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Conducting the environmental audit.

Conducting the Environmental Audit An environmental audit is an objective review of a specific property or business to determine the sources--actual and potential--of environmental contamination and to assess the potential for human exposure. It also assesses risks and liabilities involved and recommends future courses of action. Although the immediate goal is the production of a report, the impact of the results of an environmental audit goes much beyond the initial document.

There are several objectives in conducting an environmental audit.

* Accurately determine and document actual on-site conditions and operations.

* Compare site conditions to established regulatory or operational requirements.

* Identify toxic or hazardous components that have potential for release, the subsequent pathways for exposure, and the inherent hazards associated with the materials located on site.

* Assess procedures, policies, and guidelines related to hazardous waste management and to evaluate future environmental management plans.

* Assess potential exposures and areas of liability associated with past and current site activities and, where needed, make recommendations or develop remedial action plans to reduce or eliminate the risks.

These objectives are achieved through a search and review of pertinent regulatory and technical records; an on-site inspection; interviews with site owners, corporate, and building management; and preparation of a report.

The process

Environmental audits increasingly are conducted where there is a sale or purchase of real assets; a change in debt instruments by a lender; a reassessment of the quality of collateral; a foreclosure by a bank; a merger or acquisition of a company; or a transfer, change of ownership, or other change in conditions having to do with real properties.

Each inspection, survey, audit, and assessment is unique. Still, the basic elements of a model or archetypical environmental audit can be determined. Such an audit has basically three phases: identification, characterization, and solution. The boundaries among the phases may be a decision by the client to terminate interest in the transaction, to use the information gained to refine the terms of the transaction, or to seek more detailed data before making a decision.

Phase 1--identification

The first phase of an environmental audit is partially a paper exercise involving the examination of available, historical records relating to the site (from government and other sources), along with an interactive site visit. Typical data sources include maps, photographs, reports, drawings, geological and hydrological records, permits, and other written documents on the history and use of the site.

Findings from the record search are incorporated into the on-site inspection during which symptoms and suspicions derived from the research effort can be confirmed or nullified by evidence found at the site.

Phase 1 starts by defining the boundary, size, and identity of the property being reviewed. A circle with a one-mile radius is drawn around the subject property and represents the adjacent area. This is done because pollution on one property may originate from activities on adjacent properties. Real properties are contiguous, and pollutants move through air, water, and soil, irrespective of political and ownership boundaries.

The next step of the paper audit is to review a title search that dates back at least 40 years. This search will reveal the chain of ownership and possibly identify some historical users as potential polluters. Title information can be obtained through title companies or county records and can provide a first level of information on previous ownership and use of the property. Although county deeds office records may not indicate previous use (including the disposal of waste materials and toxic substances), they provide some valuable clues to the initiated.

Photographic information is available from the county in which the subject property is located, from the U.S. Geological Survey, and from the Army Map and Topographic Command. Historical land use maps are also available from the county and from private sources. Supporting data on municipal drinking water, well water, and potable water supply locations are available in a computerized form. The U.S. Soil Conservation Service has soil characteristics available on a county-by-county basis.

The first phase is not complete with only a paper survey, however; physical inspection of the site or facility must be included. For industrial sites, this is a rather detailed inspection to assess current environmental conditions, especially with respect to use, storage, spills, and/or disposal of hazardous substances. This inspection includes interviews with individuals associated with or familiar with the property.

Phase 1 centers around limited sampling and analysis of suspect situations. The major objective of this phase is to obtain semiquantitative evidence of the presence of hazardous substances at the site.

Phase 1 usually involves utilization of nonintrusive techniques to assess the presence of hazardous materials on or beneath the property. These techniques may include magnetometer surveys to locate buried drums or tanks, electromagnetic induction surveys to detect contaminant plumes, soil gas surveys with portable gas chromatographies to detect hazardous gases in the subsurface, and qualitative evaluation of aboveground air quality with respect to volatile organic compounds, using portable ionization detectors. This survey might also include sampling of materials for asbestos, analysis of discolored soil and vegetation, and analysis of groundwater.

Phase 2--characterization

Phase 2 includes exhaustive testing, the development of alternative engineering solutions to the problem, and the costing of such potential abatement activities. The objective of Phase 2 is to obtain quantitative evidence of the presence of hazardous substances and to delineate the scope of the contamination.

Phase 2 involves intrusive sampling activities to quantify the magnitude and extent of contamination in soil and groundwater. Alternative remediation solutions are defined and priced. These costs are used either to apportion the cost of cleanup between buyers and sellers or to redefine the value of the assets.

