EPA Adopts New Standard for Environmental Assessment of Phase I Sites | Harris Beach PLC
Lenders need to consider the scope and scale of the loan Phase I Environmental Site Assessment (“Phase I ESA”) they use them regularly in connection with the acquisition and financing of real estate projects. The Environmental Protection Agency (“EPA”) announced its intention to adopt a new standard on May 13, 2022, expanding the scope of the review.
The proposed standard would not supersede or replace the existing rule, but would create a second set of standards for environmental consultants who are routinely engaged by banks, lending companies and other institutions in connection with real estate project loans.
EPA approved ASTM International (ASTM) Standard E1527-21 as an additional standard that includes the “all reasonable requests” (“AAI”) Component for potential liability protection under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).
AAI is a process to assess the environmental history and condition of properties to assess potential liability for contamination from a Phase I ESA. AAI requirements apply to each party, including a lenderwho may be eligible for protection from CERCLA liability as an innocent landowner, related landowner, or bona fide prospective purchaser.
Lenders holding mortgages on properties as secured lenders are exempt from CERCLA liability if certain criteria are met. Section 101(20) of CERCLA contains a secured creditor exemption that exempts owners or operators from liability for lenders holding property in a CERCLA facility primarily to protect their security interests in that facility provided they do not participate “in the administration of the institution”.
In general, participation in governance occurs when a bank exercises decision-making power over the environmental compliance of a property or exercises control at a level similar to that of a manager of the facility or property. Participation in the management does not include Actions such as conducting property inspections, requiring a contamination response, providing financial advice, or renegotiating or restructuring the terms of the security interest.
The secured creditor exemption also provides that foreclosure on a property will not result in the liability of a lender provided the lender takes “reasonable steps” to dispose of the property “at the earliest, commercially reasonable time and on commercially reasonable terms”. to sell. Generally, a bank or other lender can continue in business and cease operations on a property so long as the property is put up for sale shortly after the foreclosure date or at the earliest commercially reasonable time. For now, the standards will coexist and any standard can be used.
Among the main differences between the standards:
- Under the new standard, the consultant would appear to be instructed to consider risk factors that the consultant could have ignored under the previous standard, potentially leading to more conservative conclusions. Phase I ESA conclusions are based on the judgment of the environmental professional, which means that different consultants can and do arrive at different classifications after evaluating the same property. A lender should be aware of the different standards and inquire which standard is being used by their advisor. While the existing standard is still accepted by the EPA (for now) as meeting the AAI requirements for liability protection, it is perhaps foreseeable that over time the existing standard could leave lenders vulnerable to claims that a Phase I ESA performed under this Standard was intentionally less thorough and accordingly is not sufficient to protect the lender from the underlying conditions giving rise to a CERCLA liability. This could potentially trigger litigation aimed at stripping lenders of CERCLA liability protection for a Phase I ESA conducted under the existing standard.
- The new standard could be further interpreted as instructing an environmental consultant to rely on the environmental professional’s experience of the likelihood that certain conditions will result in releases, rather than the risks associated with such activities due to the lack of current “evidence of a release”. “ depreciate. ”
- The new standard would require Phase I ESAs to provide the basis for environmental professionals to identify controlled Recognized Environmental Concerns (CRECs) along with copies of the underlying regulatory documentation to support such a conclusion. For the prospective buyer or lender this is a positive change as it allows the user to better understand the risks associated with the property and provides the user with the source documents for any further obligations in the property in relation to a remedy.
- According to the proposed new standard, the ESA phase I is valid for 180 days from the date of the review first of five elements by the environmental professional, so the ‘shelf life’ of the completed Phase I ESAs may be less than six months depending on the length of time needed to complete the review. Under the existing standard, the 180-day period runs from the date of issue of the report. In both cases, the phase I ESA can be extended to one year.
- Certain historical sources must be considered in Phase I of the ESA, including aerial photographs, fire insurance maps, local street registers, topographic maps, building authority records, interviews, property tax records and zoning/land use records, with an explanation if specific material is missing.
- The new standard clarifies that emerging contaminants will become subject to ESA’s Phase I review once they are classified as hazardous under CERCLA. Until then, lenders may wish to discuss the risks and benefits of including certain emerging pollutants within the scope of the Phase I ESA with their environmental advisor and legal counsel.
- In practice, a Phase I ESA may become more expensive under the new standard, leading to additional costs for borrowers and buyers.