BUILD Act- Federal Brownfield Legislation Includes Major New Liability Protections

Congress does not often pass environmental legislation, so the passage of the Brownfields Utilization, Investment, and Local Development Act (BUILD Act) is noteworthy.  While the amount of federal funds available will still be far less than needed to move the needle, there are important changes to the law that will help facilitate brownfield redevelopment.  The most notable of these changes include:

  1. Protections for Local Governments-  Local governments will no longer trigger CERCLA liability as "owners or operators" by simply taking title to property through law enforcement activity, seizures, bankruptcy, tax delinquency, or other circumstances.  The big change is that the BUILD act removed the term "involuntary" as a qualifier for local government protection from CERCLA liability if it takes ownership of contaminated property.  This allows local government to be more proactive in taking ownership of brownfield to promote redevelopment without triggering CERCLA liability.  
  2. Extends Bona Fide Purchaser Defense (BFPD) to Tenants- U.S. EPA has used enforcement discretion to extend BFPD to tenants.  The BUILD Act now formalizes that protection into the law. 
  3. More Money- The Act more than doubles funding available up to $200 million each fiscal year through 2023 and additional $50 million per year for state response program funding;
  4. Expanded Eligibility-  Certain nonprofit organizations, limited liability corporations, limited partnerships and community development entities are now eligible to receive grant funding;
  5. Increases the Funding Limit-  Max grants were raised from $200,000 to $500,000;
  6. Eligibility of Administrative Costs- up to 5% of a grant can be used for administrative costs, not including investigation or identification of site, design and performance of response action, or monitoring of a natural response;
  7. Petroleum Contaminated Site-  Sites with petroleum contamination are eligible when there is no viable responsible property;
  8. Prioritizes "Clean Energy" and Waterfront Projects-  Projects that involve clean energy or are located on the waterfront will receive more points when scoring applications thereby prioritizing these projects.

While each of the improvements have benefits, the most significant are the expanded liability protections for local governments and tenants.  Allowing cities to proactively target and acquire property without fear of CERCLA liability is a major development that will help facilitate redevelopment.

 

What Ohio Can Learn from the New Kansas Brownfield Law

In my four part blog post series- Rethinking Brownfield Redevelopment in Ohio- the final post advocated for a new Ohio liability protection law for buyers of contaminated property.  The new law would provide brownfield redevelopers liability protection faster and at a lower cost than the current Ohio Voluntary Action Program (VAP).

I suggested looking to Michigan's Baseline Environmental Assessment (BEA) law for guidance on how to set up such a program.  Well Kansas has recently passed a new law that provides a second example.  

On May 9, 2016, the Contaminated Property Redevelopment Act (S.B. 227) was signed into law by Kansas Governor Sam Brownback.  Similar to the Michigan BEA, the new law provides buyers of contaminated property liability protection under certain conditions. Those conditions include:

  • The Buyer cannot have caused or contributed to the pre-existing contamination on the property;
  • The Buyer cannot exacerbate pre-existing contamination on the property either through redevelopment or other activities;
  • Buyer must request liability protection from the Kansas Department of Health ("Kansas DHE") and Environment by applying for a Certificate of Environmental Liability Release ("CELR");
  • The Application for a CELR must include a Phase I or Phase I/Phase II assessment report or other reports requested by Kansas DHE that demonstrate the property was adequately assessed; and
  • The Buyer must provide notice to future purchasers of the existence of the CELR and notify Kansas DHE upon transfer of the property.

What is interesting is that the new law does not affirmatively require the Kansas DHE to make a finding that buyer has taken appropriate steps to address immediate environmental threats or public health risks similar to the "reasonable steps" requirement under U.S. EPA's Bona Fide Purchaser Defense.

A fee is charged by the Kansas DHE to review CELR applications.  Those fees are placed into the Contaminated Property Redevelopment Fund to assist municipalities with brownfield redevelopment.

Kansas provides another example of an enhanced Bona Fide Purchaser Defense at the State level that will likely accelerate brownfield redevelopment. 
 

Rethinking Brownfield Redevelopment in Ohio: Part 4 of 4

This is the final post discussing the current state of brownfield redevelopment in Ohio.  It provides suggested changes to the regulations and incentives in Ohio to accelerate brownfield redevelopment. The prior posts in this series discussed the following:

  1. The Issues Presented by Brownfields- In particular the impact to Urban Centers
  2. The Current State of Brownfield Redevelopment in Ohio-  Including the issues of urban sprawl and the number of brownfield sites in Ohio.
  3. Progress made in Addressing Brownfields in the Twenty Years Since Ohio's Voluntary Action Program was Adopted

As discussed in these prior posts, Ohio needs to accelerate brownfield redevelopment in Ohio.  So how does that occur?  

  • Need to be Faster- The ability to address the environmental, public health and liability risks presented by brownfield properties needs to occur much faster.  A cleanup under Ohio's Voluntary Action Program (VAP) can take anywhere from 1, 2, 3 or even more years to complete.  
  • Need Lower Costs to Redevelop Brownfields-  According to the Cleveland Department of Economic Development the per acre are significant.  These costs push businesses to consider greenfield sites
    • On average it can cost $13,000 per acre to perform sampling to determine how contaminated a brownfield site may be
    • It can cost on average $66,000 per acre to remediate a brownfield site
    • Brownfield redevelopment projects currently require a minimum of 32 -35% in public subsidies 
  • Effectively Address Liability-  VAP can be effective but takes too long and costs too much. The Bona Fide Purchaser Defense under CERCLA provides no regulatory sign-off that due diligence and cleanup were adequate.
  • Broad Based Incentives-  Current incentive programs require creation of jobs or specific types of redevelopment such as manufacturing.  More value needs to be placed on simply returning idle property to productive use.
  • Cleanup Grants should Target Public Health or Catalyst Projects-  Some portion of brownfield funding should be used to address highly contaminated sites that present public health risks to local communities or catalyst projects that may attract more development.

Rethinking Ohio's Incentive Programs

The first major hurdle to a brownfield redevelopment project is the unknown cost of cleanup.  Therefore, a large portion of incentives need to fund assessment activities.  

Ohio should drop the complicated VAP automatic tax abatement.  There are too many implementation issues (discussed in the prior posts) and the abatement does not cover new structures.  In its place, Ohio should adopt a brownfield based tax credit program that allows developers to take assessment and cleanup costs as a tax credit.  Such a credit would start to even the playing field between brownfield and greenfield sites.

Rethinking Ohio's Tools to Address Environmental Liability

The VAP should remain in place with an effort to reduce the current complexity of Ohio's primary brownfield cleanup program.  The VAP is a very good program for full assessment and cleanup of a property.  However, full assessment and cleanup isn't always necessary to put property back into productive use.  

U.S. EPA's Bona Fide Purchaser Defense under CERCLA does not require a complete Phase II assessment or full remediation.  Under the program, a buyer must take "reasonable steps" to address any threats to public health or the environment.  Reasonable steps is far less than full remediation of soil and ground water.  It typically means preventing ongoing release and eliminating complete pathways for human health exposures.  Such flexibility dramatically lowers to the cost of redevelopment.

The major issue with the BPFD is that it is a legal defense with no regulatory review or sign-off.  Some purchasers are comfortable with no oversight.  However, many would prefer the comfort of knowing their assessment and cleanup strategies received regulatory sign-off.

Ohio should adopt a State version of the BFPD that includes some level of regulatory oversight.  A similar program was adopted in Michigan- Baseline Environmental Assessments (BEAs).  While Michigan's program could be improved, it has greatly accelerated brownfield redevelopment. 

According to figures provided by Joe Berlin, BLDI Environmental Engineering, here is a comparison between the Michigan BEA and Ohio VAP Programs:

  • Michigan BEA
    • 1995-2015 there has been 20,634 BEAs completed
    • Average of 1,032 per year
  • Ohio VAP Covenant-Not-to-Sue (CNS)
    • 1995-2015 there has been 527 CNS issued
    • Average of 26 per year

The proof is in the numbers.  Maybe its time Ohio look to its neighbor up north for new ideas to accelerate brownfield redevelopment.

Rethinking Brownfield Redevelopment in Ohio- Part 3 of 4

This is the third post in a series of four assessing the current state of brownfield redevelopment in the State of Ohio.  This third post will evaluate the progress Ohio has made in the last twenty years with regard to addressing brownfields.

Current Options for Addressing Environmental Liability 

As discussed extensively in the prior posts in this series, environmental liability concerns are a major disincentive for brownfield redevelopment versus greenfield development.  Many different federal and state environmental statutes can impose liability on owners of property: RCRA (hazardous waste and petroleum contamination); TSCA (PCBs), Clean Water Act (runoff, sediment, wetlands), and other federal or state statutes.

However, the law that imposes the most far reaching liability for environmental contamination is CERCLA (Superfund) which imposes joint and several liability on buyers of contaminated property. Under CERCLA, a new owner of property can have liability for preexisting contamination regardless of whether they performed activities that created the contamination.  

