August 15, 2006
The New EPA AAI Rules Overview

By this time, most of our clients are aware that the Environmental Protection Agency published their new rules and guidelines for all appropriate inquiry (AAI) relating to Environmental due-diligence practices in November 2005. Just this past spring, ASTM published their companion practices protocol entitled E-1527-05 "Standard Practice for Environmental Site Assessments; Phase I Environmental Site Assessment Process". This companion piece published by the ASTM largely mirrored the previously published EPA protocol. As dictated by the EPA and later referenced by ASTM, the effective date for the new standards will be November 1, 2006. Until that date, the previously existing ASTM E 1527-2000 standard will remain in full force and effect and assure the consultants and their clients continuing CERCLA liability protection. The manner, in which our individual clients will approach the environmental due-diligence process after the effective date, will be determined by incorporating the new changes into the individual lendersí environmental policies, as necessary to accomplish their business objectives and satisfy their own risk tolerance.

Brownfields Re-Development Sites

Initiated by the Small Business Liability Relief and Brownfields Revitalization Act of 2001, the driving force behind the new standards was to encourage further development of Brownfields sites across the nation. The rub for the public sector marketplace is that the new rules impose in-depth research procedures and requirements that assume that every loan transaction or acquisition by a developer is a Brownfields site. To appreciate the impacts of the new protocol on the marketplace, one must first understand the definition of a Brownfields site and in turn apply that definition to a typical loan transaction encountered in their day-to-day business.

Brownfields sites vary in size, location, age and past use. Such properties can run from a small abandoned corner gas station to a large multi-acre former manufacturing plant or plants that have been closed for years. Brownfields sites are and have been problems for economic, social and environmental reasons. It is not unusual to encounter a Brownfields site that has been contaminated by previous use to an extent that the site has simply been abandoned by its previous owners and operators. The noble objective of Brownfields development is that the redevelopment of a Brownfields property can restore the site to productive use and increase property values, boost tax roles, improve public health and enhance the communityís image. By their very nature, Brownfields redevelopments are typically public sector driven projects.

The one thing that all Brownfields redevelopment sites have in common is that they are all contaminated to significant extents. The clientele of EARC is exclusively private sector. Accordingly, redevelopment of obviously contaminated Brownfields sites that are rife with unknown remediation risks, do not fit the profile of a typical loan transaction. Accordingly, expanded research, production procedures, extended time frame, and related additional costs may be unnecessary in dealing with the typical loan transaction in the private sector marketplace.

Remember that the primary motivation in utilizing the expanded 2005 protocol will be to retain protection from CERCLA liability. CERCLA liability is most commonly associated to industrial projects in industrial areas. If a bank does not engage in loan transactions in industrial areas, potential CERCLA liability may well be a lesser consideration.

Overview of Expanded Research Procedures

Letís take a look at the general overview of a few of the expanded research and associated requirements of the new 2005 protocol. Based on the inherent contamination of Brownfields sites, more in-depth and detailed environmental due-diligence is necessitated. Most of our clients have already realized this by the difference between the complexities of a Phase I of a multi-family residential development and a Phase I in a heavy industrial area.

The new requirements reflect new obligations in the 2005 standard that reflect basically an industrial area approach to every loan transaction. These expanded obligations are not only directed at the environmental consultant, but also at the clients, as the clients will now assume responsibility for some of the environmental issues under the new scope. Some of the new obligations for the consultant include: 1) an expanded review of government agency reporting; 2) interviews with former, as well as current property owners; 3) inspection of neighboring properties; and 4) identification of gaps in information and associated recommendations. Some of the new obligations for the client include: 1) special information known to the client that may reflect on the environmental condition of the property; 2) relationship of purchase price and value of the property; and 3) clean-up liens or notations of an environmental nature in the title report. Letís also take a quick look at just a couple of these new individual requirements, and remember, this is just an overview.

The government agency review standards for the 2005 protocol have expanded radically. They now include certain local government agencies, and have expanded federal and state agencies. The expanded government agency review is discussed further in the following section of this article.

