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23 rd Annual Real Estate Symposium Snowmass Village, Colorado The New Rules for Environmental Assessments in Real Estate Transactions by John R. Jacus.

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Presentation on theme: "23 rd Annual Real Estate Symposium Snowmass Village, Colorado The New Rules for Environmental Assessments in Real Estate Transactions by John R. Jacus."— Presentation transcript:

1 23 rd Annual Real Estate Symposium Snowmass Village, Colorado The New Rules for Environmental Assessments in Real Estate Transactions by John R. Jacus Davis Graham & Stubbs LLP July 30, 2005

2 Small Business Liability Relief and Brownfields Revitalization Act of 2002 Additional CERCLA defenses established Made EPA create a federal standard for “all appropriate inquiry” in ESAs EPA initiated a negotiated rulemaking which led to a proposed rule, published at 69 Fed. Reg. 52542 (August 26, 2004) Final Rule expected by end of 2005

3 The AAI Rule Substantially alters the conduct of ESAs Affects eligibility for new CERCLA defenses Creates unprecedented “continuing obligations” for owners to retain their defenses

4 Presentation Overview Compares AAI to current practice Reviews the expanded defenses and criteria for eligibility Reviews proposed revisions to ESA standards and procedures Notes key issues and practice pointers to avoid common pitfalls

5 ESA Definition & Purpose Systematic evaluation of property To determine contamination/other conditions that can create liability, remedial obligations, development restrictions, unanticipated costs and delays. Ouch.

6 Phase 1 ESAs ASTM Standard Practice E 1527-00, most common, a minimum Phase 1 Created to satisfy “all appropriate inquiry” standard and invoke “innocent purchaser” defense in SARA amendments of 1986 ASTM-equivalent Phase 1 ESAs routinely required by lenders, buyers, etc.

7 ASTM Phase 1 ESAs Looks at past ownership and uses of property in a checklist approach To identify “recognized environmental conditions,” or hopefully, their absence. Unless modified, it is limited to CERCLA hazardous substances and petroleum only

8 Items Not Covered by ASTM Wetlands and endangered species Cultural & historic resources Regulatory compliance Industrial hygiene/health & safety Asbestos & Radon Lead-based paint/lead in water systems Indoor air quality

9 ASTM Phase 1 Coverage Includes petroleum Draft Standard Practice E 1527 for 2005 to include mold Buyer/User of ASTM Standard Practice must request add-ons, determine if sampling (Phase 2) is warranted, etc. Be aware of other standards, e.g., for raw land, agricultural lands

10 Why Perform ESAs? CERCLA liability defenses Lender requirements Insurer requirements Brownfields funding requirements Seller evaluation of sale potential Avoid delays and restrictions (later on) Protect Buyer’s interests

11 You Need to Understand ESAs Because you… –Are on the Front Lines –Contract for ESAs –Control timing of deal (?) –Are in the best position to know proper scope of ESA to meet the client’s needs; and –Lenders/insurers/investors will require them.

12 Current Practice: ASTM Phase 1 CERCLA’s broad liability net prompted need for an “innocent purchaser” defense SARA amendments to CERCLA created it Defense requires that owner show it “had no reason to know” of hazardous substances by –Having made “all appropriate inquiry” –Prior to or at time of acquisition –Into previous ownership & uses of property –Consistent with good commercial or customary practice to minimize liability

13 ASTM Phase 1 Standard To satisfy original AAI, developed requirements and procedures for: –Site public records review –Interviews –Site inspections –Identifying Recognized Environmental Conditions –What comprises Final Phase 1 Report

14 ASTM a Checklist Approach Series of questions about the property Answered in light of information gathered Answers which tend to indicate a non-de minimis Recognized Environmental Condition elevate the inquiry –Phase 2 sampling & analysis –Reporting and remediation, etc.

15 2002 Brownfields Amendments Expanded CERCLA defenses to: –Amend innocent landowner defense –Add bona fide prospective purchaser defense –Add contiguous property owner defense

16 Amended Innocent Landowner Defense Must demonstrate that: –Did not know and “had no reason to know” of contamination prior to purchase –Acquired property after all disposal of hazardous substances –Satisfied AAI and “continuing obligations” (new)

17 Bona Fide Prospective Purchaser Defense May purchase property with knowledge of contamination, but must show: –Purchase occurred after January 11, 2003 –Acquired property after disposal of hazardous substances, and –Satisfied AAI and “continuing obligations”

