Risk and Reward: Environmental Issues in Real Estate Development | Brooks Pierce
Throughout 2021 and the first half of 2022, the commercial real estate market in the Southeast has been remarkably active. Despite rising interest rates and economic uncertainty, analysts expect this trend of strong activity to continue. Due to historically high demand for commercial real estate, buyers and developers are acquiring properties they might not have considered just a few years ago, including properties with environmental conditions.
Environmental conditions can affect real property in a number of ways, including:
- present the risks and costs associated with assessing and remediating existing conditions;
- future risks and costs associated with potential changes in regulatory requirements and the assertion of third-party claims;
- limitations on the use of the property, whether through institutional controls, regulatory requirements or practical limitations; and
- potential impacts on the future value of the property and its market value, whether due to actual unremediated environmental conditions or the stigma associated with past contamination that has been remediated.
To help assess and manage these potential risks and costs, buyers and developers should consider taking the following steps before taking title.
All appropriate requests
Completing “all appropriate investigations” (AAI) of potential environmental hazards on the property has become a routine step in reducing environmental risks. The conduct of an AAI may provide federal liability protections for certain property owners and potential owners who did not cause or contribute to the contamination of the property in question. Indeed, these innocent parties are showing through AAI that they have exercised due diligence to understand potential environmental risks. AAI conducted in accordance with standards approved by the Federal Environmental Protection Agency (EPA) may be used as the basis for obtaining protection against potential liability under the Federal Response, Compensation and Comprehensive Environmental Liability (CERCLA) as an Innocent Landowner, Contiguous Owner, or Good Faith Potential Purchaser.
Standards for AAI were first established by the EPA in 2002 and require a variety of specific activities, including:
- interviews with past and present operators and occupants;
- examination of historical sources;
- examination of federal, state, tribal and local records;
- visual inspection of the property and adjacent properties;
- examination of generally known or reasonably verifiable information;
- assessment of the degree of likelihood of contamination on the property; and
- seeks environmental cleaning privileges.
The AAI review must be performed by an environmental professional who meets specific requirements set forth by the EPA.
The EPA has recognized that a site assessment conducted using the standards promulgated by the American Society for Testing and Materials (ASTM) for a Phase I Environmental Site Assessment (ESA) will comply with the AAI standard. The purpose of the ASTM Phase I ESA is to identify the confirmed presence or probable presence of hazardous substances or petroleum products on the property, which are also known as “recognized environmental conditions” and commonly referred to by REC shortcuts (pronounced “wrecks”). ).
The most recent EPA-approved ASTM standards are ASTM E1527-13 (for previously developed properties) and ASTM E2247-16 (for forest land or other rural properties). ASTM recently adopted new standards for developed properties, ASTM E1527-21, which is intended to replace ASTM E1527-13. The new standard makes significant changes to the existing standard. Among other things, ASTM E1527-21 includes a new definition of a REC, places additional requirements on environmental consultants to consult historical records, and provides guidance regarding the consideration of emerging contaminants, including pervasive substances. – and polyfluoroalkyls (PFAS). However, the EPA recently withdrew a final rule to adopt ASTM E1527-21 in response to adverse comments. Therefore, the new standard has not yet been recognized by the EPA as meeting the AAI requirement. Nevertheless, potential buyers and their environmental consultants should consider complying with ASTM E1527-13. and ASTM E1527-21 to take advantage of liability protections under CERCLA as well as assess potential business and environmental risks.
In particular, respect for everything applicable AAI requirements are necessary to obtain CERCLA liability protections. For example, reporting dates can be critical because some aspects of the AAI must be completed or updated within one year of the acquisition date, while others must be completed no more than 180 days before. Details matter, and non-compliance can lead to unintended and very unwelcome exposure to liability.
Once the IAA is complete, it is important to carefully review the generated report(s) and ask questions of the consultants to determine the total costs, as well as legal risks, of any CER, including including potential further evaluation, corrective action, regulatory action or third party claims. Thorough analysis of reports and discussions with consultants enables the buyer or developer to understand and assess the business risks associated with the environmental conditions of the site.
Limit the risks and costs of environmental concerns
In addition to the AAI, there are several actions potential buyers and developers can take to limit their risk when evaluating a property with environmental issues.
- Remediation of RECs or de minimis environmental conditions prior to closing should be considered to further limit potential buyer liability. If the cost of cleaning is relatively low, future problems can be eliminated by simply correcting the REC.
- Where RECs can be ruled out by further assessment, purchasers should consider conducting limited soil and groundwater sampling in order to do so and limit the potential liability associated with that REC. Of course, the discovery of significant contamination can have a negative impact on the current owner/seller.
- When large and widespread RECs are identified, field sampling can be used as a screening tool to determine whether the expense of further assessment or remediation is warranted within the decision-making framework of the project. the potential buyer.
- A potential buyer may also consider a non-AAI scoping assessment, such as locating any wetlands or waterways on the property and assessing the potential impacts these features may have on permitting the planned development.
- To help minimize the risk associated with CERs, prospective North Carolina developers may consider participating in the North Carolina Brownfields program. Under the program, a potential developer may enter into an agreement with the state Department of Environmental Quality whereby the developer agrees to undertake certain assessments and potentially limited remediation efforts and/or use restrictions. lands. In return, the state agrees not to hold the proponent liable for further remedial action in accordance with higher regulatory standards. Essentially, this economic development program aims to encourage the redevelopment of contaminated properties by allowing the developer to enter into a contract with the state to undertake limited, risk-based rehabilitation, and in return receive liability protections and incentives. tax.
- Prospective buyers should also consider other North Carolina programs that can help reduce the burden of remediation and development of contaminated properties. For example, the Underground Storage Tank Fund reimburses eligible costs incurred in cleaning up soil and groundwater contamination resulting from an oil spill from a commercial underground storage tank. The Cleanup of Dry Cleaning Solvents Act also created a fund to assess and remediate contamination from dry cleaning solvents at qualifying facilities.
Contractual allocation of risk and liability
Many of the risks and associated responsibilities associated with the purchase and development of a contaminated property can be negotiated between the parties.
Prospective buyers must almost always obtain the right of access to the property to conduct a thorough environmental investigation and due diligence of all potential risks and liabilities. In addition, potential buyers may consider negotiating an “opt-out” clause that would allow them to rescind the offer if significant contamination is discovered.
Parties negotiating a purchase agreement should also pay close attention to the seller’s representations and warranties regarding the environmental conditions of the property. The scope of any indemnification of the buyer for claims arising after the sale of the property should also be considered, as well as any limitation of his liability. In addition, escrows may be used if there are significant environmental conditions and concerns about the seller’s future ability to actually fund its obligation to indemnify.
The parties can also negotiate who pays for the cost of an environmental assessment and other due diligence, any necessary cleanup, and the cost of entering into a brownfields agreement, if applicable.
Environmental insurance may also be considered and can be a valuable means of mitigating risk, depending on the circumstances, the cost of premiums and the risks covered and excluded from coverage.
The remarkably rapid purchase and redevelopment of brownfield properties will likely continue in North Carolina and throughout the Southeast. Environmental issues need to be strategically assessed and managed, along with the more traditional business factors involved in potential property acquisition and development. Those who are able to do this successfully can reap significant rewards.