CERCLA's broad liability provisions act as a major deterrent to brownfield redevelopment. Ohio utilizes two principal mechanisms to address the risk associated with CERCLA legal liability:

  1. Voluntary Action Program (VAP)-  Adopted in 1996 to provide greater flexibility in cleaning up brownfield properties.  The VAP has been very successful.  No question the program provided greater and more cost effective cleanup options for brownfield properties. As detailed below, the VAP has been utilized to cleanup hundreds of brownfield properties. VAP cleanup standards are regularly referenced during due diligence as a means of evaluating environmental liability.  In fact, some developers or owners perform limited cleanups using VAP standards without seeking Ohio EPA's concurrence the cleanup was sufficient.   
  2. Bona Fide Purchaser Defense (BFPD) (i.e. "All Appropriate Inquiries" under CERCLA)-   In 2002, Congress created the Bona Fide Purchaser Defense to encourage brownfield redevelopment.  EPA adopted the "All Appropriate Inquiry" rule which established a mandatory level of environmental due diligence a buyer must perform to qualify for the liability defense.  If due diligence identifies ongoing releases or risks to human health, the buyer must take "reasonable" steps to address those issues.  However, a buyer does not need to perform a full cleanup of the property to qualify for the defense.

Issues with VAP 

Twenty years ago the VAP was considered groundbreaking.  The program allowed privatized cleanups where the company/developer's consultant completed the cleanup and submitted a No Further Action (NFA) after the cleanup was completed.  Ohio EPA reviews the NFA and, if the property meets VAP standards, the Agency will issue a legal release (i.e. Covenant-Not-to-Sue or CNS).

While the VAP provides a lower cost alternative to perform a full investigation and cleanup, the program has been underutilized.  Here are some of the reasons why:

  • Slow Process- Many real estate deals need to be completed in a few months or even shorter.  It can take 90 to 180 days just to complete the VAP investigation of the property (i.e. Phase II assessment).  A full cleanup can take one, two, three or even more years to complete.
  • Costs-  Twenty years ago the program was championed as a lower cost alternative to traditional CERCLA cleanups.  However, the cost to take property through the VAP can still be very high.  It can cost $100,000 to $200,000 for a VAP Phase II alone.  Full cleanup can cost hundreds of thousands to millions of dollars.  These costs act as a strong deterrent to entering the VAP program.
  • Complexity-  The VAP program is highly complex.  There are around ninety guidance documents alone in addition to nearly one hundred pages of rules.  

Issues with BFPD

The Bona Fide Purchaser Defense (BFPD) has been in place for a little over a decade.  The advantages of the BFPD is that is much faster and cheaper than the VAP.  In many transactions, the Phase I assessment by itself is enough to establish the BFPD if no problems are identified (i.e. a "Clean" Phase I). Even if Phase II sampling is needed, sampling can be completed in 30-60 days at a much lower cost than a full VAP Phase II.  However, the BFPD has its own set of issues: 

  • No Sign Off by Regulators-  Some like that sampling and cleanup plans do not need to be reviewed by regulators to qualify for the defense.  However, without review there is no assurance to the buyer that they qualify for the defense.  In fact, a property owner cannot even voluntarily submit sampling and cleanup plans for concurrence.  As a result, property owners only find out if the sampling or cleanup was sufficient if it stands up in court.
  • No Public Disclosure-  Mandatory disclosure laws act as a strong deterrent to completing transactions involving contaminated properties.  However, providing incentives to voluntarily disclose the results of due diligence can create more public information regarding the condition of properties. 

Current Ohio Brownfield Incentives

Paying for sampling and cleanup of brownfield properties is expensive.  As discussed in prior posts, these costs push companies to consider greenfields over brownfields.  To offset these costs and attract companies and developer to brownfield properties, Ohio has a variety of incentives available. Those programs include:

Brownfield Grants and Loans Tax Incentives

Former Clean Ohio Program

  • No Longer Active
  • Up to $300,000 Phase II grant
  • Up to $3 million cleanup grants
Ohio Historic Preservation Tax Credit

JobsOhio Revitalization Program

  • Up to $200,000 Phase II grant
  • Up to $1 million 
New Market Tax Credit
County and Municipal Grant & Loan Programs VAP Automatic Tax Credit (R.C. 5709.87)

 Issues with Grant/Loans/Tax Incentives

  • JobsOhio Revitalization Program targets a limited number of projects.  Certain brownfield redevelopment projects cannot even qualify for funding, such as retail or residential.  This narrows the range of possible projects on brownfield sites that can offset investigation and cleanup costs
  • Insufficient Funding-  Cleanup grant funding at both the state and local level is capped at around $1 million.  While this amount of grant funding may be adequate for a number of projects, more contaminated properties will not attract sufficient funding to offset cleanup costs.
  • VAP Automatic Tax Abatement-  While this is the primary brownfield tax incentive, issues with its scope and implementation are well documented in prior blog posts.  One of the biggest issues is that it doesn't cover new structures.  It also assumes property valuations already account for contamination.

Ohio's Scorecard on Brownfield Redevelopment

Let's review the number of VAP projects completed and incentives utilized to leverage brownfield redevelopment.

VAP Cleanups Completed 1995-2015

659 NFA's submitted to Ohio EPA 

132 withdrawn, denied, revoked or pending

527 VAP Covenants-Not-to-Sue have been issued

 

Clean Ohio (2001-2012)

Clean Ohio was the primary brownfield grant program in Ohio for over a decade.  More data is available to evaluate the success of the program.  According to Greater Ohio, approximately 160 Clean Ohio Revitalization Projects were completed.  In reviewing VAP projects completed by year, clearly Clean Ohio accelerated brownfield redevelopment in Ohio.

1995-2001 (Pre-Clean Ohio) approximately 17 VAP covenants were issued per year

2001-2015 (During Clean Ohio) approximately 35 VAP covenants were issues per year

Based upon a study performed by Greater Ohio, an average grant incentive per Clean Ohio project was $1.97 million.  It is worth noting that this study showed each Clean Ohio dollar spent generated $4.67 in new economic activity.

Scorecard on Brownfield Redevelopment in Ohio
Total Sites to Address under the VAP Years to Address under VAP Total Cost in Incentives
527 covenants in 20 years since VAP implemented Assuming full restoration of Clean Ohio funding Assuming Clean Ohio available
estimated 10,000 brownfield sites* 35 VAP projects per year $1.97 million on average per project
9,437 brownfield sites left to be addressed 270 Years to address all brownfields under the VAP $18.5 billion in incentives to address all brownfields under the VAP

There are a number of assumptions built in to the scorecard that anyone could challenge. Including:

  • There is no reliable inventory of brownfield sites in Ohio.  The number 10,000 was taken from a U.S. EPA estimate discussed in a prior post.
  • Not all brownfield sites are addressed by the VAP.  However, when it was adopted most thought the vast majority of brownfield cleanups would go through the program.
  • Clean Ohio no longer exists and a brownfield program of that size and scope is not currently contemplated.

While the assumptions underlying the scorecard are fair game, it still demonstrates how long and how much it would cost to address a significant number of brownfield properties under the VAP. The scorecard also suggests there may be better strategies available to accelerate brownfield redevelopment in Ohio.  

The final post in the series will include a discussion of new strategies to try an accelerate brownfield redevelopment in Ohio.

Rethinking Brownfield Redevelopment in Ohio- Part 2 of 4

This second post in the series discussing brownfield redevelopment in Ohio will provide an overview of the extent and nature of Ohio's brownfield problem.  First, the post will discuss Ohio's progress in spurring brownfield versus greenfield redevelopment.  Second, the post will provide an overview of public information regarding the number of brownfields in Ohio  

Urban Sprawl in Ohio

One issue discussed in Part 1 of this series was how failure to re-utilize urban core properties significantly contributes to the issue of urban sprawl.  The negatives of urban sprawl are well documented:  decay of inner urban areas, increase infrastructure costs, more traffic (and associated air pollution) and greater impact to wetlands and streams as development moves to greenfields.

How is Ohio doing with regard to urban sprawl?  Not well based upon an analysis performed in 2014 by Smart Growth America.  Here are the rankings of some of Ohio's largest cities:

  • Cleveland 153
  • Cleveland 138
  • Toledo 117
  • Dayton 116
  • Canton 93
  • Akron 111
  • Cincinnati 166

Cincinnati Urban Sprawl Trends

A study performed by Smart Growth America of the Cincinnati region showed that during the time period of 1196-2005 the trends on brownfield versus greenfield redevelopment were as follows:

  • Thirty (30) businesses that expanded operations moved from transit accessible areas to areas without transit (i.e. out of the urban core);
  • Eight (8) business expanded within the urban core

This is a clear demonstration of the trends that the costs to redevelop brownfields pushes many businesses to expand or relocate to the suburbs contributing to Ohio's urban sprawl issues.

