New Standard Will Help Clarify Environmental Conditions For Homebuilders

by Bilzin Sumberg

When you are buying raw land to build homes, you need to know what you are buying. A 100-acre tract of farmland may look pristine to the untrained eye, but an environmental professional may discover a leaking underground storage tank, illegal landfilling, or pesticide spills next to the maintenance shed. Pre-acquisition environmental due diligence helps homebuilders uncover such environmental problems before buying land, helping builders determine the value of the land, whether the land is suitable for the planned residential development, and additional costs that may be incurred to address environmental issues. Environmental due diligence is also important to establish certain federal liability defenses.

Phase I ESAs are the backbone of environmental due diligence for commercial real estate, including large-scale residential development projects. In November 2013, ASTM (an international standards organization) issued a new standard for Phase I ESAs. The new standard, ASTM E1527-13, was prepared by a technical committee made up of environmental consultants, real estate and environmental attorneys, regulators, builders, lenders and insurers. The purpose of the Phase I ESA is to identify the presence of Recognized Environmental Conditions (RECs) at the subject property, including any historical or controlled RECs.

The last revision to the Phase I standard was made in 2005 in response to legislative amendments which created new liability defenses under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). To take advantage of these defenses, homebuilders need to undertake pre-acquisition environmental due diligence that satisfies the “all appropriate inquiries” requirement. The Phase I standard provides a checklist for meeting the requirement.

Do I Have to Use The New Standard?

Not yet. The United States Environmental Protection Agency (EPA) issued a final rule recognizing the new Phase I standard, stating that, effective December 30, 2013, compliance with the new Phase I standard will satisfy the requirement to conduct “all appropriate inquiries.” EPA also announced that it intends to publish a new proposed rule in the near future that would remove reference from its regulations to the prior Phase I ESA standard (ASTM E1527-05) as satisfying the “all appropriate inquiries” requirement. In the interim period, a Phase I ESA that conforms to either the prior standard or the new standard meets the requirements for “all appropriate inquiries.”

Why Should I Use the New Standard?

For one thing, your lender may require that you do. Some lenders already require use of the new standard, and most of them will in the near future.

More importantly, the new Phase I standard provides homebuilders with more information about the property than the prior standard. For example, under the new standard, the environmental consultant will:

  • evaluate the potential for hazardous vapors to migrate onto the property, based on existing data about any known contaminants in the surrounding area.
  • conduct additional review of regulatory agency files if the subject or adjoining properties are listed in public regulatory databases, giving the property buyer more in-depth and updated information about environmental enforcement actions and incidents such as spills.
  • identify controlled RECs affecting the property, meaning conditions that have been resolved with the use of engineering and/or institutional controls. These controls may restrict the use or future development of the property, such as by prohibiting residential uses, prohibiting use of groundwater for irrigation, or requiring that an impermeable cap remain over contaminated areas.

While we think the new Phase I ESA standard will assist homebuilders by providing a clearer picture of current and historical environmental conditions of the prospective property, homebuilders should note that these changes may also add to the cost and time for an environmental consultant to perform a Phase I ESA. This may be particularly true in the early days of adoption of the new standard. Homebuilders should take this potential delay into account when negotiating due diligence time frames with land sellers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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