ESA Fact Sheet
The following is a summary compiled from the complete ESA Fact Sheet.
Over the last two decades, environmental regulations have evolved and now affect many aspects of our lives, including the way we do business. Due to the possibility of government-mandated environmental cleanups (remediation), a concern has developed regarding who is financially responsible for remediation. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) requires the designation of potentially responsible parties (PRPs) who will bear the cost of site remediation. CERCLA also recognizes the need to limit property-owner liability by performing “due diligence” prior to real-estate transfers. The federal Superfund statute, 40 CFR Part 300, reflects CERCLA requirements.
Recent decades in American business have seen an explosion of concerns regarding who is responsible for environmental issues. In the past, regulations did not necessarily require a property owner to remediate if a property was sold without the buyer performing due diligence. As a result, many properties with environmental problems were sold to buyers who were ignorant of the concerns. Government agencies in turn pursued the new owners, in essence creating a “Buyer Beware” commercial real-estate market. Often these new owners did not have the financial wherewithal to absorb these environmental liabilities and went bankrupt. A lot of lending institutions were left holding the proverbial bag, because they were now liable for the environmental problems on the property. All these conditions led to more and more banks, realtors, and attorneys requiring environmental assessments in an effort to protect prospective buyers.
The understanding and need for due diligence has evolved over the years. When environmental assessments for commercial properties came into vogue, each consulting firm would interpret due-diligence requirements differently and would come up with their own scopes of work. Finally, in 1994, the American Society of Testing and Materials (ASTM) developed a process which became the industry standard. Standard practices for both Phase I Environmental Assessments and Transaction Screen Questionnaires were developed. As with any new way of doing business, the standard evolved, and revisions came along in 1997 and 2000.
Now a new change is on the horizon – “All Appropriate Inquiry” (AAI) is a new due diligence requirement put forth by the US EPA. The AAI requirements will soon require a change in how environmental assessments are performed, and ASTM is working to adjust the standard practice. Also, the International Organization for Standardization (ISO) has a standard practice – ISO 14015.
As can be seen, environmental due diligence has evolved, from home-grown techniques, to three evolutions of the current ASTM standards, to ISO standards, to the new EPA AAI rule. The soon-to-be-promulgated AAI rule is leading ASTM to a new revised standard. The ground continues to shift – and these are just the initial steps. If a property has an environmental liability, a deal may move forward with additional work in the Phase II realm (such as asbestos surveys, indoor air quality surveys, subsurface/groundwater assessments, and possibly some remediation work) – or a deal may fall through entirely if the environmental issues are potentially overwhelming to a prospective buyer.