Tip Sheet – Why It’s Risky to Ignore Vapor Migration/Intrusion in Lending Practices

Regulations and guidance surrounding vapor migration/intrusion are changing quickly. Lawsuits involving liability created by the migration of vapors from contaminated soil or groundwater are on the rise. The U.S. EPA defines the evolving pathway of vapor intrusion as the migration of volatile chemicals from the subsurface into overlying buildings. This pathway has been largely ignored for a long time at many sites, but there is a growing list of reasons why commercial real estate lenders should not ignore the vapor intrusion pathway in their environmental due diligence.

To shed light on the importance of managing vapor migration/intrusion risk, EDR Insight hosted a webinar on February 7, 2012 entitled “Two Experts Share Intell on Vapor Intrusion in the Real World.” David Gillay, a leading environmental attorney (former environmental engineer) and head of the Environmental Transactional Practice Group at Barnes & Thornburg, teamed up with John Sallman, a senior principal and environmental department manager in Terracon Consultant’s Dallas office to share real-word experiences on why vapor migration/intrusion risk should be managed in today’s real estate deals.

“In general, because lenders don’t understand VI, they fear it more.” (Sallman)

Based on webinar content, below is an EDR Insight Tip Sheet on why it is risky for lenders to ignore vapor migration/intrustion in their real estate lending practices:

1. Like contaminated soil and groundwater, vapor migration is part of CERCLA’s definition of “release.” As a result, if vapor migration has not been considered in a Phase I environmental site assessment, the Phase I ESA does not meet CERCLA/AAI requirements, and prospective purchasers will not be able to rely on the defenses to CERCLA liability.

“Vapor migration/intrusion is not going away. You can be an ostrich and put your head in the sand, but it will still be an issue when you pull your head back out.” (Sallman)

 2.State regulatory agencies are using vapor migration/intrusion to reopen previously-closed sites.

“This is happening, especially if the vapor pathway was not assessed at time of site closure.” (Gillay)

3. An update of an old Phase I environmental site assessment report is one of the most common ways that vapor migration/intrusion issues are being discovered. Borrowers are seeking refis using a lender-driven scope with a requirement for vapor migration screening that was not in the scope at origination.

“Now all of a sudden, a lender has a problem that never showed up four years ago.” (Sallman)

 4. Due to the popularity of risk-based cleanup programs, more contamination is being left in place. If the vapor pathway was not considered when this risk-based cleanup plan was developed, it is likely that the cleanup plan will be re-evaluated.

“While that is a good thing for brownfields redevelopment, it creates challenges for contaminated plumes that can migrate under properties and create vapor intrusion issues for property owners.” (Gillay)

 5. There are differing opinions on safe exposure limits for human exposure to contaminated vapors. For lenders who deal with sites in multiple states, the lack of clear, transparent standards is becoming a source of new litigation.

“Plaintiff attorneys are swooping in to take advantage of all the uncertainty surrounding VI so we’ve seen an uptick in litigation related to vapor intrusion claims.” (Gillay)

 6. Vapor intrusion, even if a borrower did not cause it, can result in litigation resulting from tenant and other third party suits. Moreover, the stigma of vapor intrusion may contribute to tenants breaking a lease and leaving the property, to say nothing about how difficult it will be to attract new tenants. When the property is sold in the future, this may result in significant property devaluation.

“A little bit of cost on the front end can save a lot of heartache on the back end.” (Sallman)

7. Thirty-two states now have guidance in place with additional states expected to follow after EPA’s guidance is out.

“As more states adopt regulations, it pushes a move toward having to start evaluating vapor intrusion risk as part of the standard Phase I ESA practice.” (Sallman)

 8.Be particularly sensitive to vapor migration/intrusion issues on properties on or near residential developments or sensitive-use operations (e.g., day cares or schools).

“You run a much higher risk of being dragged into potential lawsuits when VI affects people’s children or homes, and there is a different standard of care when you are dealing with sensitive populations like the elderly or young children.” (Gillay)

9. In November 2012, the U.S. EPA is expected to release an updated vapor migration/intrusion policy, cementing a federal approach for addressing this risk.

“The release of federal guidance will drive more awareness about vapor intrusion. I expect to see extensive public outreach and training efforts by EPA surrounding its release.” (Gillay)

 10.Whether it’s a new origination, refi or foreclosure, vapor migration/intrusion can create problems.

“I encourage you to get out in front of this issue before they have a state regulator, a plaintiff, or a neighboring site owner asking them questions about whether VI from soil or groundwater contamination is creating a vapor issue with the use of their property.”(Gillay)

Vapor intrusion is still a relatively new issue, but one that is changing rapidly, so it is critical that anyone involved in real estate understand the risk and how it can be managed. For more on how these two leading VI experts address today’s top technical challenges, click the link below to the replay of EDR Insight’s webinar entitled “Two Experts Share Intell on Vapor Intrusion in the Real World.”
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