Brush up on the top 6 potential changes to the ESA Standard (ASTM E1527).
When there’s a change that affects around 70,000 commercial real estate deals a year, it’s a big deal. This is about to happen in 2021. I’m talking about the Phase I Environmental Site Assessment (ESA) – the nationally recognized standard for evaluating environmental risk at a commercial property during acquisition or financing.
Given the potential impacts to so many transactions, clients have been asking me what they can expect in the new standard. I’ve been involved with the ASTM Committee throughout the revision process, so while none of the changes are final, I can offer a glimpse into how some of the bigger potential changes are shaping up.
What’s a REC?
Anyone that has read a Phase I or been involved in property due diligence knows that the big question is always, “Is there a problem at the site?” (i.e., Is there a REC?) REC stands for Recognized Environmental Condition. The definition for REC has evolved over the years to avoid confusion and there are now several terms to categorize risk appropriately: REC (including Controlled REC [CREC]), Historical REC (HREC), and de minimis conditions. These terms are still at times misunderstood and misused today.
The new draft ASTM E1527-21 standard goes to great lengths to provide more clarity. Additionally, and perhaps more importantly, there is a new appendix that really breaks down the anatomy of a REC and includes a logic diagram (if this, then that) and numerous hypothetical examples to help the industry better understand how to apply the various terms.
What is “Likely”?
The proposed new definition of REC more clearly describes RECs to include known, likely, and threatened releases. The word “likely” within the REC definition has sometimes varying interpretations of findings; for example, some Environmental Professionals (EPs) may conclude that any possibility of a release is “likely,” while others may require more conclusive evidence of a release. A proposed definition of “likely” should improve consistency in this area.
There are some potential changes regarding historical research on the subject property and adjoining properties – the more noteworthy part of which is the adjoining properties. Understanding the history of adjoining properties is important because contamination from a neighbor’s historical site use – say, an old gas station next door and uphill – can travel onto the target property and/or pose a vapor migration concern.
The standard does not require the consultant to fill in gaps in the history for those properties (some consultants go beyond the standard to do so). Considering that some properties have eight or more adjoining properties, this proposed change could substantially increase the scope and cost of the report and potentially delay transactions.
ASTM members are working diligently to tighten up the proposed language. There’s a lot of ongoing and productive discussion here, so we’ll have to wait and see how this one shakes out.
PFAS and Emerging Contaminants
Emerging contaminants, specifically PFAS (per- and polyfluoroalkyl substances), have been a growing concern to the due diligence industry – exposure to PFAS can lead to adverse health conditions.
Some have struggled with how to address the risk of PFAS contamination in a Phase I report. The proposed changes add PFAS and other emerging contaminants to the list of “non-scope issues”, confirming it’s currently not a REC while also raising awareness of the issue that some may want to evaluate as a non-scope consideration as is commonly done with asbestos and mold.
This change seems likely to pass.
Opinion on Significant Data Gaps
The draft new standard aims to call more attention to significant data gaps – i.e., a substantial piece of information wasn’t feasible to obtain given time or budget constraints – and whether that materially affects the Environmental Professional’s ability to identify RECs or CRECs. The Phase I has always required EPs to identify data gaps (significant or minor).
We’ll have to see how the discussion unfolds on this one.
How long is a Phase I report valid?
The date of the report has been frequently assumed to start the clock for the 180-day countdown. During discussions it also seemed that some participants believed that the report might, somehow, represent the conditions on the property after report completion but before expiration of the 180-day limit. It seems obvious that this isn’t the case.
Approval of this change seems likely.
There are numerous relatively minor proposed changes that serve to reiterate or reinforce current practices, or to address housekeeping issues. A few of those include:
- Site Reconnaissance clarifications. The language in the standard about the site visit’s scope and objectives has been clarified to make it easier to understand, without substantially changing the scope of work.
- Updating government database names that data providers / environmental consultants should search. This change does not expand the search, but accounts for the fact that public agencies from time to time change databases.
- Additional clarification of user obligations. Proposed revisions include additional related guidance, though it will remain important to work with an attorney or other knowledgeable professionals to make sure defenses are available if needed.
The ASTM committee will continue to discuss, refine, and vote on proposed changes in the coming months.
Phase I ESA Users – What Do You Think?
This, while meeting the needs of the industry at large and the various stakeholders – real estate purchasers, investors, lenders, attorneys, and of course Environmental Professionals. The update process always serves as a reminder of the varying risk tolerance and objectives of these different stakeholders.
It is important that Phase I ESA User voices are heard and considered during the renewal process. If you are a User of Phase I ESAs, such as a real estate investor or lender, reach out to your environmental consultant or another firm that is on the ASTM committee for clarification about these potential changes, or to voice any concerns.
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We’ve expanded this ideology to include a Shared Value Network® approach across all our service lines, offices, and the communities where our Advisors live and work. Together with our clients, colleagues, and communities, we create greater value through openness, inclusivity and innovation. We strive to create amazing value with our clients, colleagues and community. SVN cooperates proactively and place my clients’ best interests above my own.