Recent Developments in Environmental Due Diligence

Pasadena Bar Association, Real Estate SectionMay 27, 2014

PRESENTED BY

Eddie Arslanian, PEENVIRON International

Corporation

Emily Murray, Esq. Allen Matkins Leck Gamble Mallory & Natsis LLP

Agenda

• Background

• Revised or New Definitions

• Characterization of Environmental Conditions

• Other Considerations

• Vapor Intrusion

Background

What is environmental due diligence?

• Environmental due diligence is the pre-transaction (purchase, lease, sale, finance) investigation of environmental conditions and history of the subject property

• Good commercial and customary practice for environmental due diligence for real property is a Phase I environmental site assessment (ESA)

Background (continued)

Why conduct environmental due diligence?

• Liability protection under federal law

• Evaluate potential environmental risks and costs

• Plan development based on any environmental restrictions

Background (continued)

Liability protection

• The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) provides statutory defenses for innocent land owners/operators, contiguous property owners/operators, and bona fide prospective purchasers/tenants (BFPP)

• To qualify for these statutory defenses, the owner/operator must conduct “All Appropriate Inquiry” (AAI) prior to transaction

Background (continued)

AAI/ASTM Standard

• In 2005, the federal Environmental Protection Agency (USEPA) adopted its AAI Rule, which endorsed the Phase I ESA standard promulgated by the ASTM to satisfy the statutory requirements for conducting AAI

• ASTM updates the standard every eight years

• In 2013, ASTM finalized ASTM E1527-13, which updated the prior standard ASTM E1527-05

• On December 30, 2013, USEPA issued a new final rule amending the AAI Rule to include a reference to the new ASTM Standard E1527-13

Background (continued)

AAI/ASTM Standard (continued)

• USEPA’s new final AAI rule provides that the new ASTM Standard E1527-13 can be used to satisfy AAI

• The new rule does not prohibit the use of the previous ASTM Standard E1527-05, although the preamble strongly suggests that the new standard should be employed

• A future USEPA rule making is anticipated that will eliminate the reference to the previous standard

Key Changes

• Revised or new definitions for:

– Recognized Environmental Condition (REC)

– Historical Recognized Environmental Condition (HREC)

– Controlled Recognized Environmental Condition (CREC)

• Emphasis on regulatory file reviews

• Revisions to user responsibilities

• Vapor intrusion clarification

Revised Definitions: REC

Recognized Environmental Condition (REC)

2013: The presence or likely presence of any hazardous substances or petroleum products in, on, or at a property:

1) due to any release to the environment

2) under conditions indicative of a release to the environment

3) under conditions that pose a material threat of a future release to the environment

Revised Definitions: HREC

Historical Recognized Environmental Condition (HREC)

• 2013: An HREC is a REC that has been addressed to the satisfaction of a regulatory agency or meets unrestricted use criteria without subjecting the site to controls, such as property use restrictions, activity and use limitations (AULs), institutional controls, or engineering controls

• Requires confirmation by an environmental professional (EP) that finding is no longer a REC (i.e., standards have not changed)—applicable when updating a previous Phase I report

New Definitions

Controlled REC (CREC)

• An REC that has been addressed to the satisfaction of a regulatory agency or meets risk-based criteria

• Hazardous substances or petroleum products allowed to remain in place subject to implementation of controls (e.g., AULs, engineering controls)

• CRECs must be identified in the conclusions section of the report

• Evaluation of adequacy of controls is not required of EP

• CREC identification important for satisfying post-acquisition continuing obligations of property owner

De Minimis Condition

• Now a stand alone definition (pulled out of REC definition)

REC-HREC-CREC Relationship

Contamination in, at or on the target

property

Is it de minimis?

Would regulatory

officials view cleanup as adequate today?

Are there ‘controls,’ such as use restrictions?

REC

De Minimis

CREC

HREC

YES

YES

YES

NO

NO

NO

YES

NO

Has it been addressed?

Other Considerations (Records Review)

• If property or adjoining property is listed on standard environmental record source (e.g., database search), regulatory records/files should be reviewed

• EP may conclude that regulatory review is not warranted, but must explain justification in report

• Alternate sources of information (e.g., site records/files, user-provided information, interviews) can be used in place of regulatory records/files

• EP shall include an opinion regarding the sufficiency of information obtained from regulatory files/records, or alternate sources must be included in report

Other Considerations(User Responsibilities)

• User responsibilities are required of:

– Parties seeking landowner liability protections

– USEPA brownfield assessment and characterization grantees

• Lists the tasks required to be performed by the “User,” although not required to be provided to EP

– EP must request the user to provide the results

– If not provided, EP should consider the significance of the data gap

Vapor Intrusion – Clarified

• Vapor intrusion: migration of hazardous vapors from a subsurface contaminant source (e.g., soil or groundwater) through the vadose zone and into the indoor air

• Significant and challenging environmental remediation issue

• Vapor migration is clarified and considered “no differently” than contaminated groundwater migration

Vapor Intrusion – Clarified

Indoor air

Vadose Zone Soil Gas

{{

Soil Contamination

(residual or mobile NAPL)

Chemical Vapor Migration

Groundwater Contamination

basement crawl spaceslab

Vapor Intrusion – Clarified

• Migrate/migration defined in new standard:

– “refers to the movement of hazardous substances or petroleum products in any form, including, for example, solid and liquid at the surface or subsurface, and vapor in the subsurface.”

• Indoor Air Quality exclusion as a non-scope consideration clarified:

– “unrelated to releases of hazardous substances or petroleum products into the environment”

• ASTM E2600-10 Standard Guide for Vapor Encroachment Screen on Property Involved in Real Estate Transactions now referenced

Vapor Intrusion – Summary

• Vapor migration should be treated no differently than the way contaminated groundwater migration is considered in a Phase I

• EP can evaluate vapor migration using whatever methodology the EP determines to be appropriate (if not E2600-10, then EP needs to document “alternative” methodology and include documentation in the Phase I)

• Site-specific vapor intrusion evaluation more useful in real estate transactions than following the E2600-10

• When evaluating vapor intrusion, note that there are differences between Cal/EPA and USEPA methodologies

Contact Information

Emily Murray

emurray@allenmatkins.com

+1 213 955 5584

Eddie Arslanian

earslanian@environcorp.com

+1 213 943 6326