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Month: March 2014 (page 2 of 2)

AAI Overview and Key Points Chart

Key Differences between All Appropriate Inquiries (AAI) and ASTM E 1527-00

The EPA specified ASTM E 1527-00 for Phase I Site Assessments as the designated “interim standards.” Since then ASTM issued the ASTM E 1527-05 which meets and surpasses the new regulations.

The key differences between All Appropriate Inquiries standard specification and the old ASTM E 1527-00 are summarized in the table below. 

CERCLA Background
Overview of All Appropriate Inquiries Requirements  for Phase 1 site assessments
AAI & ASTM E 1527-00: Key Points | Chart of Key Differences
AAI & New ASTM E 1527-05: Key Difference – Petroleum
Federal Register PDF Document: 40 CFR Part 312 Standards and Practices for All Appropriate Inquiries; Final Rule

Table 1. Key Differences between the Final All Appropriate Inquiries Regulation Specification and the Previous Specification Standard

Investigative Criterion AAI Specification November 1, 2006 Previous Specification (ASTM E1527-2000)
Definition of Environmental Professional Specific certification / license, education and experience requirements. No specifications
Interviews of current owner and tenants Mandatory. A “reasonable attempt” had to be made.
Interviews with former owners and occupants Interviews must be conducted to achieve the objectives and performance factors of the AAI and E-1527-05 § 312.20 (e-f) Not required, but must inquire about past uses of the subject property when interviewing current owner and occupants
Interview with neighboring or nearby property owners or occupants Mandatory at abandoned properties Discretionary
Review of Historic Sources: Period to be covered From the present to when the property first contained structures or was used for agricultural, residential, commercial or any other purpose. Formerly the historic investigation was to first use or 1940.
Records of Activity and Use Limitations (e.g., Engineering and Institutional Controls) and Environmental Cleanup Liens No requirement as to who is responsible for the search; however, results must be reported to the environmental professional. This was the user’s responsibility with results reported to the environmental professional.
Scope of environmental cleanup lien search includes those liens filed or recorded under federal, state, tribal or local law.
Government Records Review Records from Federal, State, Local and Tribal sources are to be investigated. Federal and State records were required with local records being at the discretion of the investigator.
Site Inspection Visual inspection of subject property and nearby properties is required; some exceptions are allowed if property cannot be visually inspected. No specific requirement to inspect nearby properties.
Contaminants of Concern For parties seeking CERCLA protection, the CERCLA hazardous substances are considered. CERCLA hazardous substances and petroleum products only.
Brownsfields Grant Recipients: CERCLA hazardous substances, petroleum and petroleum products, controlled substances.
Data Gaps Requires identification of sources consulted to fill data gaps and an explanation of why there are gaps and if they are significant. Historic investigation was subject to the discretion of the investigator and sources that produced no findings had to be documented
Shelf life of the Written Report One year with updates after 180 days. Updates of specified activities after 180 days.

CERCLA All Appropriate Inquiries compared to ASTM E 1527-05 Key Difference: Petroleum

The basic difference between CERCLA All Appropriate Inquiries and the new ASTM E 1527-05 is the extent of the definition of hazardous substances. Under the petroleum exclusion of CERCLA Section 9601(14), petroleum and crude oil have been explicitly excluded from the definition of hazardous substances. However, ASTM E 1527-05 includes petroleum products  because they are of concern in many commercial real estate transactions and current custom and usage is to include an inquiry into the presence of petroleum products in an environmental site assessment.

As noted above, the State of California now recognizes the Innocent Landowner Protection, the Contiguous Landowner Protection and the Bonafide Purchaser Protection. Thus, while CERCLA does not include petroleum products, that omission is picked up by the State of California.

Lenders can Maintain CERCLA Exemption by Following Ownership/Liability Tests

by Robert S. Harris

The EPA Lender Liability Rule does not encourage controlling borrowers but rather it supports proper loan management.

Also see: Environmental management for banks, financial institutions & other lenders

It may appear the EPA holds financial institutions responsible for the failings of others because lenders have attempted to be responsible in their dealings with developers on environmental issues. However, we must keep in mind that the EPA is responsible for defining and identifying responsible owners and operators in order to assign responsibility for environmental failures, which can have long-lasting and far-ranging effects.