Phase 3--solution

The last phase is the actual solution to the problems previously identified and characterized. It includes containment of the situation, abatement of the site, and remediation. Depending on the findings of the audit, the property owner and manager may be faced with the need to remove or manage asbestos, radon, undergound tanks, PCBs, or other hazardous materials. Each of these pollutants is governed by different laws and regulations for care and operation.

Although much of the actual work of removal in Phase 3 will be performed by an environmental consultant or an abatement contractor, the owner's and manager's responsibilities do not end when the hazards have been identified. Before, during, and after the audit and subsequent decision-making, the owner and manager have responsibilities to monitor hazardous substances to ensure legal compliance.

The responsibilities of all parties associated with an environmental audit--buyer, seller, lender, and environmental auditor--are varied. In addition, the responsibilities continue to evolve with changing laws and regulations and with new substances added to the list of hazardous materials. Although the owner is the principal party of responsibility in most cases, the manager also has obligations to comply with laws and regulations and to provide disclosure of acquired information.

One requirement for disclosure and notification of particular importance in property transfers is the need to report any releases of hazardous or toxic materials into the environment. The most significant reporting requirements at the federal level are the those set forth in Section 103(a) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the emergency notification requirements contained in SEction 304 of the Superfund Amendments and Reauthorization Act (SARA). The notification requirements apply to all substances classified as hazardous, extremely hazardous, or toxic by the EPA.

The CERCLA reporting provision covers the release of reportable quantities of hazardous substances from a facility. (A release might involve leaking of an underground tank or a spill of dangerous chemicals.) If such an event occurs, the owner or the facility operator must report it immediately to the National Response Center in Washington, D.C.

Section 304 of SARA requires that releases of hazardous substances and extreme hazardous substances be reported to the emergency coordinator of the locale where the release occurs and to the state emergency planning commission, when the release results in exposure to persons beyond the property boundaries.

The release of hazardous substances may also trigger CERCLA's site investigation and cleanup requirements. These requirements also mandate emergency response action at the site. The U.S. EPA has adopted regulations known as the National Contingency Plan (NCP) in 40 Code of Federal Regulations Part 300. These regulations set forth procedures for conducting an investigation and cleanup of a release.

Another federal disclosure requirement covers facilities that have treated, disposed, or stored hazardous materials. As set forth under 40 CFR Section 264.119 and 271.12 of the Resource Conservation and Recovery Act (RCRA), notice of a facility's hazardous waste activities must be recorded when the facility's hazardous waste activities have ceased. Such notice must be included either in the deed for the property or in another type of instrument normally examined in a title search.

Public companies must also meet disclosure requirements in the form of registration statements, annual reports, and 10Q and 10K filings under Securities and Exchange Commission regulations. These regulations require disclosure of the effect of compliance with environmental laws on the company's financial parameters.

The situation may be more complex at the state level. For example, in 1988, California approved Assembly Bill 3713, which requires the owner of any building constructed prior to 1979 who knows that the building contains asbestos-containing materials to notify all employees working in the building.

Specifically the bill requires the owner to provide the results of any survey conducted to determine the presence of asbestos and the location of these materials, the general procedures and restrictions to minimize the disturbances of such materials, the results of bulk analysis and air monitoring conducted in the building, and the potential health risks that may result from exposure to the asbestos in the building. The bill also specifies that notice must be provided in writing to each employee.

In another example of state legislation, the New Jersey Environmental Cleanup Responsibility Act (ECRA) of 1983 requires government approval to transfer industrial properties on which hazardous substances are generated, handled, disposed of, or stored. This transfer approval is withheld until the property has been shown to be clean or until a cleanup plan has been developed or approved.

A number of other states have enacted or are considering environmental cleanup responsibility laws, including Indiana, Pennsylvania, New York, Michigan, Delaware, Connecticut, Illinois, Iowa, California, Oregon, and Washington. Other states require the seller to disclose detailed information about the environmental quality of a property to the buyer, lender, government agencies, and the public before a transfer takes place.

Findings

Our firm, Versar Inc., has conducted a large number of environmental audits for a broad spectrum of clients. Some 75 percent of all sites investigated have no identifiable potential or real environmental problem. Of the remainder, 3 percent go forward with the transaction with or without dealing with the problem. Two percent of the cases are terminated without a transaction.

Another 20 percent represent cases in which potentially serious problems exist, but additional testing and analyses are required. These cases proceed to Phase 2, where the problems are more fully characterized. Of the 20 percent, 2 percent are terminated for lack of further interest, and 12 percent proceed with the transaction knowing the extent of the problem. Approximately 6 percent represent cases that include seriously contaminated assets.