Cleveland Urban Sprawl Trends

Some times a picture (or in this case a graphic) is worth a thousand words.  Here is a graphic that shows developed land in Cuyahoga County from 1948 to 2002:

 

 

 

 

 

 

 

 

 

It is worth noting that there may be a major shift in these trends due to the millennials preference for downtown living.  A recent study showed that 7 city centers outperformed their surrounding metros in the 2002-07 period, 21 outperformed the periphery in 2007-2011.  Certainly, that trend is evident right here in Cleveland where residential occupancy is above 97.8% with major new downtown residential developments planned.  

The major shift in living preferences creates a golden opportunity to accelerate brownfield redevelopment.  

How many Brownfields are in Ohio?

Ohio does not maintain a registry that provides a good inventory of all brownfield sites.  The most extensive registry maintained by Ohio EPA was referred to as the "Master's Site List."  However, after a property owner challenged its listing on the MSL, it was determined Ohio EPA did not have the legal authority to maintain the list.  Ohio EPA stopped maintaining the list in 1999.

Currently, Ohio EPA maintains the Ohio Brownfield Inventory, but listing of properties is voluntary. Typically, properties are listed in order to qualify for some brownfield redevelopment incentives. Therefore, the registry does not provide a good estimate of the actual number of brownfields.

Public information is limited on brownfields.  A review of local studies and information from local officials and U.S. EPA reveal the following statistics which provide some insight into the extent of the brownfield problem in Ohio:  

  • 119 brownfields in Lucas County (1996 estimate);
  • An estimated 62% of real estate transactions in Lucas County are encumbered by environmental issues;
  • An estimated 25% of transactions in Toledo were abandoned due to environmental issues with an average job lost of 20 jobs per lost transaction;
  • An estimated 4,623 acres of brownfields are in Cuyahoga County;
  • 350 brownfields in Cleveland with an estimated 1,000 to 2,000 condemned structures
  • 40,000 acres or 14% of Cuyahoga County's land was industrial at some point (Estimate by the Cuyahoga Planning Commission)

Statewide estimates on brownfields:

  • 417 Ohio sites are currently identified on CERCLIS (sites on or being evaluated for Superfund Listing)
  • Over 5,000 RCRA sites listed on US EPA RCRAInfo data base
  • 4,000 to 6,000 brownfield sites in Ohio (as estimated by the Government Accounting Office)
  • U.S. EPA has a higher estimate- Over 10,000 brownfield sites have been inventoried by local governments according to testimony from Joe Dufficy (U.S. EPA) before Congress in 2005

Importance of Better Information on Brownfields

A strong case can be made that Ohio needs tools to create a better inventory of brownfields.  It's current system of waiting for volunteers looking for incentives to list sites results in very limited information.  

A better inventory helps to inform public policy as well as better track progress in addressing brownfields.  Also, better information provides more public information regarding sites that have issues.

Some may argue that there should be a mandatory law requiring all brownfield sites to be listed. However, there are many issues with this concept.  Such mandatory laws discourage brownfield redevelopment or even gathering data regarding contamination on property.  This is the exact opposite of what Ohio needs to do if it wants to encourage more brownfield redevelopment.

A mandatory law exists in New Jersey and my colleagues familiar with the New Jersey market state it acts as a strong deterrent to gathering data regarding contamination as well as transactions.

A better system is one that offers strong incentives to voluntarily disclose information regarding conditions of property.  The final post in this series will discuss Michigan's Baseline Environmental Assessment program which has been highly successful in gathering public information regarding the condition of contaminated property in the state while at the same time spurring brownfield redevelopment.

Rethinking Brownfield Redevelopment in Ohio - Part 1 of 4

Two weeks ago I participated in the Ohio Brownfields Conference in Columbus, Ohio.  2016 marks the twentieth (20th) anniversary of Ohio's Voluntary Action Program (VAP) which is implemented by Ohio EPA and is the primary regulatory program for cleanup of brownfields.  

To mark the anniversary, Ohio EPA encouraged presenters to reflect on the success of the VAP and other brownfield programs in Ohio.  Presenters were also encouraged to discuss ways to accelerate brownfield redevelopment in Ohio.  

Despite twenty years of the VAP as well as some of the best incentive programs in the country, Ohio has failed to get ahead of its brownfield problem.  I believe it is time to rethink some of the tools used to greatly accelerate brownfield redevelopment.  This three part series will cover the following:

  1. Review the Brownfield Problem-  Without looking at the issues created by brownfields it is impossible to properly design policies to address them.
  2. An Inventory of Ohio Brownfields-  The second post will discuss public information regarding the number of brownfields in Ohio.  
  3. Review Ohio's Progress in Tackling its Brownfield Problem-  The second post will provide an overview of Ohio's progress using tools like the VAP, Clean Ohio, JobsOhio Revitalization Program and brownfield tax incentives.
  4. New Strategy to Accelerate Brownfield Redevelopment-  The final post will provide recommendations for ways to better utilize incentives, streamline regulatory cleanup and better address public health issues.

OHIO'S BROWNFIELD PROBLEM

What causes brownfields to occur?

Two primary forces create brownfields- market forces and fear of environmental liability.  

MARKET FORCES

  • Expansion of business-  businesses looking to expand in urban areas often find the cost of expansion significantly higher to expand in onto neighboring property versus moving to a greenfield.  One study in Ohio found the cost of developing on a brownfield property four times higher then the cost of building on a greenfield. 
  • Closure/Relocation/Consolidation of Businesses-  Businesses close for a variety of reasons. One of the hardest hit sectors has been manufacturing.  When these businesses close they often can leave behind contaminated sites.  
  • Lower Tax Rates or Incentives-  Businesses can also be lured away by either lower tax rates or incentive packages.
  • Moving to a "Better Area"- Some businesses also move because of the decay of the urban areas where they are located.  

 ENVIRONMENTAL LAWS

  • Liability-  Expansive liability provisions in environmental laws also act as a strong impediment to businesses choosing to expand on a brownfield. The law with the broadest liability provisions is CERCLA (Superfund) which contains provisions that make any "owner" liable for pre-existing contamination regardless if they created the contamination.  Many other environmental laws can also create liability concerns as well (RCRA, underground storage tanks, TSCA, etc.)
  • Financing Considerations-  Banks understandably are concerned with the risk to their borrowers should they seek to redevelop a brownfield.  These concerns can translate into extensive due diligence requirements, more complicated financing or even refusal to finance certain projects.
  • Timing/Delays-  Navigating the complex environmental liability issues and addressing contamination under regulatory cleanup programs takes significant time.  Many businesses simply don't have the time to address the issues presented by a contaminated sites.

What social issues and environmental issues do brownfields create?

SOCIAL ISSUES

  • Vacant Buildings-  Invite abuse, including stripping of parts, materials vandalism, arson and "midnight dumping." 
  • Unemployment-  Higher unemployment occurs when businesses leave areas and those areas become blighted
  • Urban Blight- Discourage investment and contribute to pervasive sense of poverty and hopelessness.
  • Infrastructure-  Investment shifts from urban core to suburbs.  As a result of urban sprawl, more infrastructure is needed to be maintained. 
  • Taxes- Revenue sources for cities to pay for services are reduced as jobs migrate away from urban core.

ENVIRONMENTAL ISSUES

  • Contaminated Sites-  Brownfields present public health risks from exposure to contaminants. Contamination can also migrate onto neighboring properties, discharge to surface water or create vapor intrusion issues.
  • Urban Sprawl-  Expanded development away from our urban cores results in more impacts to wetlands and streams.  Also, urban sprawl results in greater air pollution due to more vehicle miles traveled and less use of public transportation.

 

Latest Environmental Due Diligence Case Highlights the Value of the "Innocent Landowner Defense"

There has not been a lot of recent case law applying the CERCLA Bona Fide Purchaser Defense or Innocent Landowner Defense.  Every time a new case emerges it is picked apart by the environmental bar trying to discern the value of the CERCLA defenses as well as pitfalls that will result in failure to establish the defense. 

The latest case is Viola Coppela v. Gregory Smith (Case No. 11-cve-01257-AWI-BAM, E.D. Cal., Jan 15, 2015).  The case involved contamination from dry cleaners.  Plaintiff owned a dry cleaner facility.  In 2011, the State of California issued an order requiring plaintiff to investigate and remediate contamination from its dry cleaner.

Defendant, Martin and Martin Properties, LLC ("M&M") owned a commercial center in close proximity to Plaintiff's property.  As it turns out, a former dry cleaner operated on Defendant's property from 1959 to possibly 1971.

Plaintiff learned about the former dry cleaner on Defendant's property likely because it was listed on CERCLIS (a federal database of properties that are suspected to have contamination).  Defendant's listing on CERCLIS was due to a 2006 investigation performed by the State of California .  In 2009, a site investigation was performed which did detect low levels of PCE in the soil.  EPA determined that no further cleanup was needed due to the low levels.