Indeed, the EPA has, on occasion, ruled that lenders have been too involved in the daily operation of a company and, therefore, have been given the responsibility for clean up. Ongoing daily involvement, even if initiated more recently than the violations, confers responsibility because it also suggests some knowledge or awareness of the failures.

Lenders that have failed to conduct due diligence or which were not thorough in protecting their security interests have inherited huge environmental liabilities under CERCLA.

There are, however, important and appropriate lender activities as an owner or operator which are shielded from CERCLA (1980) liability under the secured creditor exemption. The Lender’s Exemption provides that the term “owner” or “operator” specifically does not include a person, who “without participating in the management of a…facility, holds indicia of ownership primarily to protect his security interest in the…facility.” 

The stated purpose of the EPA Lender Liability Exemption is to define and specify the range of permissible activities a lender may conduct without exceeding the bounds of exemption.

The EPA has defined three key and identifiable elements of activities which lenders may conduct without being deemed to have exceeded the bounds of CERCLA exemption. Those elements are: “indicia of ownership”; the requirement that ownership be held “primarily to protect security interest”; and, the prohibition of secured creditors from participating in the management of a facility.

The key elements, all of which must be in place for the lender to avoid liability, are expanded for clarification:

“Indicia of ownership” is defined by the EPA rule as “evidence of interests in real or personal property.”  Qualifying indicia of ownership include a mortgage, deed of trust, legal or equitable title obtained through foreclosure, a guarantee of an obligation, an assignment, lien, pledge, or other right or form of encumbrance against the property.                     

To avail itself of the exemption, a lender must prove it holds the indicia of ownership principally for the purpose of securing payment, or performance of a loan or other obligation.

There is a two-pronged test for identifying when a lender has crossed the lines and can be deemed to be “participating in management.” Activities of management the secured creditor is prohibited from include: a) exercised decision-making control over the borrower’s environmental compliance; or, b) assumed overall management responsibility encompassing the day-to-day decision-making of the borrower’s enterprise.

Acceptable Participation

How can lenders protect their loans if they cannot exercise some control over borrowers? The EPA Lender Liability Rule does not encourage controlling borrowers but rather it supports proper loan management.

The United States Environmental Protection Agency has defined four areas where lenders can be involved in environmental inquiries and loan management without being labeled as having “participated in management” of a borrower’s company.

Acceptable loan management activities from an environmental standpoint may occur:                 

  • Before the loan transaction takes place, or at the inception of the loan
  • During the tenure of the loan
  • While undertaking a financial workout with a defaulting borrower                     
  • At foreclosure and when preparing the facility for sale or liquidation

Financial institutions serious about avoiding “unacceptable participation” rulings design and implement their own Lender Loan Management Programs to coincide with the four areas of acceptable participation defined by the EPA. The two most important focused objectives of such a program are to minimize environmental liabilities throughout the life of each loan, and to maintain the Lender’s Exemption when borrower viability appears to be at issue.

A solid Lender Loan Management Program addresses lender conduct from the onset of lending conversation, perhaps even before application, and all the way through to loan termination.

Look before leaping: Lender Loan Management Program

There are several tools and a number of procedures for the various phases of loan management which comprise an effective Lender Loan Management Program.

At the inception of the loan transaction, a Transaction Screen Questionnaire (defined by the ASTM in protocol E1528-93) is used to determine if a Phase I Environmental Site Assessment will be necessary. It is rare that some form of in-depth evaluation is not required on commercial property. Furthermore, it is inaccurate and can be risky to view the Transaction Screen as a shortcut or substitute for a Phase I Environmental Site Assessment because, performed according to ASTM protocol, there are many points where the screen leads directly to a full Phase 1 environmental site assessment.

An intermediate tool devised by Harris & Lee Environmental Sciences, LLC is a modified or abbreviated environmental site assessment report. It includes a summary computer data radius report, a brief site reconnaissance, and investigative inquiries into historical use. It is performed in conformance with ASTM protocol, and when performed by experienced senior personnel to draw comprehensive conclusions, it will indicate additional environmental conditions which warrant a Phase I environmental site assessment. Not only is the client assured costs will be kept to a minimum, the report can be expanded if considerations require additional detail. Though components of the modified assessment are done in compliance with ASTM standards, it does not technically meet ASTM standards because it is abbreviated. Even so, this abbreviated environmental site assessment will satisfy due diligence requirements for the first phase of the Lender’s Exemption rule.