Costs

The true value of environmental services is more closely associated with service provided than with the actual costs incurred. Certain organizations treat environmental audits as a commodity. Under these conditions, the price of the service decreases to the lowest possible level. The net result of this process is a degradation in the quality of the service.

Environmental audits must be tailored to need. That is, enough information must be provided to support the decision without missing important elements and without overwhelming nonenvironmental specialists with fine points and nuances. It has been traditional to offer environmental audits in phases to take into account the large amount of uncertainty associated with an unknown and unseen property.

The result of Phase 1 is a report that can be used to satisfy lender requirements, comply with corporation internal risk management policy, or support the purchase of environmental impairment liability insurance. The cost of a Phase 1 effort, with little or no environmental testing, varies from $2,000 to approximately $13,000. The lower end of the spectrum is for raw land investigations, and the high end is for industrial situations. In between are cases (in increasing cost order) involving agriculatural, residential, and commercial properties.

Phase 2 may include soil borings ($400 each), underground storage tank testing ($500 for each test), and installation of water monitoring wells (more than $2,000 for each well). More often than not, this phase includes sampling of air, water, soil, and other suspect materials. Other specialized tests include radon tests (about $25 per charcoal or alpha track detector); asbestos analysis by optical microscopy ($35 per sample for bulk or air); trace metal analysis ($150 per set); and toxic and hazardous substances, materials, and wastes (more than $1,000 per sample).

The report generated during Phase 2 is the result of comprehensive environmental testing. The report delineates the extent of the problem and the risks involved, as well as the cost of remediation. It also analyzes alternatives and ranks them in terms of risks and liability. On the average, such an assignment costs about $30,000; costs range from $10,000 to $100,000, depending on size and complexity.

The actual cleanup part of Phase 3 is approximately $100,000 for most properties, although the variance is very large; a multistory building containing asbestos may cost millions of dollars to remediate, and the cost of cleaning up contaminated groundwater is about 10 times the cost of remediating a waste site without groundwater involvement.

Conclusions

The environmental audit process is a win-win situation for all parties involved. The buyer can be assured that the price paid for the assets is in keeping with their environmental quality. The buyer further has a good idea of the environmental liability at this point in time. The seller is assured tat no liability exists or that the size of the liability is known and part of the transaction. The lender is assured of the quality and value of the collateral used to secure the financing.

The basis purpose of an environmental audit is to reduce environmental hazards and, hence, financial uncertainties for all parties involved in the transaction. Increasingly, the findings are also used to determine the value of the assets or to apportion the cost of cleanup among the parties involved.

An environmental audit report should be a living document rather than a historical document. There is no standard report except for the simplest case. Each environmental audit is specific to a site and to the desire for information to support the decision to be made. Because sites change hands numerous times over many years and because the environmental quality of a site evolves over time, the record of environmental audits becomes the input for subsequent studies, as well as a legal record should the need arise.

It should be remembered that there is no assurance that environmental audits will detect hazardous conditions, regardless of the care, time, and money spent on the investigations. Environmental reports should clearly state the procedures used and provide a factual description of the property and information available, as well as the existence of identified potential liabilities.

The question of "how clean is clean" is central to a decision of property transaction. Technically speaking, we can safely state that all properties have some form of contamination. The question is whether this contamination is above the accepted background levels or whether it is the result of the availability of increasingly more sensitive instruments.

The actual presence of chemical agents in the environment is not a sufficient reason for concern. The actual or potential risks associated with exposure to these agents constitute the central question that is usually addressed in an environmental assessment.

Contamination of properties can take place at any time, but an audit is a snap-shot in time. The value of this analysis is that it helps to shield subsequent owners from prior contamination and helps to shield prior owners from subsequent contamination and their respective financial impacts.

Robert P. Quellette, Ph.D., is the vice president for corporate development of Versar, Inc., of Springfield, Virginia, an environmental engineering firm. He plays a major role in the company's planning, marketing, public relations, professional development, and merger and acquisition programs. He previously was the division director for the Energy Resources and Environmental Division of Mitre Corporation.

Dr. Ouellette is a distinguished scientist with a specialty in environmental sciences. For over 25 years, he has contributed significantly to the debate on major environmental issues in the United States and abroad.

Bruno Maestri is vice president of the eastern regional operations for Versar, Inc.'s Technical Services Group, where he has been employed since 1977. He is responsible for all private-sector work in the areas of environmental risk assessment, property merger, and acquisition assessments. He is also in charge of all projects in the environmental impairment liability insurance marketplace.
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Title Annotation:includes related article on a legal summary of environmental hazards
Author:Ouellette, Robert P.; Maestri, Bruno
Publication:Journal of Property Management
Date:Mar 1, 1990
Words:2858
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