Once Plaintiff learned of the investigation of Defendant's property it likely believed it had an opportunity to claim releases from Defendant's property migrated onto its property.  Therefore, Plaintiff asserted Defendant should share responsibility in cleaning up its property.  This is very common with regard to dry cleaners and gas stations (i.e. parties try to deflect blame by pointing to historical releases that may have occurred on neighboring property).

Plaintiff sued Defendant under CERCLA as well as brought common law claims.  Defendant asserted the Innocent Landowner's Defense under CERCLA.  The defense allows parties to avoid CERCLA liability if it did not contribute to contamination, conducted proper due diligence prior to purchase and exercised due care with any contamination found.  The burden is on the party asserting the defense to establish it is entitled to the liability protection provided by the defense.

Court's Analysis of the Innocent Landowner's Defense

M&M moved for summary judgment on Plaintiff's CERCLA claim alleging to be an "innocent landowner."  M&M alleged prior to its purchase it had performed the following due diligence activities:

  • Reviewed prior environmental reports prepared for the prior owner;
  • Conducted a physical inspection;
  • interviewed the seller, neighboring business owners, and financial consultant's regarding the properties prior use

Clearly, the level of due diligence exercised by M&M would not be adequate under current standards (ASTM 1527-13). Defendant did not even retain its own environmental consultant to perform an independent review.  Rather, it relied on reports prepared for the prior owner- something not allowed under U.S. EPA current "All Appropriate Inquires Rule" (AAI) which recognizes ASTM 1527-13.

However, the property transfer took place in 1995- before U.S. EPA promulgated its AAI rule. Therefore, despite the fact Defendant's level of due diligence was inadequate under current standards, the Court was willing to rule mostly in favor of Defendant, concluding some of the key elements for the "Innocent Landowner" defense were satisfied.  To establish the innocent landowner defense you must establish the following:

  1. The party acquired the property after the disposal or placement of the hazardous substances occurred;
  2. At the time of acquisition, the party did not know and “had no reason to know,” i.e. made all “appropriate inquiries” in accordance with customary “standards and practices,” that any hazardous substance was disposed of or placed at the facility;
  3. The party did not actively or passively contribute to the “release” of the hazardous substance; and
  4. Once contamination was found, the party exercised due care with respect to the hazardous substance concerned, took precautions against foreseeable acts or omissions of third parties and the foreseeable corresponding consequences, and acted in compliance with land use regulations and governmental responders.

The Court determined that M&M satisfied elements 1, 3 and 4.  With regard to element 2, the Court noted that the M&M did not hire its own consultant and simply relied on reports prepared for the benefit of the prior owner.  With regard to the issue of whether M&M exercised "all appropriate inquiries" (element 2) the Court refused to grant summary judgment.

Frankly, I'm surprised how far the Court went in finding in favor of Defendant on elements 1, 3 and 4. Furthermore, Defendant still has the possibility of establishing element 2.  At trial, Defendant could produce evidence that it was common in 1995 (prior to EPA's AAI Rule) to rely on a prior owners environmental reports.  If successful, Defendant will still be entitled to the "Innocent landowner" defense.

I think the key takeaways from this case are the following:

  • Prior to EPA's "All Appropriate Inquiries" Rule, Parties may have wider latitude to argue what was standard industry practice and the accepted level of due diligence;
  • After AAI, the party should make sure it follows ASTM 1527-13 or it is very unlikely a party will meet its burden in establishing the defense;
  • There is a lot of value to the defense to fend off exactly this type of litigation- a property owner in the vicinity with contamination on-site who is looking to deflect blame or try and offset their own costs; and
  • Courts may inclined to protect parties that showed genuine effort to perform proper due diligence prior to purchase.

 

Local Governments, Land Banks and Brownfield Properties

One of the issues that has prevented local governments from being more aggressive in addressing brownfields has been liability concerns associated with existing environmental contamination.  Prior to 2009, some local governments learned the hard way that placing their name in the chain of title as an "owner" exposed the local government to liability under CERCLA (i.e. Superfund) or other environmental statutes. 

Ohio Passes Limited Environmental Liability Protection

Ohio attempted to address this gap in the law back in 2009.  Ohio Revised Code 5722.22 provides the following liability protection to County land banks:

R.C. 5722.22 Immunity of land reutilization corporation.
A county land reutilization corporation is not liable for damages , or subject to equitable remedies, for breach of a common law duty, or for violation of sections 3737.87 to 3737.891 of the Revised Code or Chapter 3704., 3734., 3745., 3746., 3750., 3751., 3752., 6101., or 6111. of the Revised Code or any rule adopted or order, permit, license, variance, or plan approval issued under any of those chapters in connection with a parcel of land acquired by the county land reutilization corporation.

This broad immunity provision appears to allow County land banks to assemble brownfield parcels without fear of exposing the entity to liability for pre-existing contamination.  However, what clearly is missing from the list of statutes in R.C. 5722.22 is a reference to CERCLA.  This is because a state cannot pass legislation that provides immunity from CERCLA, only Congress could create such an exception.   

Involuntary Acquisitions

Local governments are entitled to a liability defense if they acquire contaminated property involuntarily.  Pursuant to § 101(20)(D) of CERCLA, a unit of state or local government will not be considered an owner or operator of contaminated property (and thus is exempt from potential CERCLA liability as a PRP) if the state or local government acquired ownership or control involuntarily. This provision includes a non-exhaustive list of examples of involuntary acquisitions, including obtaining property through bankruptcy, tax delinquency, abandonment, or “other circumstances in which the government entity involuntarily acquires title by virtue of its function as sovereign."

While this provision is useful, there are times when a municipality or land bank would like to help facilitate brownfield redevelopment by proactively acquiring property.  In those circumstances, the local government will have to perform proper environmental due diligence just like any other buyer.

Municipalities and the Bona Fide Purchaser Defense

If a local government does not come into ownership of contaminated property involuntarily, it must proceed with caution in order to protect itself from liability.  In situations where a local government would like to acquire contaminated property voluntarily, it must act like a private party in order to establish CERCLA liability protection-  It must meet the requirements of EPA "All Appropriate Inquiries" (AAI) Rule in order to establish the Bona Fide Purchaser Defense (BFPD) to CERCLA.

EPA specifically identifies these steps in its CERCLA guidance document regarding local government acquisition of contaminated property:

While many abandoned properties that are of interest to land banks and redevelopment authorities are not likely to be contaminated, local governments should be aware that contamination and potential CERCLA liability may exist. A local government may increase the likelihood that the land bank or redevelopment authority is eligible for CERCLA liability protection by ensuring that the land bank or redevelopment authority conducts AAI prior to acquiring the property. Not only is AAI a critical requirement for obtaining most CERCLA landowner liability protections, but it also aids local governments in making informed property acquisition decisions. When acquiring abandoned contaminated properties, EPA encourages local governments to obtain BFPP status prior to acquisition if it is unclear whether other exemptions, affirmative defenses, or liability protections may apply. 

Under the BFPD, the local government must perform an ASTM 1527-13 compliant Phase I environmental assessment prior to taking ownership.  If potential contamination is identified, then the local government will also have to take "reasonable steps" to prevent exposures or stop ongoing releases of contamination.

County Land Banks Focus on Residential Property

Despite the environmental liability risks, some cities have been aggressive in attempting to manage brownfield properties.  Municipal land banks, such as the City of Cleveland Industrial-Commercial Land bank, have assembled and even cleaned up some brownfield sites. 

As discussed above, pursuant to R.C. 5722.22, County land banks have greater immunity from environmental liability pursuant to state statutes or common law.  Despite these protections, County land banks have been less proactive when it comes to brownfield properties.

Right now, County land banks are much more focused on addressing vacant residential properties. A current review of property held by the Cuyahoga Land Bank shows a long list of residential properties:

With the foreclosure crisis, its logical that County land banks would be focused on the residential property issue.  

However, the reason the Ohio General Assembly inserted the environmental immunity provisions contained in R.C. 5722.22 was to encourage land banks to address brownfield properties.  

County land banks that perform a limited amount of due diligence in advance of taking ownership (i.e. BFPD), coupled with the state immunity provision in R.C. 5722.22, can be powerful allies in addressing brownfield properties.  We need to see more examples of County land banks working collaboratively to facilitate cleanup and redevelopment of these properties.

EPA No Longer Recognizes Old ASTM Standard for Phase Is

U.S. EPA has published in the Federal Register its action that removes the old Phase I standard (1527-05) from the "All Appropriate Inquiries" Rule (AAI).  Until this action, AAI recognized both the old standard and the new standard- ASTM 1527-13.  

The major differences between the old and new ASTM Phase I standard include:

  • Key legal definitions associated with contamination
  • Enhanced requirements for agency file reviews
  • As discussed below, new language highlighting the need to assess the potential for vapor intrusion

EPA delayed the effective date of the rule until October 6, 2015 to allow the continued use of 1527-05 until that date.  Going forward, any Phase I report issued after the effective date of the rule which is based on ASTM 1527-05 will no longer be deemed sufficient for meeting establishing the Bona Fide Purchaser Defense to CERCLA (BFPD).  The BFPD provides new owners and tenants of property a defense to liability under CERCLA if it completes due diligence in accordance with EPA's AAI Rule.

