Phase I/Phase II Assessments

Since the sunset of the very successful Clean Ohio Brownfield Revitalization Program, brownfield redevelopment has slowed in Ohio.  At a time when the economy is finally doing well, and real estate development is in full recovery mode, brownfields are still being passed over for less costly redevelopment options.

This past week, Representative Arndt introduced House Bill 737 (Click on link hb737_00_IN) which would incorporate the CERCLA Bona Fide Purchaser Defense into Ohio Law.  The Greater Ohio Policy Center (GOPC) has been working with Rep. Arndt on the legislation.  As discussed below, if passed, the legislation would fill a gap in Ohio law that discourages brownfield redevelopment.  The current legislation also includes an option to obtain a “concurrence letter” from Ohio EPA that would help provide comfort to businesses, developers and lenders as to whether the proper due diligence steps were performed to establish the environmental liability defense.

Background

The cost to cleanup historical contamination at brownfield properties has long discouraged reuse and redevelopment.  As discussed in prior posts, brownfield properties are often bypassed to develop on greenfield space moving jobs out of urban cores and promoting urban sprawl.

In 2002, Congress created the “Bona Fide Purchaser Defense” (BFPD) as an amendment to CERCLA to encourage brownfield redevelopment.  Under the BFPD, a buyer of property can establish a defense to environmental liability under CERCLA if the buyer performs environmental due diligence prior to purchase in accordance with U.S. EPA standards.

U.S. EPA adopted the “All Appropriate Inquiries” rule which establishes the mandatory level of environmental due diligence a buyer must perform to qualify for the liability defense.  If the due diligence (i.e. Phase I and Phase II assessments) identifies an ongoing release or risk to human health or the environment, the buyer must take “reasonable steps” to address those issues.

A key aspect of the BFPD is that “reasonable steps” does not mean full cleanup of the property.   Rather, the goal is to make the property safe for reuse and to prevent any ongoing threats to the environment.  In this manner, the BFPD offers a much more cost effective means to putting brownfields back into productive use than traditional full blown cleanup programs such as the Ohio EPA Voluntary Action Program (VAP).

Gap in Ohio Law

While the BFPD exists to protect a buyer from liability under CERLCA, a federal law, it does not extend protection from liability under state laws.  Currently, even if a buyer performs “All Appropriate Inquiries” on a property in Ohio, the buyer will receive no legal liability protection under Ohio law.

H.B. 737 would fill this gap.   It would extend protection from liability under Ohio law for pre-existing “hazardous substances” contamination on property to buyers who take all the necessary steps to qualify for BFPD.  By strengthening protections under the BFPD, buyers will have a greater incentive to reutilize brownfields in Ohio.

In extending the BFPD to liability under Ohio law, Ohio would be playing catch up with many other states, such as Indiana and Michigan, which already have incorporated the BFPD or BFPD like legal protection into state law.

Concurrence Letter

Under federal law, the BFPD is self-implementing, meaning a buyer completing “All Appropriate Inquiries” does not submit anything to U.S. EPA to verify they complied with the rule.  Rather, the buyer relies on advice from their environmental consultant and attorney that they have taken the proper steps to qualify for the BFPD.   The first time a buyer will learn whether they did fulfill the necessary steps to qualify for the BFPD is when it is challenged in court.  Ashley II is an example where a buyer didn’t fare well in asserting the BFPD.

While there are positives with a self-implementing program (i.e. no regulatory sign-off), many clients I work with are more conservative with regard to taking on risk.  Some may like the option to have Ohio EPA review their Phase I and Phase II (if needed) to confirm they have done enough to qualify for the BFPD.  Other clients would be comfortable without such a comfort letter.

H.B. 737 provides an optional track to receive a concurrence letter from Ohio.  Buyers still have the option of following the traditional self-implementing approach.

Indiana already has such an option available, referred to as a “comfort letter,” and it is widely used by buyers.  Providing such an option under Ohio law would provide more tools for brownfield redevelopment.

JobsOhio launched a new site selection tool called SiteOhio designed to provide easy access to businesses looking for locations to either develop new facilities or buy/lease existing buildings.  The easy to use web based tool allows you to search by the following parameters:

  • Available buildings of a certain size
  • Vacant land based on acreage
  • Businesses that may be for sale
  • Properties in specific communities by either city or county

The site selector tool allows you to compare filter properties by energy or broadband capability or labor force.  The tool is designed to allow businesses to more quickly identify sites that meet their needs.  