Finally, ONLY the All Appropriate Inquiries – Environmental Site Assessment, Phase I Investigation satisfies the requirement for one of the three landowner liability exemptions provided by the CERCLA Brownfields Amendments. It must be performed in accordance with ASTM E 1527-05. The advantage for lenders is that these landowner exemptions protect the borrower and collateral in commercial real estate loansTenant Assessment vs. Tenant Compliance

The technical term for that time when a facility undergoes a detailed audit in which all phases of environmental compliance are investigated is “multimedia environmental compliance audit.” Put simply, it means the auditor’s investigation will include all areas for which the potential of contamination exists: soil, air, and occasionally, employee safety and health. The Tenant Environmental Compliance Audit examines not only the paper trail, but chronicles the actual daily practices to minute detail. It is a comprehensive audit process which is important in that it detects noncompliance with numerous and varied regulations, many of which impose heavy fines and cleanup requirements.

A Tenant Assessment is not intended to prevent the facility from minimizing fines due to faulty practices, but rather to identify and to prevent faulty management practices which are likely to create liability by extension to the Lender. An example of the difference in tenant assessment vs. tenant environmental compliance would be incorrect completion of a hazardous waste manifest, as opposed to the outright disposal of hazardous waste without any manifest. Incorrect completion of the manifest could lead to financial fines to the facility, but disposal of the hazardous waste without a proper manifest implies an illegal disposal practice which may be viewed as a criminal offense.                   

The assessment requires an experienced environmental auditor with a broad philosophical outlook because the hazardous waste was generated from the property, the property owner, or  the lender in some cases, could be held responsible.

New vs. Existing Tenant

Potential environmental risk is minimized when, prior to lease development, a visit is made to the potential tenant’s existing facility. A review of relevant processes and how they are presently handled is the best indicator of how the operation will be run  once the tenant is situated on the new property. The hazardous waste materials management plan and tools are reviewed and a determination is made as to how well it is followed. Specific issues regarding future compliance can be identified for coverage in the lease agreement.

Lenders should expect to monitor ongoing compliance at tenant facilities on a regular and agreed upon basis. Such monitoring protects the long-term value of the property. The most important aspect of tenant monitoring is to identify and document potential environmental problems which will or may devalue the property, or cause the extension of liability ownership to the Lender.

Depending on circumstances, the EPA has assigned liability of previous owners and lenders to the current occupant of a property. However, because previous tenants and lenders can be assessed penalties, lenders are urged to have pre-evacuation and pre-lease termination assessments of the property. Doing so minimizes the owner and lender exposure by documenting the tenant’s departure activities. It may, on occasion, be prudent to require a tenant to develop a comprehensive closure plan, and to police the implementation of that closure plan, as well as to monitor the effectiveness of such a plan. It is helpful to stipulate and draw a prospective tenant’s attention to this lender option in the lease. The intention is that tenants who are aware they will be monitored are more likely to be well-prepared, and lease termination may be more manageable.

When Borrowers Default

The EPA rule does permit a lender to take necessary steps to protect collateral. For loans threatening default or already in default, borrowers may need professional consultation, which can come at the request of the lender. Lenders may foreclose and not be considered owners for purposes of CERCLA liability.  The lender may avoid liability if it undertakes to sell, release or otherwise divest itself of the property in a reasonably expeditious manner. In foreclosure, a property may be operated by a lender under the exemption so long it, as the holder, does not improperly arrange for disposal of hazardous substances at the facility or for transport and disposal at the facility.

Essentially, all EPA rules which applied to the previous tenant apply to the lender as holder in a foreclosure.

Use of Expert Support

The term “participating in management” as applied by EPA is broad and difficult to interpret. Expert support offering a thorough understanding of the processes and their relationship to all parties is essential to assist lenders in upholding their responsibilities without crossing the line.  Technical environmental support should also include appropriate legal assistance to interpret vague language and to assist in refining procedures.