EPA action was not a surprise.  Perhaps the most interesting aspect of EPA action is the comment in the preamble related to vapor intrusion:

"The scope of the AAI Rule and the ASTM E1527–05 standard always included the
requirement to identify all indications of releases
and threatened releases of hazardous substances, or ‘‘recognized environmental conditions (RECs),’’ including indications of vapor migration or vapor releases. With the updates included in the 2013 version of the ASTM E1527 standard, ASTM modified the definition of migration to specifically include vapor migration and remove any confusion regarding the need to identify all RECs, or all indications of releases or threatened releases of hazardous substances, when conducting an AAI investigation." (emphasis added)

While EPA may believe it has always been known the vapor intrusion needed to be assessed, that certainly was not the case among consultants.  Many prepared Phase I reports that did not mention in anyway vapor intrusion.  I have read such reports in the past.

This issue is whether this type of statement from EPA provides grounds for professional negligence claims against environmental consultants who did not perform a vapor intrusion evaluation under an old Phase I which followed ASTM 1527-05.  

The most likely scenario would be someone who purchased a building and learned later that a vapor intrusion/migration issue existed on the property.  They obtained a Phase I environmental assessment prior to purchase, however, the Phase I did not review the potential for vapor intrusion.

As discussed in a prior post, a recent survey indicates that barely half of the Phase I reports being performed using the new ASTM 1527-13 standard analyze for vapor intrusion.   

Only About 1/2 of Phase I Assessments Analyze for Vapor Migration Risks

Phase I Environmental Assessments (Phase I ESA) are the first step in the environmental due diligence process.  A Phase I ESA is a review of available information regarding a property to determine the possibility contamination may be present.  The assessment includes a review of environmental databases, file reviews, interviews with regulators/property owners and a site walkover by an environmental consultant.

To encourage more reuse of brownfields, Congress amended CERCLA to provide a liability defense to prospective purchasers of property who perform adequate due diligence pre-acquisition (i.e. the "Bona Fide Purchaser Defense" or BFPD).  In 2012, U.S. EPA made the BFPD potentially available to tenants who perform adequate environmental due diligence before signing a lease.  

U.S. EPA enacted the "All Appropriate Inquiries" (AAI) rule to specify the requisite level of due diligence necessary to establish the BFPD.  Under AAI, a purchaser/tenant must obtain an Phase I ESA prior to taking ownership or signing the lease.  The Phase I ESA must meet the standards set forth by ASTM 1527.  

There have been several versions of ASTM 1527.  Under ASTM 1527-05, consultant stated it was unclear whether the assessment must include the evaluation for potential vapor migration risk into buildings.  In order to make it clear, ASTM updated the standard, releasing 1527-13 in November of 2013.  

One of the most significant changes was the addition of specific language requiring the Phase I ESA to assess vapor migration risk.  In December 2013, U.S. EPA incorporated ASTM 1527-13 into AAI. Since December of last year virtually all Phase Is purport to satisfy ASTM 1527-13.

What is Vapor Intrusion?

Vapor migration occurs when soil and groundwater contamination can volatilize and migrate up through soil into buildings over or near the contamination.  Volatile Organic Compounds (VOCs) and Semi-VOCs are the most likely to cause vapor migration issues.  

Common sources of contamination that can cause vapor migration issues are gas stations, dry cleaners or other industrial sites (especially those that utilized solvents).  

Prospective purchasers or tenants of buildings with vapor migration risk can face issues regarding exposure of occupants to air deemed unsafe.  

ASTM revised the Phase I ESA to mandate an assessment of vapor migration risks due to the increased knowledge regarding the risk presented.

Survey Indicates a Large Portion of Phase Is Still Don't Evaluate Vapor Intrusion Risks

Environmental Data Resource, Inc. (EDR) surveyed over 100 environmental consultants who regularly perform Phase I ESAs.  Of those surveyed, only 55% indicated that they began to review vapor intrusion risks as part of their Phase I ESA when ASTM 1527-13 was finalized in November 2013.  

EDR stated that the survey results show the review of vapor migration risk has become "industry practice."  The number of consultants reviewing vapor migration risks had dramatically increased since it was adopted in November 2013.  However, nearly 1/2 of all Phase I ESA don't evaluate the risk.

With the amendment of AAI to reference ASTM 1527-13, every Phase I ESA should be reviewed to make sure vapor migration risk was evaluated by the consultant.

What is the Appropriate Methodology for Evaluating Vapor Migration?

With the dramatic risk in the number of consultants evaluating vapor migration risk, the issue has pivoted from whether to perform the analysis to the proper methodology for evaluating the risk.  In 2010, ASTM 2600 was published which provided a screening method for vapor migration risk. However, many deem ASTM 2600 too rigorous.

The EDR survey found that only 27% of respondents screened for vapor migration using ASTM E2600- the only industry recognized standard for screening brownfield sites for potential vapor migration.  Of those responding, 44% said they just review the data compiled by the Phase I to determine if further research is needed.

From a legal perspective, it is important to remember that the BFPD is a defense.  Meaning, a party who asserts the defense must demonstrate they met the requirements of the AAI.  Properly documenting what was done to evaluate vapor intrusion could be a critical issue in establishing the BFPD.  Therefore, Phase I ESA should be reviewed carefully to determine whether there is adequate documentation included in the report.

As a Buyer Can I or Should I Rely on an Old Phase I?

In real estate transactions it is not uncommon for the seller to provide the buyer a copy of prior a Phase I environmental assessment.  The seller either ordered a Phase I in anticipation of the transaction or one may exist from a prior transaction involving the same property.  Should the buyer be satisfied with this prior Phase I?

Purpose of the Phase I from the Seller's Perspective

In terms of records and site review, a Phase I environmental assessment essentially involves the following steps:

  • A review of environmental databases- records of known or potentially contaminated sites in the vicinity of the property, landfills, and other disposal sites, and underground storage tank records (for both leaking and registered USTs) 
  • A review of local regulatory files-  these could include the state EPA, local fire department or health department.
  • Aerial photos and sanborn maps- to review the history of the use of the property
  • Interviews- with a site contact or  someone with knowledge of the property
  • Site walkover by the consultant-  the consultant is looking for signs of potential releases of contamination (ex: distressed vegetation or oil stains)
  • No sampling- A phase I will not involve any actual soil or groundwater sampling even if issues are identified

If the seller has a Phase I, they may have ordered a Phase I to determine whether there are any environmental concerns that can be quickly ascertained.  However, keep in mind the seller and buyer's goals are not exactly in line with regard to environmental due diligence.

First, seller is not concerned with establishing any liability defenses because they aren't entitled to them if they perform a Phase I after already owning the property.  Second, if the Phase I identifies a potential issue, many sellers will stop their inquiry- they aren't interested in taking on the costs of addressing any issues that may be identified.

Buyer's Perspective- Establish the Bona Fide Purchaser Defense

CERCLA liability applies to "owners" and "operators."  Therefore, as the buyer, once you take ownership of the property you can be liable for any historical contamination that may exist, even if you had nothing to do with that contamination.  

In 2002, Congress passed the Small Business Liability Relief and Brownfields Revitalization Act (known as the "Brownfields Act").  The Act amended CERCLA to provide greater incentives for buyers to purchases and re-utilize brownfield properties.  The amendments established the Bona Fide Purchaser Defense (BFPD).  

Under the BFPD, a Buyer can establish a defense to liability under CERCLA if it performs due diligence prior to purchase in accordance with EPA standards.  A property does not need to be abandoned or vacant to be eligible for the BFPD, facilities still operating can qualify.

This post is not meant to be an exhaustive discussion of the requirements for establishing the BFPD. However, three key points to keep in mind from the buyers perspective with regard to prior Phase I reports:

  1. The Phase I must be performed within 180 days of purchase.  If a Phase I was performed within the last year, then a Phase I update can be performed. A Phase I more than one year old cannot be used to establish the BFPD;
  2. The buyer must be able to "rely" on the Phase I.  This means if the buyer wants to utilize the Seller's Phase I it must obtain either be identified in the Phase I update as a party that can rely on the Phase I or it must obtain a reliance letter from the consultant who performed the Phase I; and
  3. The buyer must make sure that the Phase I meets all the required elements set forth under EPA recognized standard for Phase Is- ASTM 1527-13 and EPA's "All Appropriate Inquiries" Rule (AAI).  (See discussion in prior post on the new ASTM standard).

Item 3 is of particular importance to the buyer.  I have reviewed plenty of Phase I reports that did not contain the required elements of the ASTM or AAI rule.  An inadequate Phase I will not allow the buyer to establish the BFPD.  

Therefore, it is of critical importance the buyer review any prior Phase I reports to ensure they are up-to-date, can be relied on and meet the required elements.  