The site is also designed to certify sites as ready for development with available utilities, zoning, etc. The site hasn’t yet been fully populated with available sites, but JobsOhio will ensure that happens over time. Communities will be encouraged to go through the JobsOhio site authentication process to have sites in their communities certified as ready.

The JobsOhio authentication process is designed to identify sites that are "ready to develop on day one, saving businesses time and money."  JobsOhio in its announcement described the authentication process as follows:

“Through the SiteOhio authentication process, each site undergoes a usability audit designed to vet sites with companies in mind. All due diligence studies look to ensure strict criteria are met, as well as utilities and other site assets are on site, with excess capacity and accessible for doing business,” JobsOhio said in announcing the tool.

The site doesn’t include other information that may be key to determining suitability of a site, such as:

  • Taxes
  • Ease of permitting
  • Capacity of sewers
  • Availability of water

Implications for Brownfield Redevelopment

As JobsOhio stated in its announcement regarding the site selection tool, the purpose is to identify sites "ready to go on day one."  This certainly would not include brownfield properties.  A quick search of industrial properties by acreage shows a number of greenfield sites, typically industrial parks ready for development.  A quick search of available buildings identified mostly sites that would not qualify as traditional brownfield properties.  

While the tool is an excellent idea to expedite identification of readily available sites for development, the site selection tool will not encourage reuse of urban sites.  If the goal is of the site selector tool is to populate sites "ready to go on day one," then in order to encourage redevelopment of brownfield properties this would appear to encourage reconsideration of programs such as the Clean Ohio Redevelopment Ready Program.  Under this program, Clean Ohio funds were used to address environmental issues at brownfield sites upfront to facilitate reuse.

After more than ten years of building a brownfield redevelopment program, Cuyahoga County Officials are currently contemplating bringing the program to a close.  Over the last few years significant staff cuts have reduced the amount of resources dedicated to the program.  Now it appears that in 2017 the various incentives available to attract redevelopment to brownfields may no longer be available.  Or, there will be no staff dedicated to run the program.

Hopefully, County Officials will understand the critical need the brownfield programs provide to overcome the major impediments to reuse of old industrial and commercial buildings in the region.  Even with the recent economic development boom in Cleveland there remain hundreds of underutilized or vacant brownfield properties.

One of the most critical needs the County program fills is grant funds to pay for Phase I and limited Phase II environmental assessments through the County’s Brownfield Community Assessment Initiative. Under the program, the County would provide up to $5,000 in grant funds for Phase I assessments and up to $35,000 for Phase II assessments.  These incentives help overcome the first major hurdle to brownfield redevelopment- having no information about the condition of the property.  Many developers and businesses aren’t willing to front these assessment costs as part of early evaluation of a property.  

The County also provided forgivable loans to help offset environmental cleanup costs.  Under its Redevelopment Ready Program, the County can provide loan funds up to $1 million with 40% of the total loan forgivable if certain criteria are met.  This type of loan was a critical tool in the Miceli Dairy expansion project which was one of the significant brownfield redevelopment projects in Northeast Ohio.  Without County incentives, both assessment grants and a forgivable loan, the project never would have occurred.  The expansion kept and expanded jobs in a critical area in Cleveland.  

The County had offered a wide array of programs and incentives to help renovate vacant buildings and spur brownfield redevelopment.  It took nearly ten years to build up the expertise and incentives which made it a very successful program.  For a full list of the County Brownfield Programs click here.

We can only hope that the new Administration realizes what a critical function a brownfield program plays in an area with a long industrial past and limited space for redevelopment.

Companies expanding onto brownfield sites need public incentives to make their projects viable.  However, the days when cleanup of contamination by itself could attract public incentives are long over.  Under the new local and State brownfield programs companies must make job commitments and/or improvements to the property to attract government assistance.

When companies work with State and local officials to obtain brownfield incentives they must engage in negotiations regarding what they are willing to commit to as part of the project.  These commitments will often extend 3 or more years out into the future when it becomes more challenging to predict economic and business conditions.

The Dayton Daily News discussed the State of Ohio’s pursuit to recover incentives from companies that failed to meet business expansion or development commitments.  The DDN reported:

State officials reviewed 329 economic development deals that concluded in 2015 and found that all but 50 had substantially complied with the terms, such as hitting job creation and retention numbers, training workers and generating new payroll.

