March 2011

Phase I environmental assessments have become the norm in virtually any commercial or industrial property transaction.  Almost any financial institution will require a Phase I report prior to agreeing to finance a transaction.  

In this regard, Phase I’s have become a commodity- A box that needs to checked off before a deal can go through.  But buyer beware, beyond securing your financing you may not truly know the condition of your property.  Or even worse, you may not secure the legal protections from environmental liability you intended by procuring your Phase I.

A recent U.S. EPA study evaluated the quality of 35 Phase I reports that were performed on brownfields in connection with federal grant funding.  The Phase I reports were evaluated against basic requirements necessary to secure protections under the "All Appropriate Inquiries Rules (AAI)" (a shield from CERCLA liability for innocent purchasers).

"All Appropriate Inquiries"

Under federal law, in order to establish a shield from liability under CERCLA, a purchaser must, prior to the date of acquisition, perform "all appropriate inquiries" into ownership and uses of the property.  In 2005, U.S. EPA finalized its rule establishing mandatory standards for conducting AAI to secure liability protection.

IG Evaluates 35 Phase I’s

In the study, the Inspector General evaluated the 35 Phase I reports to see if they met the required elements of the AAI rule.  Not one of the reports met the U.S. EPA required elements (or alternative ASTM standard).  Worse yet, the missing components were simply formalistic elements necessary for a Phase I to meet U.S. EPA standards.  They did not evaluate the professional judgments in the reports which would be more prone to varying opinion.  Aspects evaluated included:

  1. Environmental Professional Qualification Statement- U.S. EPA AAI rule requires a boiler plate statement to be included in the report that the consultant meets the standards to be considered an environmental professional. 
  2. Signature-  The environmental professional who responsible for the assessment must sign the report. 
  3. Data Gaps-  The professional must identify any data gaps that may have impacted their ability to identify whether conditions at the property indicate a release or potential release occurred at the site.
  4. Opinion Statement-  The report must include a conclusion section that summarizes all "recognized environmental conditions" at the property.  Any areas where there were conditions identified on the property which indicate a release or potential release occurred.

In the opinion of the Inspector General, not a single one of the 35 reports evaluated adhered to all of the requirements set forth above. 

The report is another example of the risks associated with hiring an environmental consultant to perform a Phase I.  From my discussions banks don’t often evaluate the quality of the consultant or even whether the report meets the ASTM or EPA rule requirements. 

What are the risks to the future property owners in the transaction?  The Inspector General summarized the risks as follows:

Improper AAI investigations introduce risk that the environmental conditions of a property have not been properly or adequately assessed. Consequently, decisions about appropriate uses of redeveloped or reused brownfields properties may be based on improper assessments. Ultimately, threats to human health and the environment could go unrecognized.

Beyond the risks of the unknown conditions, you also could be jeopardizing the legal protections available under the AAI rule.  The rule is very specific in mandating an ASTM or EPA regulatory compliant Phase I assessment before the legal liability protections kick in.  Years later, when an issue arises, you may find you have no shield from liability due to an inadequate Phase I.

Recommendations:

  • If you want a true evaluation of the conditions of the property hire a quality environmental consultant.  Avoid consultants who are simply churning Phase I’s to move deals forward.  Low ball pricing can often be a red flag regarding the quality of the report.
  • Review the Phase I for compliance with standards to secure liability protections.

Continue Reading Questions Persist Regarding the Quality of Environmental Assessment

The U.S. Supreme Court issued two landmark decisions, Rapanos and SWANCC, which interpret the extent of federal jurisdiction under the Clean Water Act.  Since these decisions were issued the Army Corps of Engineers as well as Courts have had difficulty applying the tests for determining federal jurisdiction in a consistent and coherent manner.

The Army Corps