Biz Tips: Environmental due diligence: Things new and old
By Bruce Nickelsen adn Jim Okun
Since the commonwealth's super-lien takes precedent over a lender's lien, it is in the lender's interest to evaluate environmental risk when it extends a loan on real property secured by an interest in the property. Environmental site assessments (ESAs) have evolved as an important tool to test the value of the underlying property, and identify possible environmental cleanup costs.
The first part of this article discusses important background on environmental due diligence and introduces the new All Appropriate Inquiry (AAI) standard for environmental site assessments (ESAs). In the second part, to be included in an upcoming issue, key AAI details are brought up and the extension of environmental due diligence to single family residential properties is introduced.
Why an ESA?
• Qualifying for the "Innocent Landowner Defense" under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). This provision protects property owners (and banks should they become an owner through foreclosure) from the cost of performing Superfund level cleanups provided carefully executed due diligence has been performed (more on this later);
• Avoiding costly environmental cleanups that may approach, or in some cases even exceed, the value of the property;
• Avoiding the loss of capital liquidity as cleanups progress and are possibly delayed while waiting for government approvals and contractor performance;
• Avoiding potential law suits from owners of adjacent properties injured by contamination; and
• Where available, qualifying for potential Brownfields grants and loans.
Properly executed ESAs are likely to identify significant latent environmental conditions. However, they are never foolproof and there is always a chance that a latent problem will go undetected.
The new site assessment standard
The environmental due diligence rules are now changing and these changes are driven by AAI, which first surfaced in 1985 when the U.S. Congress passed the Superfund Amendment Reauthorization Act and it introduced the concept of the "the Innocent Landowner Defense." With this provision, Congress granted property purchasers protection from potential Superfund liability if the purchaser performed an environmental assessment meeting the AAI requirements prior to closing on a purchase.
The problem was that Congress neglected to explain what AAI should include. The American Society for Testing and Materials temporarily filled this gap with its 1993 Phase I Environmental Site Assessment Standard. Then in 2002 (17 years late), Congress directed the Environmental Protection Agency to establish a national AAI standard. Details of the new federal standard will be described in the second installment.
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