18 Contiguous Property Owner Defense Must demonstrate that: –Had no knowledge of contamination prior to acquisition (if this not possible, BFP defense still a possibility), and –Satisfy AAI and “continuing obligations” Statutory language attached at Appendix 2

19 AAI’s Statutory Criteria All of the Federal Brownfields Law’s new or expanded defenses are subject to 10 criteria specified in the Act. They are: –Inquiry by environmental professional –Interviews of present and past owners/operators/occupants –Review of historical sources

20 Ten Criteria (cont.) –Review of governmental records (may incl. local) –Search for clean-up liens –Visual inspection of property, adjoining parcels –Account for “specialized knowledge” of acquirer –Relationship of price to value uncontaminated –Consider commonly known/reasonably ascertainable information, and –Degree of obviousness of likely contamination, ability to discover by investigation

21 AAI: Defined 3 Ways For properties acquired before May 31, 1997, prior CERCLA factors and case law applies If purchased on or after 5-31-97, ASTM Standard Practice E 1527 (Phase 1) applies as interim standard, until EPA promulgates AAI Rule with 10 criteria, which then applies.

22 Additional Requirements of AAI Rule as Proposed Must meet certain threshold criteria, and Must satisfy certain continuing obligations not previously imposed on owners, if defenses are to be and remain available.

23 Threshold Criteria: No affiliation with the party liable for the contamination Conducting “all appropriate inquiries” prior to the acquisition into prior uses and condition of the property, and Duly reporting any detected hazardous substance release.

24 Continuing Obligations: Complying with land use restrictions Not impeding effectiveness of institutional controls Providing cooperation, assistance and access to EPA and state agencies with CERCLA authority Complying with CERCLA information requests

25 Continuing Obligations (cont.) Taking reasonable steps to: –Stop continuing releases –Prevent future releases, and –Prevent or limit human or natural resource exposure (not defined).

26 Some Key AAI Rule Issues Who is a Qualified Environmental Professional? Addressing Data Gaps Obviousness/Ability to Detect Contamination through AAI Comparing Price to Value Absent Contamination Interviews Use of Prior Assessments Reporting Discovered Releases

27 Who is a Qualified Environmental Professional? P.E. or P.G. plus 3 years full-time relevant experience Government-certified for ESAs plus 3 years experience B.S. in Eng’g, Env. Science or Earth Science plus 5 years experience Other bachelor’s degree plus 10 years exp.

28 Addressing Data Gaps Missing documentation or suggested but unconfirmed contamination AAI Rule requires EPs to identify these gaps Some commenters suggest a Phase 2 should always follow identification of such a gap

29 Obviousness/Ability to Detect Contamination through AAI Requires evaluation of property information in its totality To ascertain possible releases Does not require sampling per se EP must opine on need for additional investigation – lots of discretion.

30 Comparing Price to Value Absent Contamination Some commenters oppose this requirement Statute requires this consideration Some commenters want formal appraisal EPA not decided until final rule

31 Interviews Current owner and occupant To extent necessary, current and past facility managers, past owners, occupants or operators and their employees For abandoned properties, owners or occupants of neighboring, nearby parcels Local officials only if satisfying “commonly known/reasonably ascertainable requirement

32 Use of Prior Assessments Previous ESAs in compliance with rules in effect at the time may be considered if: –Information collected/updated within 1 yr. of purchase –Certain info. (interviews, lien searches, government records review, inspections and EP declarations) must be obtained/updated within 6 mos. –Info. updated to include changes in conditions, specialized knowledge/experience, price and commonly known/reasonably ascertainable information –ESA for 3 rd party special knowledge, price and commonly known/reasonably ascertainable info. added

33 Reporting Discovered Releases Required for expanded defenses Often unclear what is prior release Some reporting on very short fuse, requires RQ determination, possibly sampling, etc. Confidentiality expectations at odds Have access to help in making these determinations quickly

34 Selecting an EP Choice should reflect need for experience, professional judgment Also should consider: –E&O coverage in addition to general liability? –Claim limits of $1 million plus? –Issued by A-rated carrier? –Can supply 5 or more solid references? –Provides a sample report?

35 Final Rule by end of 2005 Know what you’re getting in an ESA Hire qualified EP familiar with ASTM & AAI Rule Allow adequate time for ESA & don’t count on using prior ESAs Don’t stop short of AAI Be mindful of reporting obligations Document post-ESA reasonable steps and continuing obligations

36 Questions? Call, fax or email me at –Ph. 303-892-7305 –Fax 303-893-1379 –Email

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