If companies fail to live up to their promises, the state may demand repayment or make other changes to the deal. In the 50 cases where targets weren’t hit, the state is moving to clawback a collective $776,000. Some of the biggest take backs are being launched against well-known, big companies — Proctor & Gamble Co., U.S. Steel Corp., and The Dannon Co. — for failing to create or retain promised jobs

This is very relevant to JobsOhio brownfield grants and loans provided to companies to assist with sampling or cleanup at contaminated properties.  The grant agreements for the JobsOhio Revitalization Program include contractual commitments to increase payroll, add jobs or make capital investments to expand the business.  For example, at minimum, JobsOhio typically requires 20 new jobs over a three year period to compete for brownfield cleanup grant funding under its Revitalization Program.

The grant agreement language is somewhat vague as to what happens if the grant commitments are not met by the company.  The language does allow for companies to assert that changing economic conditions resulted in unmet commitments.  However, the contract language does leave open the possibility JobsOhio could request return of the entire brownfield grant provided.

It is important that companies pursuing brownfield incentives be aware of the consequences of not meeting commitments.  It is also important to avoid putting forward unrealistic job or capital investment commitments just to attract upfront grant money.  Companies that over commit open themselves up to clawback by the State of the funds provided as well as publicly being outed for failing to live up to their commitments.

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.

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.

 

Attorney General Mike DeWine should be commended for putting together a comprehensive manual regarding legal issues, resources and incentives available to assist with economic development. The manual is called the 2015 Ohio Economic Development Manual.  

The Attorney General collaborated with a number of state agencies and local economic development organizations in putting together the manual.  These collaborators helped summarize a number of highly complex issues and programs.  

To my knowledge, no other state official has attempted to compile such a manual.  For those like myself who are engaged in economic redevelopment projects, in particular brownfield redevelopment, it can take a significant amount of time to stay up on the latest issues, programs and incentives.  

While the manual is an excellent resource, there is no way it can provide anything other than a basic level of understanding regarding complex issues such as brownfield redevelopment.  The purpose of this post is to raise awareness of the various layers of complexities related to brownfield redevelopment that are not discussed or oversimplified in the manual.

Overview of Brownfield Section of the Manual

The manual provides an overview of the stages of brownfield redevelopment as well as a quick summary of possible incentives.

Stages of Brownfield Redevelopment

The manual states the following as the stages for brownfield redevelopment:

  • Identify Site
  • Develop remediation Plan
    • Due Diligence
      • Phase I (paperwork, database review and site visit)
      • Phase II (sampling)
    • Cleanup- Under Ohio EPA’s Voluntary Action Program (VAP). Once cleanup complete a Covenant-Not-to-Sue (CNS) will be issued by the State

The manual provides an overly simplistic view of brownfield redevelopment.  Here are just some of the issues with this summary:

  1. Review of Phase I and Phase II Reports-  As discussed numerous times on this blog, it is very important to closely review any Phase I report received on a property to make sure it was done correctly (ASTM or VAP standards).  Also, it is not uncommon for different consultants to reach different conclusions as to whether something constitutes an issue to be identified in a Phase I report.  Finally, formulating the purpose and scope of Phase II testing is a critical component to the due diligence process. Phase II costs can range from $10,000 to $300,000 depending on the site and risk mitigation strategy to be employed.
  2. Alternatives to Full Cleanup-  There are alternatives available to property owners to mitigate environmental risk other than full cleanup of the property.  A very common approach discussed at length in prior blog posts is the Bona Fide Purchaser Defense (BFPD) under CERCLA. Depending on the Client’s risk tolerance and the issues presented at the site, BFPD can be a much faster and less expensive option to the VAP to mitigate risk and address the more serious threats a property may present.
  3. Eligibility Issues in the VAP-  There are different types of contamination and sites that are not eligible for remediation under the VAP.  These include, but are not limited to: underground storage tanks (USTs), hazardous waste management units (RCRA closure), PCBs, (TSCA) and sites under federal or state enforcement.
  4. Environmental Insurance-  No where does the manual discuss the possibility of environmental insurance to address risks presented by a site.  Such insurance is commonly used in business transactions as well as brownfield redevelopment projects.
  5. Cleanup Design-  The manual suggests that a party can consult with Ohio EPA’s VAP Technical Assistance program in developing its cleanup plan for a project.  While Ohio EPA’s Technical Assistance program is an extremely useful tool, the manual does not indicate that a private party has a great deal of control over designing a cleanup to meet applicable standards.  Since the cleanup is the most expensive component, it is critical to evaluate the options available to meet standards (i.e. engineering controls, institutional controls and addressing exposure pathways).