Buyer May Want a Closer Look

If the seller's Phase I is "clean"- does not identified any "Recognized Environmental Conditions" (i.e. no indications of a release of contamination), then seller will be reluctant to allow any greater scrutiny of the property.  However, buyer should make sure the Phase I was adequate and no red flags are contained in the report.  

If the Phase I report does identify RECs, did the seller perform any additional investigation?  While AAI technically does not require sampling, it may be very difficult, if not impossible, to establish the BFPD without sampling to determine if a release did occur.  

If contamination is identified, then the buyer still can establish the BFPD if it takes "reasonable steps" to stop releases and prevent exposure to that contamination.  Under the BFPD, the buyer is not expected to perform the same level of cleanup as a liable party under CERCLA.

Beyond liability defenses, as the potential owner of the property, it is generally prudent to avoid taking on major headaches.  Therefore, buyers want to make sure sufficient due diligence was performed.  It is definitely in the buyer's interest to ensure they have a thorough understanding of the condition of the property.

For example, the BFPD is only a liability defense to CERCLA.  If other environmental regulatory obligations exist, such as underground storage tanks, the BFPD will not provide liability protection to those requirements.

Sellers may resist any questioning of the adequacy of a prior Phase I.  If the prior Phase I identified issues, seller may also be reluctant to allow further investigation.  However, as the buyer, you face liability exposure under CERCLA and potentially other environmental laws once you take ownership.

In conclusion, if a prior Phase I report exists, it it very important the buyer thoroughly review the report and take the necessary steps to protect themselves.  

EPA Takes Action to Recognize ASTM 1527-13 as the "Appropriate" Phase I Standard

On December 30th, the  Federal Environmental Protection Agency (EPA) finally took action trying to address the confusion it caused when it previously issued a final rule recognizing both ASTM 1527-05 and 1527-13 as appropriate standards for conducting Phase I assessment.  A proper Phase I assessment is a requirement  for establishing the Bona Fide Purchaser Defense under CERCLA.  (See prior post).  

On the second to last day of the year, EPA published a final rule in the Federal Register (78 FR 79319) recognizing the new ASTM E1527-13 phase I standard practice as an approved method for complying with the All Appropriate Inquires (AAI) rule.  EPA also provided new language in the preamble as well as a separate guidance document addressing comments EPA received.

Background on Prior EPA Actions

On August 15, 2013, EPA issued a direct final rule which recognized both E1527-05 and E1527-13 as appropriate standards for conducting environmental due diligence in accordance with the AAI. EPA received negative comments regarding its decision to continue to recognize both standards. Many felt it caused unnecessary confusion.  In response to comments, on October 29, 2013, EPA withdrew the final rule.  

As a result of EPA's action, there was a two month period where the most up-to-date standard, E1527-13, was not recognized by EPA as satisfying AAI.  This caused some attorneys and buyer/sellers of real estate  to request consultants to meet both standards.

With the December 30th action, EPA officially recognizes E1527-13 and also indicates it will soon issue a proposed rule removing AAI's reference to E1527-05.  

Vapor Intrusion Remains the Big Issue

 The biggest differences between E1527-13 and E1527-05 include:

  • Revised definitions of RECs, HRECs CRECs
  • Greater emphasis on reviews of regulatory files
  • Vapor intrusion

(See prior post discussing differences in greater detail)

It is the last bullet point that has caused the greatest confusion and controversy.  Some provided comments to EPA expressing their view that under the prior E1527-05 standard consultants did not have to evaluate vapor intrusion.   Those commentators view E1527-13 as establishing that requirement for the first time.

However, EPA makes clear in the preamble to the December 30th action that the language in E1527-13 pertaining to vapor intrusion is only an enhancement of the requirements under the old standard.  EPA specifically states that E1527-05 "already calls for identification of potential vapor releases or vapor migration."

EPA comments create issues for environmental consultants who did not include evaluation of vapor intrusion as part of Phase I assessments under E1527-05.  Failure to do so could be grounds to assert the consultant committed malpractice.  

In situations where no such evaluation was performed under an old Phase I, and the building later proved to have vapor intrusion issues, consultants face heightened liability exposure.

EPA action should provide greater clarity to the due diligence community.  

 

 

 

Which Phase I Standard Should Consultant's Use Right Now?

Over the weekend, there was a good blog post on Schnapf LLC Blog discussing which Phase I standard lawyers and consultants should use for at least the rest of 2013.  Due to an unanticipated reversal by U.S. EPA, there is a gap right now between the current ASTM standard and EPA's recognized standard for Phase I's for compliance with the "All Appropriate Inquiries" Standard (AAI).

On November 6th, ASTM officially recognized E1527-13 as the new standard for conducting Phase I environmental assessments.  As a practical matter, this means ASTM E1527-13 represents current best practice in the industry.  

However, as discussed in a prior post, U.S. EPA reversed course and withdrew a direct final rule that would have recognized both E1527-13 and E1527-05 as meeting AAI.  As a result, the only standard EPA currently recognizes as satisfying AAI is E1527-05.

The post discussed the quandary caused by the current gap between sanctioned standard and the most up-to-date standard: 

So what is a consultant to do for transactions requiring a phase 1 prior to EPA formally recognizing E1527-13? On the one hand, by publishing E1527-13, ASTM is essentially saying that the new version now represents good commercial practice. Thus, a consultant failing to use the most current version of E1527 could expose a consultant to professional negligence claim if, for example, the consultants fails to identify a REC because it did not do a file review or fails to evaluate the soil gas pathway. This would seem to tip the decision towards using E1527-13.

However, E1527-13 is not yet recognized as an acceptable method of satisfying AAI. Thus, if the purpose of the phase 1 is to comply with AAI, a consultant stating that its phase 1 complies with AAI could be subject to breach of contract or claims of misrepresentation since only E1527-05 is currently recognized in the AAI rule.

The biggest differences between the two standards is the more defined requirements pertaining to file reviews and analysis of the vapor intrusion pathway.  It is pretty clear the E1527-13 requires additional work.  Arguably, a Phase I that meets E1527-13 should also be consistent with E1527-05.

For an attorney, you will want the consultant preparing the Phase I report to state it meets the current EPA recognized standard- E1527-05.  Without such a reference it is possible your client hasn't satisfied AAI.  

A consultant will want to comply with the standard recognized in the industry as the best practice- E1527-13. Otherwise, one may argue the consultant isn't utilizing current best practice.

It may be best to discuss the issue with your consultant and see if they are comfortable stating in the report that the Phase I meets both standards.  That may be the best alternative until EPA officially sanctions E1527-13. 

 

U.S. EPA Alters Plan on New ASTM Standard for Due Diligence

As discussed in a prior post, U.S. EPA had issued a direct final rule approving the use of the new ASTM Standard E 1527-13 "Standard Practice for Environmental Site Assessments:  Phase I Environmental Site Assessment Process."  The final rule was set to take effect on November 13, 2013.

If the rule had gone into effect, it would have allowed use of either ASTM Standard E 1527-13 or the old ASTM Standard E 1527-05 to comply with due diligence requirements associated with the "All Appropriate Inquiries Rule," (AAI), a necessary step to establishing certain affirmative defenses to CERCLA liability.  However, just prior to the September 16, 2013 comment deadline, adverse comments were filed by some influential practitioners.  

Concerns were expressed with regard to the practical effect of EPA's proposal to allow either ASTM standard to be followed.  E 1527-13  is believed to be more costly than the old standard because it enhances the requirement for environmental professionals to perform agency file reviews as part of the Phase I process.  It also contains more definitive language requiring evaluation of potential vapor intrusion migration pathways. In addition, each ASTM standard uses different definitions. Adverse comments expressed concern that the use of the different definitions will lead to confusion or inconsistent practices in the due diligence community by allowing two different standards to satisfy AAI.

It is still unclear what U.S. EPA will do in response.   The Agency issued a proposed rule at the same time as the final rule.  The proposed rule contains the same option to utilize either ASTM standard.  It is possible EPA could sunset E1527-05 when it finalizes the proposed rule.  Or it could address the adverse comments in the final preamble to the rule.

Right now there is no clear direction from U.S. EPA with regards to this critical aspect of due diligence. 

UPDATE:  On October 29th, U.S. EPA did officially withdraw the direct final rule.  Currently, E1527-05 remains the only officially sanctioned guidance to meet the "All Appropriate Inquiry Rule."

Are All Phase I's the Same?

The title of this blog post may make many in the environmental consulting and legal business laugh.  "Of course not..." most would certainly reply.  With Phase I's governed by two ASTM guidance documents and the EPA "All Appropriate Inquiries" Rule (AAI), how can there be such variations?

The answer is that a Phase I environmental assessment requires professional judgment.  Not all consultants will look at the same site conditions the same way.  As an example, take a look at the website in which environmental consultants debate various technical issues associated with due diligence. Read the debate over how to handle "dirty floors" or "old dry cleaners" when performing a Phase I. 