Although at face value interviews with former as well as current property owners and the inspection of neighboring properties appears to be a prudent inclusion in due-diligence protocol, however, from a practical aspect, one must consider the motivation or willingness of a former owner to answer questions regarding a property that could only potentially cause him liability. Additionally, the willingness of neighboring property owners to allow an environmental consultant to physically inspect his property is probably not likely. These issues may be pressed in an industrial area or on a Brownfields site, but it will be more problematic in other areas.

Some of the new obligations based on the client can also be unnecessarily cumbersome to a typical loan transaction. The reference of special information known to the client that may reflect on the environmental condition of the property is a rather nebulous and open-ended reference. Additionally, the client may just simply not realize that he his looking at something that may have environmental impact to the project. Additionally, for the client or the consultant, to compare the relationship of a purchase price to the value of the property is probably something left better to a qualified appraiser rather than someone looking for an inequity or discount of a property for potentially unknown environmental defects.

One sound obligation under the new protocol is that clean-up liens or notations in the title report be reviewed. This is designated in the new protocol as the responsibility of the client. However, it would be at the option of the client to compensate the consultant for reviewing the title report during his activities. This brings us to a consideration regarding the 2005 protocol that is near and dear to all of our clientsí hearts and that is the ultimate monetary cost applicable to the expanded research and expanded production requirements of the new 2005 protocol.

Expected Cost Dynamic of the 2005 Protocol Report

Any banker or businessman realizes that expanded procedures and obligations inherently impact the costs of any product. Not only will the reports under the 2005 protocol be more expensive, as each one will involve more man-hours than the current protocol, but will require a longer turn-around time for delivery to the client.

Beware of the company or the consultant that promises delivery of an expanded product at the same price and same turn-around time. Corners must be cut to accomplish that end, thusly impacting the quality of the product delivered. Although some companies and consultants may also promise that their 2005 compliant product will be produced at the same price as the current protocol, you can be sure that the simple math relating to the additional man hours involved in the ultimate product will ultimately have to be passed on to the marketplace in whole or in part.

As one example of increased hard costs, we need look no further then the environmental database records review. Our database resource methodically began transitioning the additional databases into their reports over the past year, initially assuring all of their clientele that no price increase was planned. However, shortly after the issuance of the ASTM 2005 standard, the database company raised its prices by 12%. Additionally, the reports are larger with vastly more data to review that must be evaluated and incorporated into the resulting Phase I report, necessitating additional man-hours to produce the report for the client.

Internal Environmental Policy

A strong bank environmental policy is imperative to protect against risks of financial obligations for clean-up costs and fines to borrowers that may result in loan default. Remedial actions can also disrupt site access and impair occupants from doing business. However, not every transaction needs the same level of assessment. All commercial properties should have a satisfactory level of due-diligence performed while remembering that sound environmental policy that protects the bank, should also protect the borrower. It is our belief that both our clients, as well as EARC, have that responsibility to those borrowers.

All of our clients including banks, as well as developers will find themselves on occasion after November 1, 2006, ordering reports based upon the new E-1527-2005 protocol. Certainly, in industrial areas where CERCLA liability is a bona fide concern, use of the expanded 2005 protocol should be used. Unfortunately, the additional time and expense related to the expanded research and reporting procedures, will also overlap into traditionally environmentally straightforward projects, such as multi-family residential properties and new single-family developments. The necessity of the expanded report for straight forward projects will be created by some entities that simply rubber stamp the new 2005 protocol without realizing the additional costs or time burdens of the new product.

In other circumstances, our banking clients have the option to continue to use the existing E-1527-2000 Phase I protocol, or the E-1528-2005 Transaction Screen protocol. Either may well satisfy their own level of comfort in regards to environmental due-diligence. Certainly on bank portfolio loans that involve non-industrial area properties, the current Phase I E-1527-2000 protocol presents a bona fide option to fill the need for sound environmental diligence. Remember that the existing protocol is not being discarded and the new protocol instituted as a result of the previous practice being antiquated or failing to satisfy the needs of the marketplace, but to encourage the re-development of Brownfields sites.

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