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GeoInsighter Spring/Summer 2005 Newsletter

AAI: The Changing Face of Environmental Site Assessments

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Performing due diligence through environmental site assessments (ESAs) has become an integral part of business for many lenders, developers, and anyone involved in the sale or purchase of commercial and industrial real estate.  For many years, American Society of Testing and Materials (ASTM) E1527 Standard Practice for Environmental Site Assessment: Phase I Environmental Site Assessment Process and its revisions (E1527-93, E1527-97, and E1527-00, the most current) have been the accepted standard by which due diligence is conducted. 

This foundation is about to change.  The 2002 Federal Brownfields Law and the publishing of the proposed All Appropriate Inquiries (AAI) standard in the Federal Register will change the face of due diligence and Phase I ESAs as we now know them.   

Brownfields Law
The AAI standard had its genesis on January 11, 2002 when President Bush signed the Small Business Liability Relief and Revitalization Act (the Brownfields Law).  In general, the Brownfields Law amends the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and provides funds to assess and cleanup Brownfields sites, clarifies CERCLA liability provisions for certain landowners, and provides funding to enhance State and Tribal cleanup programs.   

The Brownfields Law revises some of the provisions of CERCLA by clarifying the requirements necessary to establish the innocent landowner defense and providing additional means to limit CERCLA liability.  Parties who seek to qualify for the exemptions and limitations to CERCLA liability provided in the Brownfields Law must undertake “all appropriate inquiry” into prior ownership and use of the property at the time of acquisition.  CERCLA liability protection afforded by the Brownfields Law includes the following. 

Innocent Landowner Defense.  Innocent purchasers and landowners must perform all appropriate inquiry prior to purchase of a property and must buy without knowing, or having reason to know, of contamination on the property.

Contiguous Property Owner Exemption.  Contiguous property owners whose property is not the source of the contamination, but is contiguous to a facility that is the source of contamination found on their property must perform all appropriate inquiry prior to purchase and buy without knowing, or having reason to know, of contamination on the property being purchased.

Bona Fide Prospective Purchaser Exemption.  Bona fide prospective purchasers who buy property after January 11, 2002 must perform all appropriate inquiry prior to purchase and may buy knowing, or having reason to know, of contamination on the property while still qualifying for the limitation on liability provided by the new definition.  

All Appropriate Inquiry
As part of the Brownfields Law, Congress directed the United States Environmental Protection Agency (USEPA) to establish, by regulation, standards and practices for conducting all appropriate inquiries. 

 The USEPA's Proposed Rule: Standards and Practices for AAIs was signed by the USEPA Administrator and published in the Federal Register on August 26, 2004.  The proposed rule established specific regulatory requirements for conducting all appropriate inquiry into the previous ownership, uses, and environmental conditions of a property for the purpose of qualifying for the revised limitations to CERCLA liability provided by the Brownfields Law.

 It should also be noted that the proposed AAI standard applies to all properties, not just commercial properties, where the purchaser wishes to qualify for CERCLA liability limitations. 

 AAI vs. ASTM E1527

The proposed AAI standard is very similar to the familiar ASTM E1527 standard.  However, the proposed rule differs from ASTM E1527 in a number of ways, including: 

·         providing specific requirements as to who is qualified to perform inquiries by defining the “Environmental Professional;”

·         a greater degree of reliance on the environmental professional’s judgment as opposed to the more prescriptive approach of the ASTM standard;

·         requiring identification of data gaps, descriptions as to how to resolve such gaps, and whether or not such gaps prohibit a determination of conditions indicative of a release or threatened releases of hazardous substances;

·         specifically requiring the inclusion of an affirmative declaration in the written AAI report regarding the environmental professional’s credentials and qualifications;

·         conducting interviews with past, as well as present, property owners, or in the event of a property that is vacant, conducting one or more interviews with the owners or occupants of adjacent parcels;

·         the environmental professional must render an opinion on whether the purchase price of the property reasonably reflects the fair market value of the property and, if it does not, determine whether the difference is due to the presence of releases or threatened releases of hazardous substances;

·         documentation of the degree of obviousness of the presence or likely presence of releases or threatened releases of hazardous substances at the property, and the ability to detect such releases or threatened releases by appropriate investigation; and

·         modification of some of the standard search radii for environmental database reviews and the inclusion of additional databases and searches for recorded environmental cleanup liens.

 What Does This All Mean?

Some of the requirements of the proposed AAI standard, including the definition of the environmental professional and the overall increase in the level of documentation that will now be required, are above and beyond what has been required by ASTM E1527.  Adoption of the AAI standard, as it is currently proposed, will likely impact the industry in a number of ways including: 

·         time - the additional requirements will almost certainly extend the time it takes to complete due diligence;

·         cost - the increased effort necessary to perform AAI and the limitations placed on who may perform it will raise the cost of a typical Phase I or AAI report; and

·         additional investigation/research - the requirement to identify data gaps and the necessary inclusion of recommendations to close the gaps will likely result in the need to perform intrusive investigative activities (e.g., sampling) or additional research such as a legal title search or review of other historical ownership records to establish protection from CERCLA liability. 

Until the final version of the AAI standard is published, the interim standard set by Congress and clarified by the USEPA is ASTM E1527-00 (and E1527-97).   

Because ASTM E1527-00 (and E1527-97) has been set by Congress and the USEPA as the only interim standard for meeting the AAI criteria, ASTM E1528 (the Transaction Screen standard) does not meet the criteria for satisfying AAI.  Therefore, a Transaction Screen is not adequate to meet the due diligence requirements of the Brownfields Law and, thus, will not qualify the user for any of the protections from CERCLA liability. 

The proposed rule is just that, proposed.  It has not yet been finalized.  The original comment period was due to expire on October 25, 2004, but was extended to November 30, 2004.  The public comment period has since been closed, and the USEPA is currently in the process of reviewing the comments that have been received.  The USEPA anticipates the final AAI rule will be published by the end of calendar year 2005.

Richard T. Gille
rtgille@geoinc.com

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