiry
    • Phase 2 sampling & analysis
    • Reporting and remediation, etc.
2002 brownfields amendments
2002 Brownfields Amendments
  • Expanded CERCLA defenses to:
    • Amend innocent landowner defense
    • Add bona fide prospective purchaser defense
    • Add contiguous property owner defense
amended innocent landowner defense
Amended Innocent Landowner Defense
  • Must demonstrate that:
    • Did not know and “had no reason to know” of contamination prior to purchase
    • Acquired property after all disposal of hazardous substances
    • Satisfied AAI and “continuing obligations” (new)
bona fide prospective purchaser defense
Bona Fide Prospective Purchaser Defense
  • May purchase property with knowledge of contamination, but must show:
    • Purchase occurred after January 11, 2003
    • Acquired property after disposal of hazardous substances, and
    • Satisfied AAI and “continuing obligations”
contiguous property owner defense
Contiguous Property Owner Defense
  • Must demonstrate that:
    • Had no knowledge of contamination prior to acquisition (if this not possible, BFP defense still a possibility), and
    • Satisfy AAI and “continuing obligations”
  • Statutory language attached at Appendix 2
aai s statutory criteria
AAI’s Statutory Criteria
  • All of the Federal Brownfields Law’s new or expanded defenses are subject to 10 criteria specified in the Act.
  • They are:
    • Inquiry by environmental professional
    • Interviews of present and past owners/operators/occupants
    • Review of historical sources
ten criteria cont
Ten Criteria (cont.)
  • Review of governmental records (may incl. local)
  • Search for clean-up liens
  • Visual inspection of property, adjoining parcels
  • Account for “specialized knowledge” of acquirer
  • Relationship of price to value uncontaminated
  • Consider commonly known/reasonably ascertainable information, and
  • Degree of obviousness of likely contamination, ability to discover by investigation
aai defined 3 ways
AAI: Defined 3 Ways
  • For properties acquired before May 31, 1997, prior CERCLA factors and case law applies
  • If purchased on or after 5-31-97, ASTM Standard Practice E 1527 (Phase 1) applies as interim standard, until
  • EPA promulgates AAI Rule with 10 criteria, which then applies.
additional requirements of aai rule as proposed
Additional Requirementsof AAI Rule as Proposed
  • Must meet certain threshold criteria, and
  • Must satisfy certain continuing obligations not previously imposed on owners, if defenses are to be and remain available.
threshold criteria
Threshold Criteria:
  • No affiliation with the party liable for the contamination
  • Conducting “all appropriate inquiries” prior to the acquisition into prior uses and condition of the property, and
  • Duly reporting any detected hazardous substance release.
continuing obligations
Continuing Obligations:
  • Complying with land use restrictions
  • Not impeding effectiveness of institutional controls
  • Providing cooperation, assistance and access to EPA and state agencies with CERCLA authority
  • Complying with CERCLA information requests
continuing obligations cont
Continuing Obligations (cont.)
  • Taking reasonable steps to:
    • Stop continuing releases
    • Prevent future releases, and
    • Prevent or limit human or natural resource exposure (not defined).
some key aai rule issues
Some Key AAI Rule Issues
  • Who is a Qualified Environmental Professional?
  • Addressing Data Gaps
  • Obviousness/Ability to Detect Contamination through AAI
  • Comparing Price to Value Absent Contamination
  • Interviews
  • Use of Prior Assessments
  • Reporting Discovered Releases
who is a qualified environmental professional
Who is a Qualified Environmental Professional?
  • P.E. or P.G. plus 3 years full-time relevant experience
  • Government-certified for ESAs plus 3 years experience
  • B.S. in Eng’g, Env. Science or Earth Science plus 5 years experience
  • Other bachelor’s degree plus 10 years exp.
addressing data gaps
Addressing Data Gaps
  • Missing documentation or suggested but unconfirmed contamination
  • AAI Rule requires EPs to identify these gaps
  • Some commenters suggest a Phase 2 should always follow identification of such a gap
obviousness ability to detect contamination through aai
Obviousness/Ability to Detect Contamination through AAI
  • Requires evaluation of property information in its totality
  • To ascertain possible releases
  • Does not require sampling per se
  • EP must opine on need for additional investigation – lots of discretion.
comparing price to value absent contamination
Comparing Price to Value Absent Contamination
  • Some commenters oppose this requirement
  • Statute requires this consideration
  • Some commenters want formal appraisal
  • EPA not decided until final rule
interviews
Interviews
  • Current owner and occupant
  • To extent necessary, current and past facility managers, past owners, occupants or operators and their employees
  • For abandoned properties, owners or occupants of neighboring, nearby parcels
  • Local officials only if satisfying “commonly known/reasonably ascertainable requirement
use of prior assessments
Use of Prior Assessments
  • Previous ESAs in compliance with rules in effect at the time may be considered if:
    • Information collected/updated within 1 yr. of purchase
    • Certain info. (interviews, lien searches, government records review, inspections and EP declarations) must be obtained/updated within 6 mos.
    • Info. updated to include changes in conditions, specialized knowledge/experience, price and commonly known/reasonably ascertainable information
    • ESA for 3rd party special knowledge, price and commonly known/reasonably ascertainable info. added
reporting discovered releases
Reporting Discovered Releases
  • Required for expanded defenses
  • Often unclear what is prior release
  • Some reporting on very short fuse, requires RQ determination, possibly sampling, etc.
  • Confidentiality expectations at odds
  • Have access to help in making these determinations quickly
selecting an ep
Selecting an EP
  • Choice should reflect need for experience, professional judgment
  • Also should consider:
    • E&O coverage in addition to general liability?
    • Claim limits of $1 million plus?
    • Issued by A-rated carrier?
    • Can supply 5 or more solid references?
    • Provides a sample report?
final rule by end of 2005
Final Rule by end of 2005
  • Know what you’re getting in an ESA
  • Hire qualified EP familiar with ASTM & AAI Rule
  • Allow adequate time for ESA & don’t count on using prior ESAs
  • Don’t stop short of AAI
  • Be mindful of reporting obligations
  • Document post-ESA reasonable steps and continuing obligations
questions
Questions?

Call, fax or email me at

  • Ph. 303-892-7305
  • Fax 303-893-1379
  • Email john.jacus@dgslaw.com