Upgraded Standards for Phase I Site Assessments May Impact Loans and Sales

Phase I Environmental Site Assessments (Phase I’s) have been the subject of this column in the past. See, for example, BIC’s August 2013 issue (pg. 94). Recent revisions to the standards for Phase I’s have been announced that will lead to more comprehensive Phase Is, which will benefit purchasers/lenders to the potential detriment of sellers/borrowers.

Phase I’s are widely used by real estate purchasers and lenders to discover past uses of property and potential contamination of that property. The requirements for Phase Is are set out in an ASTM standard, No. E1527-05, and EPA’s “All Appropriate Inquiries” Rule (40 CFR Part 312). Compliance with the existing ASTM standard is deemed compliance with the EPA rule. While both the ASTM standard and the EPA rule include specific guidelines and best practices to which an environmental professional conducting a Phase I must strictly adhere, there are differences that make the EPA rule more stringent.

ASTM has just revised Standard No. E1527-05 and will issue a new standard, No. E1527-13, that includes an updated and more detailed set of guidelines and best practices.  EPA is expected to recognize or adopt the new standard and it will become the new standard for environmental professionals conducting Phase I’s. This will bring the ASTM standard more in line with the EPA rule.
There are two revisions worth noting. The first relates to an update to or clarification of the definition of Recognized Environmental Condition (REC). The new definition focuses on the presence of hazardous substances that are indicative of a release or material threat of a future release, which brings it more in line with the objectives of the EPA rule.

However, the main change to the definition of REC relates to subsets of what is considered an REC. The definition of Historical Recognized Environmental Condition (HREC) will now include only past releases that have been addressed to unrestricted residential use. A new term, Controlled Recognized Environmental Condition (CREC), has been added to include all other releases that have been addressed but in which contamination remains in place. Additionally, the definition of a “de minimis” condition was revised to ensure no HREC or CREC could be included as a de minimis condition.

This change removes a great deal of discretion from the environmental professional conducting the Phase I. Previously, the environmental professional had discretion to determinate a past release might be an HREC or a de minimis condition and might not have included that information in a final Phase I report. Now, any past releases, whether an HREC or CREC, will be included in the report and the inclusion of these conditions could influence a decision to extend a loan or complete a sale. It could also lead to the addition of conditions in the transactional documents designed to protect the purchaser/lender.

The second major change relates to migration of contamination. Under the new standard, vapor migration (that is, migration of contamination from the subsurface upward in the form of vapors) is included within the new definition of migration. Vapor migration will now be considered an REC. Obviously, additional RECs will create greater uncertainty for purchasers/lenders in deciding whether to move forward with the transaction.

In short and overall, these revisions add more and higher quality information for a purchaser/lender, which is the overall intent of the Phase I process. Nevertheless, the added benefit to the purchaser/lender seems to create, in a zero-sum way, a disbenefit for a seller/borrower.

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