For the first time in eight years, there will soon be a new ASTM standard for Phase I environmental site assessments (ESAs). Any financial institution with an environmental policy that references ASTM E 1527-05 should be aware of what is changing and begin thinking about whether and how to update their policy in response.
Updates to environmental policies
A significant eighty-six percent of financial institutions have environmental due diligence policies in place that require Phase I ESAs—and this percentage is growing as more community banks adopt their first policies. When ASTM publishes the next iteration of the standard, these institutions will need to revisit whether to update their policies to reference the new standard of practice.
Three key areas of revision
The revisions to the standard fall into three key areas: vapor migration, definitions for “recognized environmental conditions” or RECs and agency file reviews.
- The revised standard will recognize vapor as a path for contaminant migration, along with the more traditional soil and groundwater pathways. This revision is being made to make the standard’s definition for “release” more consistent with the federal definition under CERCLA. The way that lenders currently address the risk associated with the migration of contaminated vapors varies. Twenty-two percent require vapor screens on all new originations. Others only require it on properties the bank is purchasing directly while others make case-by-case determinations. New attention on the risk associated with vapor migration is likely to result in a greater percentage of institutions having specific requirements for assessing vapor risk as a standard part of environmental due diligence.
- An agency file review is a common industry term used to describe the search for and review of files maintained by local, state, or federal authorities whereby an environmental professional physically travels to the file location. Sixty percent of environmental professionals “always” or “often” perform agency file reviews as part of Phase I ESAs. The revised Phase I ESA standard clarifies when an environmental professional should conduct this type of file review:if the subject property or adjoining property is identified in any of the standard environmental records sources.In addition, if the consultant determines that an AFR is not warranted based on professional judgment, the bank’s Phase I ESA report should also include documentation on the justification for this decision and the significance. There are concerns in the due diligence community about what the new language will mean in terms of Phase I ESA turnaround time. Sixty-three percent of file reviews are typically completed in two weeks or less, but they can take as long as six weeks or more. The level of effort involved in conducting a file review is very site-specific and can vary considerably based on a number of factors (e.g., travel time, size of files , etc.).
- The third key area of revision seeks to clarify the language at the core of a Phase I ESA: identifying any recognized environmental conditions or RECs. In the revised standard, there will be a simplified definition of the traditional REC term, an expanded clarification of a historical REC (or HREC), and a new definition for “controlled REC” or CREC. This new term CREC will apply to past releases that are subject to controls/limitations/restrictions. The impact of this revision is expected to provide users with more guidance in making clear distinctions between RECs, HRECs and CRECs. Lenders will see RECs and CRECs both listed in the findings and conclusion sections of their Phase I ESA reports and should get comfortable with the new terms and their implications for risk management decisions.
All Appropriate Inquiry and CERCLA liability
ASTM E1527-05 was recognized by the U.S. Environmental Protection Agency as sufficient protocol for meeting All Appropriate Inquiry (AAI) and qualifying for CERCLA liability protection. ASTM submitted the final version to EPA for formal approval of the revised ASTM E 1527 standard as “AAI-compliant.” ASTM E 1527-13 will be published after EPA’s review is complete (expected late summer/early fall). The U.S. EPA will determine whether the new E 1527-13 will serve as the updated practice for qualifying purchasers for the same CERCLA protections and update the federal AAI rule if necessary. If the AAI rule is updated to recognize the new standard, any borrowers seeking to qualify for CERCLA liability protection as an innocent landowner, bona fide prospective purchaser or contiguous property owner will need to follow the practice defined under ASTM E 1527-13 prior to taking title to the property (as well as meeting continuing obligations over the course of property ownership).
Climbing Up the Learning Curve
There is wide disparity in the response of environmental professionals to the new standard. Some are actively educating lenders about the revisions (31 percent) while others are preparing materials (24 percent) or waiting until the standard is released (38 percent). Lenders should be working with their preapproved environmental consultants to seek clarity on the revisions and begin preparing for any necessary changes to policies, Phase I ESA scopes of work and templates prior to release of the new standard.
Develop an internal response
In advance of the new standard, lenders should begin considering the following:
- Does our policy reference ASTM E 1527-05 and if so, will we adopt the new standard at release?
- Are all of our environmental consultants knowledgeable about what is changing? What are they doing to prepare for a seamless transition?
- Is internal bank staff aware of the key areas of change and the impact on how our Phase I ESA reports will look
- How familiar are we with the potential liability to the bank of vapor-related risk and is our policy adequately addressing it?
- What impact if any will the new REC/HREC/CREC determinations have on our due diligence decisions?
- Are agency file reviews part of our current Phase I ESAs? If not, how might that change after the new standard is in place? Will it impact the price or turnaround time of our reports?
EDR Insight is committed to helping you prepare for the clarifications to the E 1527 standard. All of our publications to date on E 1527-13 are posted here. This page will be updated as we release new materials.
NOTE TO READERS: EDR Insight wishes to thank Brett Dehler for providing peer review of this Technical Brief.