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Task Group Responds to Industry Demand
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 June 2006 Feature
Jon Walker is associate vice president of business development for Environmental Data Resources’ corporate division. He co-chaired the task group that developed ASTM E 1528-06, Standard Practice for Limited Environmental Due Diligence: Transaction Screen Process. He can be reached at 800/352-0050.

Task Group Responds to Industry Demand
The Revision of the E 1528 Transaction Screen Standard

In 2004, an ASTM task group embarked on the revision of ASTM E 1528-00, Standard Practice for Environmental Site Assessments: Transaction Screen Process. A two-year consensus building effort followed and the task group, a part of ASTM International Committee E50 on Environmental Assessment, Risk Management and Corrective Action, unanimously approved a 2006 version of the standard in January.

The revised standard represents the task group’s response to a wide range of stakeholders who weighed in on the need for a standardized tool for conducting limited environmental due diligence. E 1528 is designed to serve as an early warning system to identify potential environmental concerns, or PECs, in connection with a particular parcel of real estate prior to a property transaction. Strong support by critical stakeholders during the rewriting of the standard suggests that E 1528-06 will become an invaluable option in the hierarchy of tools available to environmental consultants, lenders, corporations, lawyers, government agencies, brokers, appraisers, homeowners, and other parties with an interest in performing limited environmental inquiries at properties perceived to be low risk.

E 1528: A Look Back
On Feb. 25, 1993, the Federal Deposit Insurance Corp. issued a memorandum that required institutions under its supervision to establish environmental risk programs that would “limit exposure to potential environmental liability associated with real property held as collateral.” With this mandate, the FDIC emphasized that their examiners would be reviewing an institution’s lending policies and procedures to ensure that adequate safeguards were in place to protect against environmental risk. At the time, most banks had an acceptable environmental risk policy in place for large loans, but few banks had any policy specifically designed to limit potential environmental risk exposure on low-cap loans.

The growth of the transaction screen market is in large part directly attributable to this FDIC memorandum. A few months after the memorandum’s release, the ASTM transaction screen standard was first born (E 1528-93), along with E 1527-93, Practice for Environmental Site Assessments: Phase I Environmental Site Assessment, as a process for property owners to follow in order to satisfy the qualifying criteria for the innocent landowner defense to CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) liability. The E 1528 standard was later revised in 2000 to be consistent with the revised E 1527-00.

Two years later, E 1528 lost its intended relevance in the context of CERCLA liability protection when President George W. Bush signed the Small Business Liability Relief and Brownfield Revitalization Act (the Brownfields Act) in January 2002. Hailed as the “biggest, boldest move” the U.S. Environmental Protection Agency had ever made to drive forward the redevelopment of blighted properties across the U.S., the Brownfields Act amended the original innocent landowner defense and created the new contiguous property owner and bona fide prospective purchaser landowner liability protections. To qualify for any of the three protections, a property owner must conduct “all appropriate inquiries” into the previous ownership and uses of the property prior to taking title. The act also directed EPA to write the first federal rule dictating the steps required to meet the all appropriate inquiries requirement, and identified ASTM’s E 1527 Phase I environmental site assessment standard as an appropriate interim protocol. In its supporting documentation for the AAI rule, however, EPA also included the following statement: “The less stringent transaction screen (ASTM E 1528) is not an interim standard and does not meet the requirements for obtaining the CERCLA liability protections.”

Given this change in the legal criteria for conducting all appropriate inquiries, the ASTM task group believed it was a matter of great urgency to remove the claim that compliance with E 1528-00 would allow a user to qualify for CERCLA liability protection. The danger was that a failure to approve an updated E 1528 practice would leave the 2000 version in place for several more years, resulting in a misconception about the applicability of a transaction screen as a safety net from CERCLA liability.

The E 1528 task group then also faced the dilemma of determining whether the transaction screen process served a useful role in the due diligence market, even outside its original purpose. Early in its deliberations, the task group considered the alternative of simply repealing the E 1528 practice. “As the task group chair for both the E 1527 and the E 1528,” commented Julie Kilgore, Wasatch Environmental and current chair of the E 1527 task group, “I had initially proposed a ballot to withdraw the ASTM E 1528 transaction screen standard from the marketplace since it appeared that the stated purpose of that standard was no longer valid.”

For the first time in its brief history, the standard was put to the test. Outreach to the market about the perceived value of E 1528 revealed that transaction screens are, in fact, commonly relied upon for due diligence – and not necessarily as a tool for CERCLA liability protections. In fact, noted Kilgore, “user groups, including lenders, utilities, and government sectors, vigorously objected to the complete abandonment of the transaction screen.” Indeed, various stakeholders from the worlds of lending, industry, government and environmental consulting provided evidence that E 1528 was actively relied upon in the marketplace as a screening tool and should be retained with revisions eliminating inconsistencies with the 2002 Brownfields Law.

“As a user of transaction screens, I strongly disagreed with the recommendation that E 1528-00 be pulled as a standard and not replaced,” noted Dan Neal II, Environmental Affairs Division, Pollution Prevention and Abatement Branch, Texas Department of Transportation. “Instead, I favored its redesign as a tool for low risk property evaluations for real estate transactions where CERCLA liability protection is not a concern.” The fact that demand for the E 1528-00 practice, as evidenced by ASTM’s sales of the standard, remained at a high level served as yet another important indicator of its perceived value.

