When there’s a change that affects around 250,000 commercial real estate deals a year, it’s a big deal. This is about to happen in 2021. I’m talking about the Phase I Environmental Site Assessment (ESA) – the nationally recognized standard for evaluating environmental risk at a commercial property during acquisition or financing.
Every so often, the ASTM E1527 standard for doing a Phase I Environmental Site Assessment is renewed – the current version is ASTM E1527-13 and, once finalized, the new standard will be ASTM E1527-21. Generally, the ASTM community looks to this renewal process to make the standard better – either to safeguard quality or consistency in how Phase I ESAs are done, or to correct unintended consequences of prior revisions.
Given the potential impacts to so many transactions, clients have been asking me what they can expect in the new standard. I’ve been involved with the ASTM Committee throughout the revision process, so while none of the changes are final, I can offer a glimpse into how some of the bigger potential changes are shaping up.
What’s a REC?
Anyone that has read a Phase I or been involved in property due diligence knows that the big question is always, “Is there a problem at the site?” (i.e., Is there a REC?) REC stands for Recognized Environmental Condition. The definition for REC has evolved over the years to avoid confusion and there are now several terms to categorize risk appropriately: REC (including Controlled REC [CREC]), Historical REC (HREC), and de minimis conditions. These terms are still at times misunderstood and misused today.
The new draft ASTM E1527-21 standard goes to great lengths to provide more clarity, for example by rewording the REC definition itself (without changing the original meaning). Additionally, and perhaps more importantly, there is a new appendix that really breaks down the anatomy of a REC and includes a logic diagram (if this, then that) and numerous hypothetical examples to help the industry better understand how to apply the various terms.
The spirit of the changes is likely to be voted in; however, the language may be tweaked during the final review process.
What is “Likely”?
The proposed new definition of REC more clearly describes RECs to include known, likely, and threatened releases. The word “likely” within the REC definition has sometimes varying interpretations of findings; for example, some Environmental Professionals (EPs) may conclude that any possibility of a release is “likely,” while others may require more conclusive evidence of a release. A proposed definition of “likely” should improve consistency in this area.
There are some potential changes regarding historical research on the subject property and adjoining properties – the more noteworthy part of which is the adjoining properties. Understanding the history of adjoining properties is important because contamination from a neighbor’s historical site use – say, an old gas station next door and uphill – can travel onto the target property and/or pose a vapor migration concern. But there is debate about the extent to which such historical research should be required.
Without getting too into the weeds, the proposed changes could be interpreted to require the same level of historical research of adjoining properties as is done for the subject property. Under the current standard the history of adjoining properties is reviewed based on information collected for the subject property, but the standard does not require the consultant to fill in gaps in the history for those properties (many quality consultants frequently do this now when it seems necessary, but at their own discretion). The proposed changes could be interpreted to put more onus on the Environmental Professional to do additional historical research to fill in data gaps for certain adjoining properties, which could increase the scope and cost of some reports and potentially delay transactions.
ASTM members are working diligently to tighten up the proposed language. There’s a lot of ongoing and productive discussion here, so we’ll have to wait and see how this one shakes out.
PFAS and Emerging Contaminants
Emerging contaminants, specifically PFAS (per- and polyfluoroalkyl substances), have been a growing concern to the due diligence industry – exposure to PFAS can lead to adverse health conditions, but they have not yet been classified by the Environmental Protection Agency (EPA) as a hazardous substance. Though the EPA has taken steps in that direction, potential impacts from PFAS are not considered to be Recognized Environmental Conditions under the current ASTM Phase I ESA standard. Some have struggled with how to address the risk of PFAS contamination in a Phase I report. The proposed changes add PFAS and other emerging contaminants to the list of “non-scope issues”, confirming it’s currently not a REC while also raising awareness of the issue that some may want to evaluate as a non-scope consideration as is commonly done with asbestos and mold.
This change seems likely to pass.
Opinion on Significant Data Gaps
The draft new standard aims to call more attention to significant data gaps – i.e., a substantial piece of information wasn’t feasible to obtain given time or budget constraints – and whether that materially affects the Environmental Professional’s ability to identify RECs or CRECs. The Phase I has always required EPs to identify data gaps (significant or minor), but proposed changes would require the EP to include an opinion as to whether additional investigation should be conducted to address significant data gaps. Changes also require the discussion of significant data gaps to be included in the executive summary to make it harder to overlook.
We’ll have to see how the discussion unfolds on this one.
How long is a Phase I report valid?
The All Appropriate Inquiries (AAI) rule established by EPA requires that certain elements of the Phase I ESA be completed less than 180 days before acquiring property, including the site visit, interviews, search for environmental cleanup liens, review of government records, and EP conclusions. After one year, the entire report must be updated. This was incorporated into the ASTM practice more than a decade ago; however, the date of the report has been frequently assumed to start the clock for the 180-day countdown. The revised ASTM standard will require inclusion of the date upon which each element was completed in order to allow users to readily identify updates required to comply with AAI. During discussions it also seemed that some participants believed that the report might, somehow, represent the conditions on the property after report completion but before expiration of the 180-day limit. It seems obvious that this isn’t the case, but an additional section has been added to clarify that reports are intended as a snapshot in time.
Approval of this change seems likely.
There are numerous relatively minor proposed changes that serve to reiterate or reinforce current practices, or to address housekeeping issues. A few of those include:
- Site Reconnaissance clarifications. The language in the standard about the site visit’s scope and objectives has been clarified to make it easier to understand, without substantially changing the scope of work.
- Site Plans and Photos would be required in all reports. Since these are already included in most reports, this change will impact only a small portion of reports and will serve to improve consistency in the industry.
- Updating government database names that data providers / environmental consultants should search. This change does not expand the search, but accounts for the fact that public agencies from time to time change databases.
- Additional clarification of user obligations. To qualify for defenses to liability under EPA rules, commercial property buyers are required to do certain things in addition to the Phase I report. Proposed revisions include additional related guidance, though it will remain important to work with an attorney or other knowledgeable professionals to make sure defenses are available if needed.
The ASTM committee will continue to discuss, refine, and vote on proposed changes in the coming months. The proposed revisions will then be submitted to the EPA for verification that they meet the requirements for conducting All Appropriate Inquiry. The goal is to publish the new ASTM E1527-21 standard by the end of 2021.
Phase I ESA Users – What Do You Think?
The ASTM community is committed to the quality and consistency of Phase I Environmental Site Assessment reports while meeting the needs of the industry at large and the various stakeholders – real estate purchasers, investors, lenders, attorneys, and of course Environmental Professionals. The update process always serves as a reminder of the varying risk tolerance and objectives of these different stakeholders.
It is important that Phase I ESA User voices are heard and considered during the renewal process. If you are a User of Phase I ESAs, such as a real estate investor or lender, reach out to your environmental consultant or another firm that is on the ASTM committee for clarification about these potential changes, or to voice any concerns.