Environmental site assessments: federal 'due diligence' regulations are changing.

Environmental due diligence has become a necessity for anyone who is buying commercial or industrial property. Since the 1980s, the Phase I Environmental Site Assessment or ESA has been the standard approach to due diligence in property transactions. Substantial changes are coming, however, that will affect anyone buying, selling or financing commercial and industrial property.

The Small Business Liability Relief and Revitalization Act of 2002, also known as the federal brownfields law, directed the Environmental Protection Agency to write the nation's first federal "all appropriate inquiries" or AAI standards for assessing the environmental conditions of a property prior to purchase. The draft regulation, approved in November 2003 and titled "Part 312--Standards for Conducting All Appropriate Inquiries," is now at what is called final consensus. The final consensus draft regulation follows the existing standard for Phase I ESAs in many areas, but it does require new levels of investigative effort.

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New landowner liability protections

Since 1986, federal law has provided property owners with the "innocent landowner defense," which provides protection from clean-up liability for pre-existing contamination if the owner conducted "all appropriate inquiries" prior to the purchase, and no evidence of contamination was revealed. The federal brownfields law, in an attempt to mitigate obstacles to brownfield redevelopment, revised the requirements necessary to establish the innocent landowner defense, and in doing so added two new landowner liability protections:

* The bona fide prospective purchaser defense provides protection for an owner who knowingly purchases a contaminated property, provided the owner can demonstrate that contamination on-site occurred prior to purchase.

* The contiguous property owner defense provides protection for the owner of a site contiguous to a contaminated property, provided the owner can show that he/she did not know of contamination on his/her property at the time of purchase.

To qualify for any of these three liability protections, the property owner must conduct "all appropriate inquiries" in accordance with the upcoming federal rule. The draft rule will apply to a larger variety of properties than the existing standard, which is currently limited solely to commercial properties and the innocent landowner defense. Applicable properties under the draft rule include:

* Commercial properties.

* Residential properties used for commercial purposes.

* Residential properties under government ownership.

* All grantees whose environmental inquiries are funded under EPA's brownfields program.

Inquiry shelf life

Both the existing standard (technically called ASTM E 1527-00) and the draft rule are consistent in giving Phase I ESAs a six-month shelf life. The difference between the two occurs when the Phase I exceeds six months old. An AAI inquiry is only valid up to one year prior to the purchase date of the property, and the interviews, searches for environmental cleanup liens, reviews of government records and visual inspections may not be more than 180 days old. Additionally, under the draft AAI rule, if the assessment is more than one year old, a complete new assessment must be performed. Under the existing standard (ASTM E 1527-00), a Phase I ESA report over one year old could still be used, provided the necessary updates are made.

The EPA will promulgate the final regulation most likely in late 2004 or early 2005. Until the first federal AAI rule takes effect, the ASTM E 1527-00 standard will continue to provide clients with liability protection. The rule is complex and will require more investigation, more interviews and more documentation. AAI has the potential to affect all commercial real estate transactions.

Doug Brown is director of development at Brighton-based ASTI Environmental, a member of the Detroit Regional Chamber. He is a member of Leadership Detroit Class XXVI.

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