VOICES FROM THE INDUSTRY: New rules make big changes to environmental reports

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Every buyer and seller of commercial property is familiar with Phase I environmental reports-the ubiquitous due-diligence requirement for commercial property transactions or financing.

When they first began to be used, the work behind the reports-and often
the reports themselves-varied greatly in thoroughness and completeness. With the advent of ASTM standards, more uniformity appeared, even if quality remained spotty.

The front is about to change dramatically. Recent regulations by the U.S. Environmental Protection Agency, which take effect in November, have a direct impact on how Phase I reports will be prepared. The result is an increase in quality and thoroughness-and cost.

The EPA regulation responsible for the shift in Phase I preparation technically has
nothing to do with most Phase I reports. It’s directed at the “All Appropriate Inquiry” standard which must be met to qualify for certain defenses under federal environmental statutes, such as Superfund and some Brownfields requirements.

What’s required

A few highlights of the new phase I standards include the definition of an “environmental professional,” expanded research obligations, “data gaps,” and a definitive shelf life.

Environmental professional-For
many years, just about anyone could advertise as a preparer of Phase I reports and get paid for it. No more. If a report is to be accepted by a knowledgeable buyer or lender, it now will have to be prepared by an environmental professional.

To qualify, a person must have a professional engineer’s or geologist’s license with three years of experience; a BS degree with five years of experience, or; no science degree, but 10 years experience in a relevant field.

Non-qualifying employees may assist in conducting the work, but only under direct supervision. The environmental professional must personally certify the report.

Inquiry-The level of inquiry is significantly increased by the new standards. Now required is review of historical records as far back as can be shown, even to agricultural use.

All occupants likely to have used hazardous materials must be interviewed, and in some cases, present and past property owners, managers, occupants and even employees must be contacted.

If the property is abandoned, interviews of neighboring property owners are required. The inquiry obligations fall not only on the environmental professional, but also on the new owner. He or she is required to consider the cost of the property in comparison to the market, the presence of environmental liens and any specialized knowledge.

Data gaps-If the inquiry can’t answer all the questions or information is simply not available, the report must state so. It must also discuss the efforts taken to find the information and specifically comment on the significance of the gap. Although this is not significantly different from current good practice, the level of reporting is higher and now mandatory. In a typical situation, these gaps may be filled in with the sampling and analysis associated with Phase II work.

Shelf life-Although there are exceptions, a Phase I report can be relied upon for 180 days. It can be good for up to a year if certain key information, such as interviews, is updated. A report isn’t valid if it is more than a year old.

The effects

The EPA’s rule takes effect on Nov. 1. Given the shelf life definitions, any report prepared starting today should be in full compliance with the EPA standard and the ASTM equivalent.

Phase I reports are going to cost more. EPA has variously estimated $58 to $76 as the increased cost. With all respect to the agency, this is woefully wrong. Expect to pay $500 to $5,000 more for a Phase I report, depending on the size and environmental complexity and history of the site.

It will be more difficult to get reports done in a short-time frame. Given the substantial inquiry obligations, the days of getting a consultant’s report in two weeks are mostly over.

Phase I reports are going to be better, much more thorough, and certainly more revealing. Whether this is justified by the increased cost and preparation time is an open question.

Clark is a director of the Indianapolis law firm of Sommer Barnard. Views expressed here are the writer’s.

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