In both instances, the consultants couldn't come to total agreement as to whether these particular situations should be identified in the report as "Recognized Environmental Conditions" (RECs).  Of course, the REC determination is critical because it impacts the process for securing liability protection under U.S. EPA's Innocent Landowner or Bona Fide Purchaser Defenses.

Changed Definition of a REC

As discussed in a prior post, U.S. EPA published a rule that allows entities to utilize either ASTM E1527-05 or E1527-13 guidance in performing Phase I consistent with the AAI Rule. My prior post reviewed some of the key difference between the two standards.

In considering how professional judgment impacts Phase I reports, examine the proposed changes to the definition of REC.  The changes were intended to "clarify" the definition and promote greater consistency among environmental professionals in writing Phase I reports.

The old definition (E1527-05) defined REC as:

"The presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into ground, groundwater, or surface water of the property.  The term includes hazardous substance or petroleum products even under conditions in compliance with laws."

Comments received during preparation of the revised ASTM standard- E1527-13 were that the definition of REC was confusing or ambiguous.  The changes made to the definition were intended to add clarity.  

The revised definition of REC in E1527-13 is as follows:

"The presence or likely presence of any hazardous substances or petroleum products in, on, or at a property 1) due to any release to the environment; 2) under conditions indicative of a release to the environment; or 3) under conditions that pose a material threat of a future release to the environment."

Let's take a closer look at some of the differences between the two definitions:

  • "Into structures on the property" versus "environment"-  I'm sure consultants could debate how these terms should be interpreted.  It appears that by removing the "into the structures" language relative to release means that there must be some indication contamination made it into either the soil, groundwater, surface water or indoor air.
    • For example:  simply having staining on a concrete floor may not be enough to conclude there was a release to the "environment." There should be evidence of drains or cracks that could serve as a conduit for contamination.  Of course, as evidenced by my link above, not everyone may agree. 
  • "Ground, groundwater or surface water" versus "environment"-  Some had debated under the old REC definition whether a Phase I included evaluation of releases to indoor air through vapor intrusion.  Most thought the old definition includes indoor air, the new definition and other changes in E1527-13 make clear the indoor air through vapor intrusion is to be considered.

Keep in mind, lawyers don't write the Phase I report.  They can provide comments or advise their client relative to the conclusions.  It is the consultant who exercises the professional judgment which includes the findings detailed in the Phase I report.

Be Comfortable with the Consultant Selected 

Regardless of changes in E1527-13 which were intended to promote greater consistency, there will still be big differences in how consultants write their Phase I reports.  You simply can't remove professional judgment when such vague terms are utilized.  

Why should you care?  The exercise of professional judgment could result in major difference in whether potential liabilities are investigated.  Or, such a difference could result in more expensive due diligence when a consultant is very conservative in how they view a site.  

Prior to engaging a consultant to perform a Phase I, it is advisable to go beyond just written proposals.  It would be prudent to interview the consultant to learn about their philosophy in performing Phase I's.  As the customer, you should be comfortable with that philosophy because it impacts your exposure and bottom line.

When performing such an interview, make sure you talk to the consultant who will actually be performing the Phase I, not just anyone in the company.  There can be wide disparities even among consultants in the same firm.

Quick Primer on Voluntary Action Program (VAP) Cleanups

Ohio EPA has established its own voluntary cleanup program for addressing hazardous substances and obtaining a legal release from liability- the Voluntary Action Program (VAP).  The VAP program has been on the books since 1995. 

When the VAP was created its purpose was to allow the private sector to address historical contamination at industrial or commercial properties.  The key word in the program's title "Voluntary" means that Ohio EPA does not order companies to complete the VAP.  Rather, the program offers an opportunity to either:

  • Address historical contamination at brownfield sites that may otherwise limit or prohibit redevelopment; or
  • Allow an operating company to address its potential liability for historical contamination at a property it is still utilizing.

In the nearly twenty years of the VAP, approximately 360 properties have completed the cleanup process and obtained an legal release. (You can visit a map of VAP properties here)   In reality, 360 VAP cleanups is not that many considering there are thousands of properties in Ohio with historical contamination.  

Process

A complex set of rules and guidance documents govern VAP cleanups.  Those documents are accessible through Ohio EPA's website.  Here is a very brief overview of the process:

  1. Hire a Certified Professional (CP)-  In order to perform a VAP cleanup and receive a legal release from the State you must retain a CP.  A CP is an environmental consultant that has been certified by Ohio EPA has being technically capable of completing a VAP cleanup.
  2. "No Further Action" (NFA) Letter-  Unlike other regulatory cleanup programs, VAP is intended to allow a CP to complete a cleanup without Ohio EPA review of sampling and cleanup plans prior to initiating work.  The CP can develop a NFA without oversight by the Agency.  However, if a company wants a legal release from the State, the NFA must be submitted to Ohio EPA. The components of an NFA would likely include: the Phase I/Phase II assessment, a Risk Management Plan, an Operation & Maintenance (O&M) Plan, an O&M agreement and an Environmental Covenant.
  3. "Covenant Not to Sue" (CNS)-  If the company decides it wants a legal release from the State upon completing a VAP cleanup, it must have its CP submit the NFA for review.  If the Ohio EPA agrees that the NFA meets VAP cleanup regulations and the property meets VAP standards, it will issue the CNS. 

Issues/Considerations with VAP Cleanups

While the VAP has been a success, there are complex issues that must be evaluated prior to initiating a cleanup under the program.  Some of those considerations include:

  • Benefits-  Companies looking to address potential liability exposure, the VAP is worth considering. Performing a VAP to address contamination will make property more marketable as most major banks are familiar with the program in Ohio.  Furthermore, the VAP is a key tool for brownfield redevelopment in order to attract new tenants or users of the property who may otherwise be concerned with environmental liability or exposures associated with old industrial or commercial properties.
  • Limits on CNS-  The CNS does not release you from liability from third party property damage or injury lawsuits, including toxic tort claims related to exposure to releases of contamination.  Furthermore, the State takes the view that the CNS is also limited to the property itself, not contamination that has left the property. Finally, the CNS does not include a release from U.S. EPA (although you can obtain certain comfort that U.S. EPA won't pursue separate action once the VAP cleanup is complete).
  • Eligibility Issues-  Certain regulatory requirements must be addressed before a property can be deemed eligible to participate in the VAP.  Properties subject to State environmental enforcement may not be eligible.  Portions of the property required to be cleaned up under hazardous waste regulations (RCRA) are ineligible until cleanup is completed.  The presence of underground storage tank (USTs) can complicate VAP eligibility. 
  • Complex Cleanup Issues-  Each site cleanup is different.  However, it doesn't take much for a site to present complex cleanup challenges.  Existing buildings and structures may present vapor intrusion issues.  Off-property migration of contaminated groundwater may also need to be addressed.  Impacts to surface water or other ecological features may need to be evaluated.
  • Costs-  Again, each site cleanup is different.  However, the cost of cleanup can be expensive.  State and local brownfield grant programs can help mitigate those costs.  Even the costs of preparing and submitting the documents to Ohio EPA can be costly.  Due to such cost considerations, some businesses have decided to utilize the VAP standards to address historical contamination without submitting the NFA to the Agency for review. 

Options to Address Environmental Liability in Ohio

The VAP has been a very useful tool for addressing historical contamination.  However, the costs and complexities involved in completing such cleanups make it less attractive, particular for smaller sites with very limited contamination.

As discussed in prior posts, Ohio currently does not have a less formal means of addressing historical contamination, such as Michigan's Baseline Environmental Assessment Program.   This leaves may buyers or tenants with choosing between costly VAP cleanups or performing due diligence to try and establish the federal "Bona Fide Purchaser Defense."  

U.S. EPA Endorses New Phase I Standard

ASTM 1527-05 was the first ASTM standard recognized by U.S. EPA as meeting the requirements of the "All Important Inquiries Rule." (AAI)   AAI sets forth the standards and practices necessary for fulfilling the requirements to obtain liability protection (i.e. bona fide purchaser defense) under CERCLA section 101(35)(B).  Most Phase I proposals reference 1527-05.  

ASTM standards have a five year shelf life and a three year grace period.  After the eight year period, the standard can sunset or be renewed.  In preparation for the eight year period coming to an end on 1527-05, an updated version of the standard has been developed- ASTM 1527-13.  On August 15, 2013, U.S. EPA officially recognized the updated version of the ASTM standard for conducting Phase I environmental assessments as satisfying AAI.   

What are the Major Differences Under the New ASTM Standard?

It is interesting to note that the new ASTM is not being billed as really changing anything, rather it just clarifies requirements that were already part of the old standard  (ASTM 1527-05).  However, in my experience at least two "clarifications" will either change or modify practice among many environmental consultants.  Those two areas include:

  1. Vapor intrusion; and
  2. Agency file reviews

Vapor Intrusion

Some have debated whether consideration of vapor intrusion issues was part of ASTM 1527-05. Many attorneys view the definition of "release" to include vapor of contaminants.  However, some consultants took the view that ASTM 1527-05 classified "indoor air quality" issues as non-scope items. 

