What does it mean for commercial real estate transactions?
In late 2021, ASTM International revised its standard for conducting Phase I environmental site assessments (ESAs), a change that will affect most commercial real estate transactions. First published in 1993, the standard, officially known as ASTM E1527, is revised every eight years to ensure that it continues to reflect the current best practices for conducting ESAs.
The Importance of a Comprehensive ESA
Conducting an appropriate ESA, commonly known as a “Phase I,” is critical to most CRE transactions. Owners of contaminated properties can be subject to environmental liability under federal and state law. For example, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as the Superfund law, imposes strict liability on a current owner for any environmental contamination found on a property. A current owner of a contaminated property can be forced to clean it up even if they did not cause the contamination. Additionally, owners of contaminated properties can face indemnity provisions in leases, purchase and sale agreements, and loan agreements.
An ESA serves two primary purposes. First, it helps the purchaser determine whether there are any potential environmental issues with a property that might require further site assessment, such as testing the soil, soil vapor or groundwater. Second, purchasers seeking to avoid Superfund liability must comply with the statute’s “all appropriate inquiries” requirement before the acquisition date to qualify for one of CERCLA’s few statutory defenses, such as those for bona fide prospective purchasers, innocent landowners and contiguous property owners. Fortunately, the standard provides guidance to ensure that environmental professionals conduct appropriate and consistent ESAs.
In addition to potential environmental liability, owners of contaminated properties may face difficulty refinancing or reselling the property in the future. Future redevelopment may also be challenging. For example, an environmentally impacted property may be restricted to industrial or commercial use unless remediated to residential standards.
Key Changes in the 2021 Standard
While the 2021 standard includes many of the same provisions as the 2013 standard, there are some important differences.
Key terminology revisions and additions. The primary goal of an ESA is to determine whether there are any Recognized Environmental Conditions, or RECs, at a property. A REC refers to the presence or likely presence of any hazardous substances or petroleum products at a property. The identification of RECs typically triggers a recommendation by the consultant for further site assessment.
The 2021 standard clarifies the definition of RECs, including other types of RECs such as Controlled Recognized Environmental Conditions (CRECs), which are RECs that have been addressed to some degree, and Historical Recognized Environmental Conditions (HRECs), which are RECs that have been addressed to the satisfaction of regulatory authorities and are not subject to any controls. This reduces the possible misclassification of known or likely hazardous materials and petroleum products affecting properties. A new appendix provides useful guidance regarding REC, HREC and CREC classification, as well as an updated discussion of business environmental risks (a risk that may impact the planned use of commercial real estate but is outside the scope of the standard).
ASTM International also added formal definitions for Property Use Limitation and Significant Date Gap to provide clarification of these concepts. According to the standard, a Property Use Limitation is a “limitation or restriction on current or future use of a property in connection with a response to a release, in accordance with the applicable regulatory authority or authorities that allows hazardous substances or petroleum products to remain in place at concentrations exceeding unrestricted use criteria.” A Significant Data Gap is “a data gap that affects the ability of the environmental professional to identify a recognized environmental condition.”
The new standard also identifies PFAS (per- and polyfluoroalkyl substances) as an “emerging contaminant” that may be evaluated as a business environmental risk. It’s an acknowledgment of growing concern and regulation of PFAS. According to the U.S. Environmental Protection Agency (EPA), “PFAS are widely used, long-lasting chemicals, components of which break down very slowly over time.” EPA has taken steps toward the regulation of PFAS. Once designated by EPA as a hazardous substance, PFAS analysis will be a required aspect of “all appropriate inquiries.”
These revisions should increase consistency between Phase I reports prepared by different environmental professionals and provide additional useful information in those reports to potential property purchasers.
More robust historical research requirements. The 2021 standard imposes more stringent requirements for the review of historical records. The 2013 standard partially left the scope of the historical records review to the discretion of the environmental professional performing the ESA. The 2021 standard requires the environmental professional to review, at a minimum, these four historical sources for both the subject property and any adjoining properties — aerial photographs, fire insurance maps, local street directories and historical topographic maps.
The 2021 standard also includes retail uses with industrial or manufacturing uses to address the possibility of dry-cleaning operations at a retail location. Dry cleaners are a major source of contamination because they use many volatile, long-lasting chemicals.
These and other record-review requirements could increase the scope of work for an ESA depending on the location of the subject property (e.g., rural vs. urban) and types of adjoining properties (e.g., commercial/industrial vs. residential).
A potentially shorter shelf life for the Phase I report. Like the 2013 standard, the 2021 standard states that the Phase I report is viable if completed no more than 180 days prior to the date of acquisition. That timeline could be extended up to one year if certain aspects of the report are updated, such as interviews, environmental lien searches, review of government records, site reconnaissance and the declaration of the environmental professional preparing the report.
However, in contrast to the 2013 standard, the 2021 update requires the report to include the dates that each of these components were completed and determines the 180-day and one-year period based on these completion dates. This will lead to a significant shortening of the viability of a Phase I report. In the past, the report “expiration” was based on the date of the final report. Prospective purchasers with extended diligence periods may be required to update components of the Phase I report prior to property acquisition to comply with the 2021 standard.
Wrapping It All Up
Using the 2021 standard may ultimately result in different findings of RECs due to the revised definitions.
It may also increase the cost and time to prepare the Phase I report. The shorter shelf life of the Phase I report under the 2021 standard may also affect the viability of the Phase I report.
As of this writing, the EPA has not adopted the new standard, but the agency will likely approve it later this year.