All Appropriate Inquiry: A New Standard for Environmental Due Diligence
by Mark S. Koellner


You have found the ideal property. The site offers great location. It’s at a fair cost, and provides a great upside for your business. However, your lender requests that environmental due diligence be completed prior to closing the loan.  

Historically, an environmental transaction screen completed pursuant to ASTM (American Society for Testing and Materials) Standard 1528, or a Phase I Environmental Site Assessment (ESA) completed pursuant to ASTM 1527-00 was the standard that most lenders looked to as a baseline for due diligence. Lenders have invoked a tiered approach to due diligence, based upon the risk tolerance of the institution, and the likelihood of environmental impact on a given property type. Environmental ESA scopes of work varied widely by property type (i.e. retail, agricultural, commercial, office and industrial).  

While lenders and property owners have been able to secure liability relief for property purchases under most State laws, federal liability relief has been difficult to attain. The CERCLA or “Superfund” legislation of 1980 had a provision to provide liability relief called the “innocent landowner defense.” The defense was applicable when a property purchaser performed environmental due diligence, such as a Phase I ESA and did not have reason to know that the property that they purchased (which was ultimately impacted) was contaminated. However, the innocent landowner defense was rarely able to be obtained; thus, little case law exists to support its use.  

Background  

In January 2002, Congress passed The Small Business Liability Relief and Brownfields Revitalization Act (the Brownfields Act) that authorized the United States Environmental Protection Agency (USEPA) to develop an environmental standard that would support Federal liability protection to purchasers of impacted properties. In the Brownfields Act, Congress specified “All Appropriate Inquiry” (AAI) as a major requirement that parties would need to fulfill to establish a defense to Superfund liability. This draft regulation will undergo further review by the EPA and the Executive Branch’s Office of Management and Budget. When promulgated later in 2004, the regulation will change the way environmental due diligence is performed.  

Parties who may take advantage of the federal liability protection include: “innocent purchasers” who purchased impacted property without knowing, or having had reason to know, of releases of hazardous substances; “bona fide prospective purchasers” who purchased properties after January 11, 2000, and unlike “innocent purchasers,” may have purchased impacted property knowing, or having had reason to know, of a release of hazardous substances on or to their properties; and “contiguous property owners” whose properties were impacted by contiguous properties and who purchased impacted properties not knowing, or having had reason to know, that the property was impacted.  

In order to be eligible for Federal liability relief, AAI must be completed prior to purchase of a property. This regulation was written by a committee of stakeholders formed and facilitated by the USEPA. This committee consisted of 25 stakeholders in five general interest categories including Government/ Tribal, Environmental Justice/Public Health and Conservation, Real Estate/Finance Industry, Government Interest Associations and Environmental Professionals.  

The charge of the committee was to “conduct discussions and reason consensus, if possible, on proposed regulatory language setting standards and practices for conducting all appropriate inquiry.” The10 criteria that EPA gave the committee under which to develop the regulations included the following:  

I. The results of an inquiry by an environmental professional.  

II. Interviews with past and present property owners, operators, and occupants of the facility for the purpose of gathering information regarding the potential for contamination at the facility.  

III. Reviews of historical sources, such as chain of title documents, aerial photographs, building department records, and land use records, to determine previous uses and occupancies of the real property since that property was first developed.  

IV. Searches for recorded environmental cleanup liens against the facility that are filed under Federal, State or local law.  

V. Reviews of Federal, State and local government records, waste disposal records, underground storage tank records and hazardous waste handling, generation, treatment, disposal, and spill records, concerning contamination at or near the facility.  

VI. Visual inspections of the facility and adjoining properties.  

VII. Specialized knowledge or experience on the part of the defendant.  

VIII.The relationship of purchase price to the value of the property, if the property was not contaminated.  

IX. Commonly known or reasonably ascertainable information about the property.  

X.The degree of obviousness of the presence of contamination at the property, and the ability to detect the contamination by appropriate investigation.  

The Environmental Professional  

In order to successfully complete AAI, the draft regulations require retaining an Environmental Professional who is qualified to complete AAI. For the first time under Superfund, the minimum requirements of the Environmental Professional have been established. In order to complete AAI, the Environmental Professional must:  

• Possess a Professional Geologist or Professional Engineer’s license from a State, tribe, US territory or Puerto Rico, and have a minimum of three years relevant experience;  

• Be licensed to perform environmental inquiries certified by Federal or State government, a tribe, a US territory or Puerto Rico, and have a minimum of three years of relevant experience;  

• Have a BA, BS, or higher degree from an accredited institution of higher learning in a relevant discipline of engineering, environmental science, earth science, and a minimum of five years of full time relevant experience;  

• As of the date of promulgation of the regulation, have a BA or BS or higher degree from an accredited institution of higher education and a minimum of 10 years of full time relevant experience.  