Also see: Environmental management for banks, financial institutions & other lenders

Robert Harris is the senior scientist of Harris & Lee Environmental Sciences, LLC, an environmental consulting firm. He holds degrees in chemistry and biochemistry, and has 32 years experience in environmental analytical chemistry and environmental toxicology.  Mr. Harris has established and operated large laboratories and has developed several ground-breaking methodologies for environmental analysis, including the standard method for analysis of polychlorinated biphenyls in water, soils and oils. His firm has saved lenders, insurance, real estate and law clients millions of dollars, including conversion of waste costing $120,000 per month to a usable fuel.

CERCLA Liability Limits – Landowner Liability Protections

Key Points

Under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), persons may be held strictly liable for cleaning up hazardous substances at properties that they either currently own or operate or owned or operated at the time of disposal. Strict liability in the context of CERCLA means that a potentially responsible party may be liable for environmental contamination based solely on property ownership and without regard to fault or negligence.

However, the CERCLA Brownfields Amendments provides three landowner liability exemptions:

  • Innocent landowner
  • Bona fide  purchasers
  • Contiguous property owners

There is no protection under CERCLA for a current property owner when hazardous substances are released.

CERCLA Background

Overview of All Appropriate Inquiries (AAI) Requirements for Phase I Site Assessments

Innocent Landowners, Standards for Conducting All Appropriate Inquiries: 40 CFR Part 312

Innocent Landowner Protection

In 1986, the Superfund Amendments and Reauthorization Act (SARA) created an “innocent landowner” defense to CERCLA liability by adding Section 101(35)(B). This section states: “for those persons who could demonstrate, among other requirements, that they “did not know and had no reason to know” prior to purchasing a property that any hazardous substance that is the subject of a release or threatened release was disposed of on, in, or at the property. Such persons, to demonstrate that they had “no reason to know” must have undertaken, prior to, or on the date of acquisition of the property, “all appropriate inquiries” into the previous ownership and uses of the property consistent with good commercial or customary standards and practices.

Brownfields Amendment Liability Limitations

The Brownfields Amendment clarified liability provisions for innocent landowners and added protections from liability for bona fide purchasers and contiguous property owners who meet certain statutory requirements. The All Appropriate Inquiries Rule issued by the U.S. Environmental Protection Agency on November 1, 2005 established the specific regulatory requirements and standards for conducting All Appropriate Inquiries.

Generally, under the CERCLA Brownfields Amendments, the following conditions would minimize a purchaser’s exposure to liability for past environmental contamination. The advantage for lenders is that these landowner exemptions protect the borrower and collateral in commercial real estate loans. 
For the Innocent Landowner Exemption:

  • Did not cause or contribute to hazardous substances
  • Property acquired by inheritance or bequest
  • After completing All Appropriate Inquiries & ASTM E 1527-05 did not know and had no reason to know of “release or threatened release” at the time of acquisition

For the Bona Fide Purchaser Exemption:

  • Acquires ownership after 1/1/05
  • Hazardous substances released before purchase
  • No potential liability or connection with Potentially Responsible Party other than through purchase agreement
  • Rigorously completes All Appropriate Inquiries & ASTM E 1527-05
  • Appropriate care in dealing with hazardous substances
  • Cooperates with regulatory agency’s mandated remedial work, contractors, etc.

For the Contiguous Landowner Exemption:

  • Adjacent Property Owner
  • Did not cause, contribute, or consent to release or threatened release
  • After completing All Appropriate Inquiries & ASTM E 1527-05 did not know and had no reason to know of “release or threatened release” at the time of purchase
  • No potential liability or connection with neighboring Potentially Responsible Party

Harris & Lee Environmental Sciences, LLC strongly recommends purchasers seek legal advice before acquiring a property with known environmental damage. This information should not be construed as legal interpretation or legal advice. Our intent is to simply point out that these exemptions exist.

Residential Uses

In the case of property acquired by a non-governmental entity or non-commercial entity for residential or other similar uses, the current standards (ASTM and AAI) may not be applicable. For those cases, the Brownfields Amendments to CERCLA establish that a “facility inspection and title search that reveal no basis for further investigation shall be considered to satisfy the requirements for all appropriate inquiries”.

  • The definition of “facility inspection” is open to conjecture. It can mean more than just inspecting; it may include an investigation into nearby environmentally active sites.

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