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 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 • Substantially alters the conduct of ESAs • Affects eligibility for new CERCLA defenses • Creates unprecedented “continuing obligations” for owners to retain their defenses
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 • 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 • 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 • 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 • 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 • 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? • 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 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 • 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 • 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 • 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 • Expanded CERCLA defenses to: • Amend innocent landowner defense • Add bona fide prospective purchaser defense • Add contiguous property owner 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 • 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 • 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 • 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.) • 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 • 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 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: • 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: • 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.) • 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 • 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? • 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 • 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 • 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 • Some commenters oppose this requirement • Statute requires this consideration • Some commenters want formal appraisal • EPA not decided until final rule
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 • 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 • 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 • 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 • 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? Call, fax or email me at • Ph. 303-892-7305 • Fax 303-893-1379 • Email firstname.lastname@example.org