New Environmental Due Diligence Standards When Should They Be Used? Another Article in This Issue, "Recent Environmental Regulatory Reforms: Clarity or Confusion?" Discusses EPA's All Appropriate Inquiries Legislation. This Article Covers the Technical Aspects Related to the AAI Process

By Richardson, Stephen V. | The RMA Journal, March 2007 | Go to article overview

New Environmental Due Diligence Standards When Should They Be Used? Another Article in This Issue, "Recent Environmental Regulatory Reforms: Clarity or Confusion?" Discusses EPA's All Appropriate Inquiries Legislation. This Article Covers the Technical Aspects Related to the AAI Process


Richardson, Stephen V., The RMA Journal


As part of the 2002 Brownfields Act, also known as the Small Business Liability Relief and Brownfields Revitalization Act, Congress directed the U.S. Environmental Protection Agency to define its requirements for all appropriate inquiries (AAI), which is a necessary element of the three "landowner defenses" available under federal environmental law:

1. Innocent landowner (no contamination is discovered).

2. Bona fide prospective purchaser (contamination is known or discovered during due diligence).

3. Contiguous property owner (contamination has migrated onto the defendant's site from adjacent property).

Prior to issuance of EPA's AAI Final Rule in November 2005, only the "innocent landowner" defense had been available, and EPA had allowed earlier versions of the ASTM Phase I Environmental Site Assessment (ESA) standard (1527-97 and 1527-00) to satisfy the AAI requirement for this defense.

The Brownfields Act listed the components that must be included in any AAI investigation. The investigation must be performed under the responsible charge of an "environmental professional" (EP) and must include the following:

1. Interviews.

2. Reviews of historical sources.

3. Searches of recorded liens.

4. Reviews of government agency records.

5. Visual inspection of the site and adjacent properties.

6. Any specialized knowledge of the "defendant" (person seeking to claim one of the three defenses noted above).

7. A consideration of the relationship between the purchase price to the property's value if not contaminated.

8. Commonly known and reasonably ascertainable information regarding the property.

9. A consideration of the degree to which contamination is obvious and the likely presence of contamination at the property.

Working with a stakeholder group, EPA developed the AAI Final Rule, "Standards and Practices for All Appropriate Inquiries," 40 CFR Part 312, published November 1, 2005, and effective November 1, 2006. Concurrently, ASTM has updated its Phase I ESA standard to fully comply with EPA's AAI requirements. It is known as E1527-05, "Standard Practice for Environmental Site Assessment: Phase I Environmental Site Assessment Process."

What does the development of these new environmental due diligence standards mean to the banking industry? The short answer: It depends, and time will tell.

Due to liability protections afforded secured lenders since CERCLA was amended in 1996 (after which secured lenders were specifically exempted from the definition of owner or operator under CERCLA--the "secured creditor exemption"), the AAI protections are not as critical to lenders as they are to property owners and prospective purchasers. Also, since banking regulations do not specify what must be performed by secured lenders as part of the environmental due diligence process, banks are free to select from a variety of due diligence tools. Accordingly, the new AAI and ASTM standards are not in any way mandatory for secured lenders; they must be met only if the "user," typically the borrower, seeks to establish one of the three defenses to CERCLA liability.

Accordingly, in the post-AAI world, there has been a range of responses by lending institutions.

Some are adopting a conservative approach and requiring an AAI/1527-05-compliant Phase I ESA on all lending secured by real estate. Some have deemed it unnecessary to make any changes to their existing environmental due diligence tools. More common however, particularly among larger banks with a sizable CRE portfolio, is the use of a variety of environmental due diligence tools, depending on the specific loan and collateral situation. This toolbox may include the following:

* A simple questionnaire.

* An electronic database search.

* An ASTM 1528-06 Transaction Screen.

* A Transaction Screen with additional non-scope business risk considerations, such as asbestos, mold, radon, and lead paint. …

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