Redesigning E 1528
Armed with evidence that there was considerable support for a revised E 1528 standard, the task group was spun off from Kilgore’s E 1527 task group to tackle the necessary modifications. The task group was charged with redesigning the process to identify current or past potential environmental concerns at properties where CERCLA liability immunity is not an issue. In essence, if the user is going to do “less than a Phase I ESA,” the E 1528 revision now provides users (i.e., lenders, corporations, lawyers and other interested stakeholders) with a consensus-based standardized process for performing limited environmental due diligence. One benefit is consistency. “E 1528 provides a nationally accepted standard for screening,” said Harriet Greenwood, Greenwood Solutions LLC and member of the E 1528 task group, “even though many lenders will continue to use their own checklists and screens.”

Below are highlights of the key changes to E 1528-06, which is now titled Practice for Limited Environmental Due Diligence: Transaction Screen Process.

Purpose:
• The new release of the E 1528-06 standard expressly attempts to divorce the transaction screen from the Phase I ESA process, and rework its purpose for applicability to sites where CERCLA is not a concern. For consistency with the Brownfields Law, the new standard clarifies that the practice will not constitute “all appropriate inquiries ... into the previous ownership and uses of the site in accordance with generally accepted good commercial and customary standards and practices” (42 U.S.C. §9601(35)(B)(i)(I)) and therefore will not establish CERCLA landowner liability protections.

• E 1528-06 makes a clear distinction between a Phase I ESA, aimed at establishing CERCLA liability immunity, and a limited environmental due diligence that can be performed at lower cost by the user but provides no CERCLA liability protection.

• The terminology of the E 1528-00 due diligence was changed from “recognized environmental condition” (the phrase used in the E 1527 Phase I standard) to a “potential environmental concern.” While this definition is similar to that of the “recognized environmental condition” in E 1527, the revised definition reflects that the transaction screen is a more limited assessment and the end point of a transaction screen is less conclusive than the end point of a Phase I.

Process:
• The transaction screen process consists of three stages: 1) asking property owners and occupants specific questions, 2) observing site conditions and 3) conducting limited research regarding specified government records and historical sources.

• The finding of a “potential environmental concern” could be an impetus for additional inquiry. E 1528-06 states, “Upon completing the transaction screen questionnaire, if the user concludes that further inquiry or action is needed (for example, consult with an environmental consultant, contractor, governmental authority, or perform additional governmental and/or historical records review),” the user should proceed with such inquiry.

• E 1528-06 adds local street directories inquiries to historical records inquiries. E 1528-00 focused in Question 22 on fire insurance maps or consultation with the local fire department. During task group meetings, two valid points were made: 1) fire insurance maps are not always available and 2) the quality of the information from local fire departments may be minimal at best. As such, and because of the importance of a reasonable level of third-party historical research, the task group gained consensus on eliminating “consultation with the local fire department” and replacing it with a “review of local street directories.” This records review may be valuable in uncovering past dry cleaning tenants or gas stations on, or adjacent to, the subject property.

The Impact of E 1528-06
Today, many low risk properties are not subject to any environmental due diligence, leaving potential environmental risks unknown at the time of a real estate transaction. The task group believes that keeping a relatively inexpensive practice available for limited screening will result in more transactions being subject to environmental due diligence where no environmental investigation of any kind would have previously occurred. The potential applicability of E 1528-06 is significant, given the wide universe of properties that are perceived to be low risk and for which, initially at least, the user deems a Phase I ESA to be unnecessary.

Although transaction screens, unlike Phase I ESAs, do not require the expertise of a qualified environmental professional, environmental consultants have always played an important role in performing transaction screens for their clients — and likely always will. “The revised standard allows users to follow an established environmental due diligence approach in situations where CERCLA liability protection is not desired or needed,” observed David Parsonage, environmental consultant and vice president, American Geosciences, Inc. “In fact, I used the revised 2006 transaction screen standard on the very first day of its publication to meet the developer/purchaser and lender requirements on just such a commercial transaction.”

For lenders, the E 1528-06 standard represents a new branch on their decision tree about how much environmental due diligence is warranted for a particular process. The timing of the new E 1528 release works well with the environmental due diligence world’s transition related to the federal “All Appropriate Inquiries” rule, effective November 1, 2006. It appears likely that, over the course of the coming months, amidst stern warnings from regulators about risk exposure and lax underwriting, users, specifically lenders, will be turning a critical eye toward their own due diligence policies.

Whether a user relies on E 1528-06 to perform transaction screens in-house or hires a qualified consultant for the process, decisions about the level of environmental due diligence need to be made prudently. The decision should be guided by property type, the expertise and risk tolerance of the user, the perceived risk of the property, and the plans for property use. In the end, the re-issuance of the transaction screen process maintains market relevance as a tool for buyers and sellers to conduct some level of due diligence on perceived low risk property transactions. According to C. Tom Jones, supervisor of Gas and River Transportation Environmental Services at American Electric Power, owner of many property types, from undeveloped forest and farmland to large industrial facilities that have been in service for decades, “Unless companies have a policy to undertake some amount of due diligence for every property transaction, as we do at American Electric Power, it is likely that no real due diligence would be conducted in association with many such property transactions if there were no transaction screen standard.”

E 1528-06 unveils another available option that warrants the attention of all parties involved in buying any type of real estate with potential environmental concerns, those who extend loans for purchasing such properties or those who perform environmental investigations. The end result of this version of the standard could be that it provides a needed alternative to formally screening loans that may not have undergone any environmental due diligence in the past. //

 
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