Incentives Available

The manual discusses the following incentives available to assist with brownfield redevelopment:

  • Ohio EPA Targeted Brownfield Assessment- Ohio EPA program to pay for Phase I assessments and potentially Phase II activities using its Site Investigation Field Unit (SIFU).
  • EPA VAP Technical Assistance- Ohio EPA provides technical assistance on how to complete a VAP cleanup on the property.
  • Ohio Brownfield Fund- Loans up to $500,000 for Phase II activities and $5 million for cleanup
  • JobsOhio Revitalization Loan and Grant Fund-  Up to $200,000 for Phase II, $1 million in grant funds and $5 million in loan funds for cleanup activities.
  • Abandoned Service Station Fund Program-  Class C underground storage tank (USTs) cleanup fund for abandoned tanks.  Up to $100,000 for assessment and $500,000 for cleanup activities.

This list of available incentives provided in the manual is a good basic overview of the major state programs in Ohio.  However, the manual does not mention the fact there are a number of local brownfield incentive programs that will provide grant funds for Phase Is, Phase IIs and cleanup activities. In many instances, these local programs can be a better fit for a particular project.

Furthermore, each of the programs listed above have important eligibility criteria, limits on reimbursable costs as well as development or job creation requirements in order to secure funding.  It is critical for a party to understand these commitments prior to accepting grant or loan funding.

Conclusion

This post is not meant as a criticism of the Attorney General’s efforts in putting together the manual.  The manual is a good place to start to get a basic understanding of various issues and programs that can impact economic development.  However, with complex issues like brownfield redevelopment, the redevelopment process is more of an art than exact science.  An over simplified view can result in failed projects or unnecessary costs.  

In a novel case, the Court of Appeals (Second District Montgomery County) held that Ohio EPA had no duty to disclose knowledge of contamination to a buyer of a contaminated property, even though the Agency had records in its files documenting additional contamination.  See, Ohio v. Republic Envrtl. Sys. (Ohio), Inc., 2015 WL 5783650 (Ohio Ct. App. Sept. 30, 2015).  

Key Facts 

Buyer purchased a property that was in the middle of a hazardous waste cleanup (RCRA).  Seller makes no representations regarding the condition of the property (agreement contains an "as is" clause). Buyer also agrees to assume Seller’s cleanup obligations.

Prior to purchase, Ohio EPA approves a cleanup plan ("RCRA Closure Plan").  The Buyer purchased the property in reliance on the closure cost estimates in the plan.  After Buyer purchases the property, it is later discovered that additional contamination is present on the property which will result in a significant increase in cleanup costs.  Buyer asserts Ohio EPA knew the contamination was present based upon documents it had in its files.

Court Holds Ohio EPA Has No Duty to Disclose

Buyer argued that Ohio EPA had a duty to disclose all known contamination because the Agency had records in its files showing additional contamination.  Buyer asserted that the Ohio Administrative Code provisions related to approval of cleanup plans (RCRA Closure Plans) placed an affirmative duty on the Agency to inform the Buyer of everything it knew regarding the property.

Court disagrees, holding that the Agency simply oversee the cleanup process.  Owners or operators are responsible for identifying all contamination and cleaning up the property to meet standards.  

The Court noted that the Buyer did not perform any independent due diligence prior to purchasing the property.  The Court said, Buyer should not have relied only upon the Agency’s approved cleanup plan cost estimate.

Lessons

Key lessons from this case:

  1. The burden is on the Buyer to perform sufficient due diligence prior to purchase;
  2. Don’t rely upon Agency approved cleanup cost estimates, Buyer should perform their own independent analysis of cleanup requirements; and
  3. Cleanup of environmental sites always involve the risk that additional contamination will be discovered during the cleanup process.  

An environmental audit is a self-evaluation of current compliance with applicable environmental regulations.  The audit is typically performed by an outside environmental consultant. However, more sophisticated businesses can utilize advanced electronic compliance tools or their own EHS personnel.

