Transcript Document

23rd 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
• 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
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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?
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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…
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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
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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:
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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.)
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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 Requirements
of 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
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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:
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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 [email protected]