These requirements for the first time impose significant restrictions on who may complete AAI. Persons who do not meet the qualifications listed above will be able to work on AAI, but must do so under the direct supervision of the Environmental Professional.

The requirements will have a significant impact on how and by whom, environmental due diligence is completed. Many individuals completing environmental investigations today, including those completing ASTM 1528 transactions screens, or ASTM 1527-00 ESAs do not meet the minimum qualifications. You must be certain that when you contract with an environmental professional, the people working on the report, and specifically those signing the report, meet the minimum qualifications of the Environmental Professional. The report must contain a statement that the environmental consultant who performed the AAI is in fact, an Environmental Professional.  

Beyond ASTM 1527-00  

AAI requires that additional steps beyond what is currently completed as part of ASTM 1527-00 be completed. This additional investigation includes: interviews with one or more (as necessary) owners and/or occupants of neighboring or nearby properties (for abandoned properties); database search review and interpretation using larger search distances than those that are currently subscribed; and reviews of institutional or engineering controls for the site and properties within one-half mile.  

The review of engineering and institutional controls holds particular importance for Pennsylvania. Under the Pennsylvania Department of Environmental Protection’s (PADEP) Land Recycling Program (Act 2) a number of different environmental standards may be attained in order to secure liability protection under the Act 2 regulations. One such standard is the sitespecific standard that allows contamination to remain on site at concentrations higher that those subscribed under another standard, the statewide health standard (i.e. published concentrations). When a site-specific release is secured, there is often a deed restriction, or a description of the use of engineering or institutional controls to minimize access to impacted areas, or minimize the migration of contamination. This concept is termed “pathway elimination.” Thus, AAI would include a search of PADEP files to include engineering or institutional controls used to provide pathway elimination for attainment of the site-specific standard.  

The AAI Report  

The results of the AAI must be presented in a report, that at a minimum, contains the following elements: an opinion as to whether the AAI has identified conditions indicative of a release, or threat of a release, of hazardous substances; an identification of data gaps and their significance; a description of the qualifications of the Environmental Professional, and the declaration that the Environmental Professional meets the eligibility specifications discussed previously.  

The most significant departure between the AAI report and the current ASTM reporting is the identification and discussion of the significance of data gaps. Under AAI, the Environmental Professional must endeavor to close data gaps with a written record contained within the report. A data gap is a timeframe within the history of the site that has either no information available, or is not readily or practically attainable by the Environmental Professional.  

For example, if an Environmental Professional cannot account for the operators and/or activities on an industrial site for a period of six years, the AAI report must acknowledge the data gap and speak to its relevance. For instance, if it can be determined that the facility has not materially changed, or anecdotal information suggests that processes would have remained the same; the presence of the data gap may be insignificant. If however, there can be no information gained; the data gap may be long enough or significant enough that the Environmental Professional may recommend sampling and analysis to close that gap.  

The regulation does not indicate just how, or using what language, the Environmental Professional is to discuss data gaps, nor does it prescribe specifically the role of sampling and analysis. Thus, prospective purchasers should discuss these issues with the selected Environmental Professional prior to engaging to complete AAI.  

Shelf Life of the AAI Report  

Under the current ASTM 1527-00 standards, a report may be considered reliable for up to one year from the date of issuance. Under the proposed AAI regulations, that timeframe is reduced to 180 days. If a report is older than 180 days, the following tasks must be completed to update it: interviews with past and present owners, occupants and operators; reviews of Federal, State, local and tribal records; a new visual inspection of the property; documentation of the relevant changes to the conditions of the property; a declaration by the Environmental Professional that states they meet the eligibility requirements of the regulation and have the relevant specialized knowledge of an Environmental Professional; and an indication of those intending to use the report.  

According to the regulation, a report prepared for others may be used to constitute AAI for the person relying on the report. This however, brings to issue the contract between the Environmental Professional and their client, which typically states that the report may only be relied upon by the persons(s) that contracted with the Environmental Professional.  

A new ASTM standard is currently under development that is intended to incorporate AAI. The standard will be finalized after the AAI regulation has been promulgated. Having an ASTM ESA Standard and AAI referenced together will be important to maintaining consistency in the industry.  

In summary, the AAI regulation will likely be passed sometime in 2004. In the meantime, lenders, brokers, developers and Environmental Professionals should evaluate their own processes and risk tolerance to determine how AAI will work for their own business.  

Mark S. Koellner is Principal-in-Charge at BL Companies’ Harrisburg office, specializing in environmental consulting and site closure services. For more information regarding environmental due diligence contact Mr. Koellner at 717-651-9850 or email mkoellner@blcompanies.com. Thanks to the Environmental Bankers Association and the law firm of Dechert, LLP for source materials referenced in compiling this article.

Copyright 2005 BillGladsone.com. All Rights Reserved.

< Back to Exclusive Articles