An audit can be wide in scope (i.e. compliance with all applicable regulations) or it can review just one issue at a specific facility (Ex: Does a particular process need an air permit). Common areas of noncompliance identified in audits include:

  • Failure to obtain permits or update expired permits;
  • Failure to evaluate waste streams; and
  • Failure to perform mandatory reporting (TRI and SARA are very common reporting violations)

There are many reasons why a company should consider performing an environmental audit, including the following:

1.  Environmental Audit Policies and Immunity Laws

The states and federal government have laws and policies designed to encourage performing environmental audits.  These policies and laws provide incentives as well as privilege over communications related to the audit.

U.S. EPA has its own environmental audit policy which encourages environmental audits and self-disclosure of violations.  Under the current policy, U.S. EPA will provide penalty forgiveness if the company meets nine (9) requirements when making a self-disclosure.  To take advantage of these incentives, regulated entities must voluntarily discover, promptly disclose to EPA, expeditiously correct, and prevent recurrence of future environmental violations.

Many states have passed environmental audit & immunity laws.  Each state has different requirements with regard to self-disclosure and penalty forgiveness.  However, in many cases the immunity laws provide very strong incentives to self-disclose and correct violations.  The protections and incentives offered at the state level are often much better than available under U.S. EPA’s audit policy.

Many state’s allow all records  associated with the performance of an environmental audit to be privileged.   U.S. EPA does not provide privilege for environmental audit.  Therefore, in order to protect communications related to the audit from disclosure, the audit must be performed in a state that has passed an environmental privilege law.

Such privilege laws allow the company to review compliance and consultant with legal counsel prior to making a determination whether to self-disclose any violations identified during the audit.  It is important to carefully review the exceptions to privilege.  Some examples of common exceptions include:

  • Criminal activities are not entitled to privilege
  • If there is a mandatory duty under existing environmental regulations to report a violation (Ex:  Title V certification of compliance)
  • The audit cannot be performed after the company is aware it is the subject of a possible environmental enforcement action.

2.  Buying a Business is the Perfect Time to Perform an Environmental Audit?

When purchasing a business it is often difficult to assess whether the seller has taken environmental compliance seriously.  Most transactions rely upon three strategies to address the risk that the business being purchased may not be in compliance:

  1. Reps & Warranties in Purchase Agreement-  This is the most common strategy.  While a breach of a rep may provide buyer a right to indemnity, it doesn’t protect buyer from the regulator.  In the eyes of the law and regulator, the current owner is responsible for ensuring compliance.
  2. Data Room-  It is common to request that documents related to environmental compliance be placed into the data room for the transaction.  However, a data room that has no documents related to environmental issues does not mean there are no issues, it just means there may be no historical documents which help identify compliance issues.
  3. ASTM 1527-13 Phase I Environmental Assessment–  An ASTM 1527-13 Phase I environmental assessment is geared to identifying historical releases of contamination, not whether a business or facility is in current compliance.  Evaluation of compliance in terms of permitting, reporting or documentation are considered non-scope items for the typical Phase I environmental assessment.  

As discussed above, each of these strategies have their limitations.  A material compliance evaluation (i.e. audit) of the business or facility to be purchased is the best way to get a comprehensive evaluation.

3.  The Risk of Noncompliance

You don’t just need to be purchasing a business for an environmental audit to make sense.  It is important to understand that noncompliance can expose the business to civil penalties.  Most environmental statutes impose penalties on a per day basis.  Therefore, the longer a business goes without correcting its violations, the larger the potential penalties.  

It is important to determine the appropriate strategy for addressing noncompliance issues.  Many companies simply turn in missing permits or reports without ever considering utilizing environmental audit laws or policies.  However, the submission of those permits or records can immediately trigger a significant enforcement actions with penalties.

Once regulators identify serious noncompliance at a facility through their own inspections, it is much more likely that facility will get more intense scrutiny.  This could mean more inspections or multi-media inspections.  Most regulators are inclined to work with and provide leniency to companies that self-audit and correct their noncompliance.

4.  Audit Laws and Strategies are Complex

If a business decides to conduct (or is thinking about conducting) an environmental audit, it is important to consult is experienced environmental attorney.  Many of the laws and policies associated with privilege, immunity & self disclosure have unique and complicated requirements.  It is important to put a strategy together before initiating an audit.

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.