A Phase I Environmental Site Assessment is only useful if it addresses all current and relevant issues impacting risk associated with real estate transactions. That’s why the American Society for Testing Materials (ASTM) is updating the industry’s Standard Practice for Phase I Environmental Site Assessments to reflect recent changes in the due diligence world. The 2013 version of the Phase I ESA standard, ASTM E1527-13, is undergoing some final tweaks and, pending approval by the US Environmental Protection Agency (EPA), is expected to be passed this summer.
While ASTM E1527-13 is predicted to differ only on a few key points from its 2005 predecessor (which at the time was revised mainly to meet the EPA’s new requirements for All Appropriate Inquiry [AAI] for environmental due diligence), these proposed changes could have an important impact on the way Phase I ESAs are conducted and written. There is some concern that, under certain circumstances, the proposed changes may increase costs for the user and add to report delivery times – a fear that’s not unsubstantiated.
So what are the key new procedures and terminology to look out for?
• ASTM E1527-13 will address confusion that has surrounded
Recognized Environmental Conditions as defined in the current standards: the definition of the standard REC has been simplified to make it easier to understand, and the Historical Recognized Environmental Condition (HREC) will be more definitively defined as “a past release of any hazardous substance or petroleum products that has occurred in connection with the property and has been addressed to the satisfaction of the applicable regulatory authority”. In other words, it’s an environmental condition which has been dealt with appropriately so that it no longer limits the property’s use or activities.
• The big newcomer is the Controlled Recognized Environmental Condition (CREC). This new category applies to sites where contamination is controlled but could still pose ongoing or future obligations for the owner, such as special precautions during development.
These adjustments to the REC definitions will primarily allow DD professionals to provide greater clarity in disclosing the degree of risk, and are not expected to affect the cost or timing of the process.
So what are the items that could add cost or lengthen report delivery times of the Phase I ESA?
• Vapor intrusion, vapor encroachment and overall vapor risk have been hot topics in the environmental industry for some time. Following suit, several proposed changes for the new ASTM standard will create a greater emphasis on assessing Vapor Migration Risk. The potential liability and impact on property value due to vapor migration has been of increasing concern for lenders, but it is often unclear if vapor migration risk assessment should be included as part of a standard Phase I ESA. ASTM E1527-13 clarifies the definition of a ‘release’ and ‘migration’ to in fact include contamination in the vapor phase (not just soil or groundwater). While the Environmental Professional (EP) may use discretion whether to conduct the additional ASTM E2600 screen assessment to evaluate vapor risk or otherwise address it within the Phase I Environmental Site Assessment, the change is expected to push environmental consultants to address vapor encroachment concerns more explicitly in their assessments. And, of course, additional work could mean increased costs for the user.
• Similarly, the new standard proposes a stronger recommendation for conducting regulatory file reviews. Since it is already industry standard to include file reviews on the subject property, this change will likely have the biggest effect on file reviews for adjacent properties, which are done with far less consistency in the industry. Again, the EP reserves the right to forego such a review, but must explicitly explain in the report why a review is not warranted. This extra requirement will improve the depth of the Phase I ESA and further help clients to understand and minimize exposure to environmental risks, but depending on the state or agency you’re dealing with, it may also add to report production times. This is likely to be the biggest issue because in the world of fast-paced commercial real estate transactions, it may not be possible to wait 4-8 weeks for a file review.
The EPA will shortly cast their vote on the proposed changes, a process which could take as little as 60 days but will most likely take until the end of summer 2013. The changes will go into effect one year from the EPA approval date, which is when all Phase I ESAs must be conducted in accordance with the new standard and we’ll be able to get a clear picture of just how much the changes will impact pricing and report timing. Until then, we’ll keep you up to date with the latest news and a more in-depth review of the changes on our website.
For more information, check out my colleague Kathryn Peacock’s article on how Phase I Environmental Site Assessments will differ under the new ASTM E1527-13 standard versus the existing ASTM E1527-05 standard.