In my practice, I have reviewed many Phase I reports and discussed findings with a wide variety of consultants.  Many of the consultants took different views with regard to assessing vapor intrusion.

The new ASTM 1527-13 standard makes very clear that vapor intrusion issues are to be considered as part of Phase I environmental assessments.  First, the definition of "migrate/migration" was amended to specifically reference vapor.

"the movement of hazardous substances or petroleum products in any form, including for example, solid, liquid at the surface or subsurface, and vapor in the subsurface.”

The new standard also specifically states that non-scope indoor air quality issues are "unrelated to releases of hazardous substances or petroleum products into the environment." 

Finally, ASTM E2600-10, the Standard Guide for Vapor Encroachment Screening on Property Involved in Real Estate Transactions, is specifically referenced in the new standard.  It is not a requirement for a consultant to use E2600-10, rather the standard is recognized as an acceptable means of evaluating the potential for vapor intrusion.

There seems to be debate among consultants as to whether they will utilize E2600-10.  Some believe it is too onerous.  Regardless, consultants are going to have to evaluate the potential for vapor intrusion as part of Phase I assessments and include a discussion in their report. This does not mean vapor intrusion sampling is required, just that the consultant needs to consider whether site conditions dictate identifying vapor intrusion as a potential "Recognized Environmental Condition" or REC in the findings section of the Phase I report.

Agency File Reviews

The new standard adds a section on agency file reviews which basically states:

  • If the property or adjacent property is identified in governmental records search, the relevant records in the agency files should be reviewed...at the discretion of the environmental consultant;
  • If the consultant doesn't think the file review is warranted, then it must include its opinion in the final Phase I report;
  • A consultant can review information from other sources (e.g. on-site records, user provided records, local government agency records, etc.)
  • A summary of the information reviewed should be included in the report as well as an opinion as to the sufficiency of those records.

It is not always the case that regulatory files are reviewed.  Inclusion of this new guidance on file reviews will make it more common practice that such reviews take place.  

However, agency records are not always readily accessible.  Often there is a lot of time pressure on completing the Phase I report.  However, if that pressure forces the consultant to include a statement that records were not reviewed and the review was warranted, that could create a huge issue with the Phase I report. 

Conclusion

U.S. EPA still recognizes 1527-05 as consistent with the AAI rule.  However, if the new standard is deemed as simply a clarification, it begs the question as to why any proposal for a Phase I assessment would reference 1527-05 going forward and not 1527-13.  

After recognition of 1527-13 by U.S. EPA this month, vapor intrusion issues will become even a bigger part of due diligence going forward.  In addition, consultants will face increasing pressure to balance finalizing reports to meet client deadlines, with the need for comprehensive reviews of available records. 
 

A Revised ASTM Standard for Due Diligence to Be Issued

A task force assigned to review the ASTM standard for Phase I environmental assessments has completed its review of the current standard.  It has sent its recommendations to U.S. EPA who is expected to accept the recommendations. 

Any revisions to the ASTM standard for Phase I has big implications.  Phase I reports are a requirement of the "All Appropriate Inquiries" process to establish CERCLA liability defenses.  Most property transactions involve a Phase I assessment.

As reported on the Schnapf LLC blog, the revised standard will likely include the following changes:

  • definition of REC was tweaked to make it more understandable to environmental consultants;
  • A new term “Controlled REC” (CREC) was added which is intended to complement the HREC term. The latter applies to prior RECs that have been remediated to unrestricted cleanup levels while CREC applies to risk-based cleanups that have ongoing institutional or engineering controls;
  • creates a presumption that the environmental professional should perform a file review of agency records in determining the presence of a REC. If the environmental professional decides a file review is not required, it must explain why a file review was not performed;
  • the revised legal appendix clarifies scope of the CERCLA indoor air exclusion from definition of release and also discusses other CERCLA exclusions;
  • the revised legal appendix clarifies the role of that vapor intrusion in phase 1 reports (it is just like any other exposure pathway- (groundwater, air, soil). In most cases, there will be an underlying REC (contaminated groundwater or soil) that will already be a REC. However, there may be instances where there is an off-site source where there is potential for vapors to have laterally migrated through the soil gas to the subject property. In such an scenario, the potential for Vapor intrusion could be a REC. However, determining if the pathway is completed will usually beyond scope of the phase 1unless otherwise specified by the client;
  • a new Business Environmental Risk (BER) appendix describes the BERs that are commonly encountered for commercial properties and discusses factors that may be considered in determining if a client wants to include BERs in the scope of the phase 1.

A couple comments on these potential changes:

  1. REC Definition-  It will be interesting to see how the definition of REC is modified.   In my experience, there is a wide range of interpretations applied by environmental consultants.  Some will opine that any property that had industrial operations should be identified as a REC.  Others say there needs to be some information suggesting a release or at least the potential for a release to have occurred to be identified as a REC.
  2. Vapor Intrusion-  Adding specificity that vapor intrusion issues should be identified as a REC will add to the complexity of analyzing Phase I reports.  With the clarification discussed, it may lead to the vapor intrusion pathway being identified as a REC in more Phase I reports.  This has big implications for due diligence because the vapor intrusion pathway is often the most difficult to assess in a subsequent Phase II.  It doesn't help that U.S. EPA still hasn't finalized its vapor intrusion guidance and relies upon 2002 OWSER vapor intrusion guidance still labeled draft.

Tenants Can Now More Easily Qualify for Protection from Liability for Pre-Existing Contamination

Often times businesses only worry about performing due diligence (Phase Is and Phase IIs) when they are purchasing a building, factory or land.  In my experience, many tenants never think about the fact that they could inherit liability for pre-existing contamination just by leasing property.  However, tenants, particularly those that are leasing industrial space, should be concerned and protect themselves accordingly. 

Now, U.S. EPA has created an even larger incentive for performing proper due diligence as a tenant.  On December 5, 2012, US EPA issued new guidance that expands liability protections for tenants that could be held liable for cleanup and remediation costs at leased properties.  

Quick Primer on Tenant Liability under CERLCA

The environmental statute that has the most broad reaching liability for pre-existing contamination  is the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)- also known as Superfund.  Under CERCLA, any "owner" or "operator" can be held jointly and severally liable for cleanup costs at a site for even contamination that was present prior to their use or ownership of the property.

Tenants can be deemed an "owner" under CERCLA depending on the structure of the lease.  For example, they could be deemed a de facto owner if they have control over the entire property.

Tenants could also be held liable for pre-existing contamination as an "operator" if they store or generate hazardous substances on the leased property during the term of the lease.  There are varying tests for determining whether a tenant should be deemed an "operator" under CERCLA.  However, any tenant utilizing hazardous substances on a leased property should be aware that they could be deemed potentially liable for pre-existing contamination.

Tenants and the Bona Fide Purchaser Defense (BFPD)

In order to encourage re-use of brownfield properties, in 2002 Congress passed the Small Business Liability Relief and Brownfields Revitalization Act.  As part of the Act, Congress created the "bona fide purchaser defense" (BFPD) which allows purchasers that conduct proper due diligence and follow other requirements  to purchase property with knowledge of hazardous substance contamination without incurring liability as an "owner" or "operator." 

However, when the law was passed in 2002 it did not provide the same opportunities to tenants to qualify for the BFPD.  The only way a tenant could qualify for the protection is if they were deemed an "owner" based upon the lease terms or if the owner already qualified for the BFPD.  Tenants under traditional lease arrangements with an owner that never qualified for the BFPD fell into a gap.  They simply couldn't qualify on their own for BFPD protections. 

Finally, in December 2012, EPA recognized there was a gap in potential liability protection for most tenants and it issued a new guidance allowing all tenants to qualify for the BFPD if they meet certain conditions, including:

  1. Don't dispose of hazardous substances on the property;
  2. Conducts proper due diligence (known as "All Appropriate Inquires");
  3. Makes all legally required notices;
  4. Takes "reasonable steps" regarding releases;
  5. Cooperates with regulators;
  6. Complies with any use restrictions or controls designed to protect against exposure to contamination;
  7. Complies with administrative subpoenas and information requests; and
  8. Is not potentially liable for response costs or affiliated with a person who is liable for response costs at the facility.

It is worth noting that this is only enforcement discretion guidance and not statutory liability protection.  This means that EPA could still file a suit against a tenant if it felt the circumstances justified such an action.

Tenants Should Consider the BFPD and Contract Provisions to Protect Themselves

Due to the large liability exposure associated with leasing property that may have had some history of use of hazardous substances, tenants should take steps to protect themselves.  First, perform due diligence prior to signing the lease.  Second, insist on contractual provisions that release and protect them from liability associated with pre-existing contamination. However, contract provisions still don't prevent regulators from suing you.  Therefore, as a third step tenants should evaluate are the benefits of the BFPD as another means of mitigating risk.

 

Questions Persist Regarding the Quality of Environmental Assessment

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.