Site Assessments & Compliance Audits:Knowing the Difference Matters

From a regulatory perspective, the Phase I site assessment, if conducted in accordance with the federal requirements of 40 CFR Part 312: the All Appropriate Inquiry or AAI guidelines can aid in the establishment of a variety of useful and important liability shields such as the innocent landowner defense, the contiguous property owner and the bona fide prospective purchaser exemptions to Superfund liability. Additionally, AAI equivalent Phase I's are needed to qualify for most Federal and State Brownfield site characterization and assessment grant programs. ASTM International (formerly American Society for Testing and Materials) has more conveniently compiled AAI requirements in its E1527-05 Standard. Environmental Compliance Audits also have some regulatory benefits. Incentives established under the USEPA's Audit Policy (Federal Register, Vol. 65, No. 70, Tuesday, April 11, 2000, pp 19618-19627) allow for facilities that discover, voluntarily disclose and quickly correct certain non-compliance issues to avoid fines and penalties or have those fines and penalties significantly reduced.

Fundamentally, however, the purpose and objectives of a Phase I site assessment and those of a Compliance Audit are very different. The Phase I seeks to identify environmental liabilities before an acquisition (when conducted by the buyer or lender) or in advance of a divestiture or refinance (when prepared by a seller). Compliance Audits are focused on determining those areas where the facility currently is not conducting its operations in accordance with applicable regulatory requirements, generally without regard to ownership or future liability. Intimately connected to these two objectives is a sense of facility history. Phase I's look backward to at least the 1940's and, in some cases, much earlier: to when the property was undeveloped land. Compliance Audits usually limit their examinations of historic data and operating conditions to a three to five year timeframe. Phase I assessments typically are completed within a few weeks to a month, driven largely by the transaction schedule. Planning and implementation of Compliance Audits can take place from several to many months in advance, with the facility gathering needed data and protocols being established and negotiated with the audit team. In both cases, on-site inspection time is limited to only a few days. However, Phase I findings (especially those being procured by a buyer) are seldom discussed directly with site personnel, while real-time Compliance Audit debriefings with facility staff are a critical part of the value of the process.

Costs associated with curing deficiencies identified in a Compliance Audit are not considered during the audit work, but in Phase I assessments they are the primary reason why the project is being performed. The conclusions of a Phase I often are used as a negotiating tool during property valuation, while audit findings identify and track compliance priorities and have very little impact per se on the purchase or sale price of a site; however, they may impact price in a stock acquisition. Finally, while surrounding land use is a key component of a Phase I, what the neighbors are doing is not a very relevant part of a Compliance Audit.

Lenders, purchasers and even environmental consultants need to recognize that, while a Compliance Audit may supply some very useful information about how a facility or business operates, it cannot take the place or offer the liability comfort of a Phase I. Compliance Audits are invaluable tools in determining the regulatory status of an operation and give key facility staff and operators a set of goals, with instructions, to keep themselves and their business in compliance with law enforcement. Compliance Audits are useful in determining whether the operations will be interrupted or shut down due to regulatory issues and therefore impact business sustainability and ability to repay a loan. Phase I's take into account broader market considerations and attempt to directly connect property value with observed or reasonably anticipated environmental conditions. Lenders may seek to require Compliance Audits in transactions when the operation's revenue is crucial in repayment of the loan. Sometimes both reports are needed.

Robert P. Blauvelt is senior vice president of Environmental Waste Management Associates LLC, Parsippany. He can be reached at Bob.Blauvelt@ewma.com.