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Continuing Obligations: A Cautionary Tale

February 13, 2020

Surprised by the need for an updated environmental assessment or other related activities at your property? You’re not alone. PM Environmental experts discuss the common drivers of change, and how to avoid future surprises.

Continuing Obligations – What are they?

Owners and operators of properties that contain residual contamination have continuing obligations.  These generally include:

1. Actions undertaken to ensure that the property can be used for its intended purpose in a way that occupants are not unacceptably exposed to the contaminants.  A good example would be the use of  pavement to prevent dermal contact with lead-contaminated soils, or operating a vapor control system to keep contaminated soil gas from entering a building structure where occupants would breathe them.

2. Preventing exacerbation of existing contamination by not changing property conditions in a way that causes  the existing contamination to migrate or in a way that increases the costs of cleanup for a liable party.

3. Complying with existing land use restrictions imposed on a property as part of cleanup or No Further Action activities. An example under this scenario may be not installing a water supply well at a property with a groundwater use deed restriction.

Changes in regulatory cleanup criteria and/or the introduction of new regulations over time are the main drivers for changes in continuing obligations at a property.  Changes in land use such as a change in a tenancy from a commercial or office use to a day care facility can also affect continuing obligations because different regulatory standards apply based on property use.

Consider the following scenario: 

Five years ago, a commercial property was purchased. A Phase I Environmental Site Assessment (ESA) conducted in conjunction with the transaction indicated the need for a Phase II Environmental Site Assessment (ESA). The Phase II ESA documented that residual contamination was present but at concentrations that did not exceed applicable regulatory criteria. Therefore, the site was in compliance with existing environmental regulations and no further action was needed. 

Fast forward to today. When the property owner seeks to refinance the property, the lender requires a new environmental inspection be completed. That assessment reveals that the property is not in compliance with current regulations, much to the owner’s surprise. 

“Unfortunately, we encounter this situation often,” said Kristin Gable, PM Environmental’s National Manager of Due Diligence. “Property owners who have completed a Phase I or Phase II ESA may not anticipate ever needing another one. Or they assume a follow-up assessment is a formality and are surprised when it yields a different result.”

“It’s not that property owners are irresponsible,” added PM Environmental Vice President Adam Patton. “Most are well-meaning businesspeople but paying attention to changes in environmental regulations is not their primary focus. Fortunately, it’s ours.” 

Gable, Patton and other PM consultants have helped hundreds of clients in a variety of locations and industries address the challenges of changing environmental regulations. Here, they address some of their most common questions and concerns.

We already established environmental compliance. Why do we need a new ESA?   

Any of a number of changes in the status of a property or its financing can trigger the call for a fresh assessment of the site’s environmental risks.

Refinancing or new lending for a property often requires updated ESAs because the environmental condition of a property is related to its overall value. Also, changes in the owner’s continuing obligations can potentially impact operational costs. Continuing obligations refers to the ongoing responsibility to contain any contamination previously identified on the property. A variety of requirements may be included in an owner/operator’s continuing obligations, including actions to ensure that the property’s occupants are not exposed to unsafe contaminants, and that existing contamination does not grow worse or migrate to adjoining areas.  

“Different lenders have different requirements,” noted Gable. “Some require a full Phase I ESA to meet the standard of All Appropriate Inquiry (AAI), which protects both borrower and lender from costs related to environmental cleanups or closures. Others may accept a less rigorous Risk Review. We help clients understand lenders’ policies and pursue the right course.”

The actual lending product may also drive those requirements. “Loans backed by third parties such as the U.S. Small Business Administration, the U.S. Department of Housing and Urban Development, and others often come with requirements for additional environmental assessments because those agencies also have their own environmental risk policies,” Patton said. “Those products sometimes require more environmental assessment, but the borrower can benefit from the lower interest rates or other preferential terms.”

The previous environmental reports said everything was fine. What changed?

Again, a number of factors could be behind the change:

A risk was underestimated or overlooked during the previous environmental investigation by another consultant.

“When a later assessment uncovers a deficiency in the original due diligence, it’s sometimes the result of differing professional opinions about a site’s environmental risk,” said Gable. “But it can also be that original consultant was not sufficiently thorough and accurate.” Many consultants offer Phase I ESAs. Those promising a quick, cheap process may fail to flag potential problems. They may not completely educate you about the process, and they may not be current on the latest compliance regulations. 

Something changed in the area surrounding the property.

Since the time of the original due diligence, environmental conditions on an adjoining property may have changed. Perhaps there has been a release from the underground storage tanks of the gas station next door. Or a soil gas plume from a nearby factory has migrated toward the property.

“Conditions may have been fine five years ago,” explained Patton, “but the concentrations and locations of contaminants can change. An investigation is needed to find out if contamination has migrated to your property that may have resulted in increased risk.”

Environmental regulations have changed.

Regulatory standards and cleanup criteria, which vary widely from state to state, also evolve, often becoming more stringent over time. The concentration of a given chemical that may have been documented to be acceptable during previous site investigations may now represent an exposure risk requiring action. 

“Regulatory program changes are a major reason property owners find themselves facing unanticipated compliance costs,” Patton said. “A common example is vapor intrusion from contaminants like chlorinated solvents, which are used in countless industrial applications. Concentration of those chemicals that were deemed safe just ten years ago are often considered a significant risk with a fraction of the previous acceptable soil vapor concentrations now triggering the need to install a vapor control system under the building.”    

“Entirely new standards to regulate emerging contaminants may have been enacted since your previous due diligence, too,” added Gable. “PFAS is a prime example. Just a few years ago, there were no regulations governing these chemicals. As regulations are implemented on a state by state basis, clients must now respond to new – and continuously changing – PFAS regulations.” 

What can be done to avoid future surprises?

Stay informed. 

Anticipate that environmental compliance is an ongoing aspect of doing business, not a ‘one and done’ phenomenon at the time of property purchase. 

Environmental regulations can change significantly over time, often without drawing media attention. Property owners, especially those seeking new lending or are planning to refinance their properties should stay abreast of developments in environmental regulations. “At the very least, they should bookmark PM’s website for the latest updates,” advised Patton. 

Find the right environmental partner for today, and tomorrow.

All environmental consultants are not created equal. “PM Environmental has experience with every recognized environmental concern,” say Gable and Patton. “We stay current on the constantly changing landscape of regulations. And we offer the full spectrum of capabilities – from identifying and quantifying environmental risks to designing and installing customized solutions to mitigate them.”

Whether you’re new to environmental risk management, or your original due diligence contractor fell short, move forward with us.

 

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