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.