December 2, 2003
Unanimous Decision Reached in 'All Appropriate Inquiry' Real Property Assessment
MBA (11/20/2003) Schwarting, Katie; Seckman, Cristina

The Environmental Protection Agency (EPA) conducted the final in a series of meetings from November 12 to 14, aimed at crafting new regulation regarding environmental property inspections. The new proposed regulation provides an “all appropriate inquiry,” (AAI) standard that would replace the American Society for Testing Materials (ASTM) Phase I assessment.

The new EPA regulations would require borrowers to conduct a more involved assessment than the ASTM Phase I in order to avoid liability for hazardous substance releases when acquiring real property.

Currently, a potential property purchaser uses the ASTM Phase I standard assessment to conduct the property review, which meets the burden of establishing "all appropriate inquiry" for the innocent landowner, the bonafide purchaser or contiguous landowner defenses under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the so-called Superfund law.

Congress, however, directed the EPA to develop AAI, a real estate environmental assessment standard, which would provide a purchaser of real property a defense from liability for any releases of hazardous substances caused by an earlier owner or third party on the property.

It is expected that ASTM will make changes to their Phase I to reflect the requirements set forth by AAI. The new regulation would require compliance training and education of both the lenders and their borrowers and could increase borrower costs to complete the work.

Similar to the ASTM Phase I, however, the AAI review demonstrates that the purchaser actively investigated any potential threatened or actual hazardous substance releases existing on the property.

If no releases are discovered during the assessment, the purchaser is deemed an "innocent landowner."  However, if releases are found, the purchaser could still buy the property as a "bonafide purchaser" and take the necessary steps toward remediation, which are required by state and federal laws.

A purchaser seeking a grant from EPA to develop the property, under Superfund, is also required to conduct AAI in order to qualify for the grant.

The new regulation would impose both more and less stringent requirements for borrowers and lenders than set forth by the ASTM Phase I guidelines.

Specifically, the regulation is broader, leaving several aspects of the environmental inspection to the environmental professional's judgment. But under the new regulation, the qualifications to work in the field as an “environmental professional” are more strictly defined, requiring such professionals to have a more enhanced educational background and greater field experience. However, there is consideration in the new proposal for environmental workers who have many years of experience in the industry and for anyone qualifying to do environmental site assessments under state licensing programs.

While the ASTM Phase I assessment provided detailed guidelines for assessment, AAI is a performance-based standard that allows for more discretion on the part of the environmental professional so long as the detection of existing and threatened releases of hazardous substances is still successfully achieved, based upon information relating to the uses of the property, hazardous substance management, disposal and other similar types of data.

The meetings were part of a negotiated rulemaking process in which MBA staff and members participated, representing the interests and concerns of the commercial real estate industry.

The EPA chose to promulgate the regulation for AAI through the establishment of a Federal Advisory Committee Act group (FACA), which consists of interested parties participating in the negotiated rulemaking process.  Abbi Cohen, partner at the Philadelphia , Pa. law offices of Dechert LLP, represents the interests of MBA members on FACA.

The FACA committee represented many diverse trade associations, including: Trust for Public Land , Environmental Bankers Association, Maryland Department of the Environment, US Public Interest Research Group, Cherokee Nation/ITEC, American Society of Civil Engineers, and National Association of Industrial and Office Properties. But the FACA group also worked together to establish balances between the issues, including health and safety, revitalization, real estate transactions, local government involvement and a defined liability standard.

As part of the ground rules for negotiated rulemaking, FACA agreed that unanimous consent was required on each section of the regulation to complete the new proposal.

With the negotiated rulemaking process now completed, the next step in the establishment of new regulation is a cost analysis. Once the cost analysis is completed, the regulation will be circulated to other government agencies and then published in the Federal Register, a process MBA expects will be completed by March. Once published, there is a 90-day period during which the regulation is open for comments.

For more on the current status of the EPA and FACA meetings, visit the EPA website at http://www.epa.gov/brownfields/regneg.htm.

Please forward any comments or suggestions to Katie Schwarting at kschwarting@mortgagebankers.org.