What It Means for Environmental Due Diligence of Commercial Real Estate
The U.S. Environmental Protection Agency (EPA) announced the pending publication of a final rule on April 19, 2024, that will designate two per- and polyfluoroalkyl substances (PFAS), specifically perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS), as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as the Superfund law. PFAS, often referred to as “forever chemicals,” are found in various consumer products and industrial applications and can harm human health, welfare, or the environment, with potential effects including cancer, reproductive, developmental, cardiovascular, liver, and immunological issues. The effective date of the final rule is 60 days after publication.
Implications for Environmental Due Diligence Practices
EPA’s designation of PFOA and PFOS as hazardous substances under CERCLA has significant implications for environmental due diligence (EDD) in commercial real estate transactions. Prior to EPA’s rule, PFAS was addressed in the ASTM E1527-21 Standard Practice for Phase I Environmental Site Assessments (ESA) as an “emerging contaminant” that was outside the scope of an ESA. Now, as a CERCLA hazardous substances, PFOS and PFAS are on equal footing with other hazardous substances under the CERCLA liability umbrella. Along with other new and proposed Federal and State regulations, this change will increase scrutiny of properties for potential PFAS releases, as the presence of these substances could result in strict liability for property owners, regardless of whether they caused the contamination. “The identification of certain PFAS as CERCLA hazardous substances is truly a game-changer for environmental risk management,” according to Ned Witte, an environmental attorney with Godfrey & Kahn who focuses on PFAS. “Consider that this is not only a forward-looking effect – we essentially have over forty years of ASTM Phase I due diligence practice shaped by CERCLA liability that will effectively require fresh evaluation for PFAS when those previously reviewed properties are the subject of new transactions.”
Impact on Commercial Real Estate
Parties involved in real estate transactions will need to consider expanding their scope to include PFAS assessments, potentially conducting both Phase I and Phase II Environmental Site Assessments (ESAs) to identify Recognized Environmental Conditions (RECs) related to PFAS. “The sleeping giant has finally awoken,” says Victor DeTroy, PFAS Practice Leader of AEI Consultants, “The hope is that firms have prepared for this by training staff and updating their internal resources.”
The inclusion of PFAS due diligence during real estate transactions could affect negotiations, property values, and the allocation of potential liabilities between buyers and sellers. Properties with PFAS contamination may also see an impact on financing options, tenant interest, and development costs. Georgie Nugent, Environmental Division Director with McFarland Johnson foresees that, “Properties with known PFAS impacts, such as airports, will continue to be developed and to attract various tenants that rely on air service and/or infrastructure that these properties provide. She added, “It comes down to the amount of risk that the new owner and/or tenant is willing to take, while taking potential health and safety concerns into account. I’d want to verify the previous tenant’s business operations and the drinking water source for an existing building located on a potentially PFAS impacted property, for example.”
The evolving regulatory landscape and the potential for properties with PFAS releases to be added to the National Priority List could also lead to additional obligations at existing cleanup sites or the reopening of sites previously considered remediated. Added DeTroy, “We may be entering a new era of re-openers. States like California have been collected sampling data from various high-risk properties. With the CERCLA Hazardous Substance designation, they will be able to bring the hammer down on specific sites where releases have occurred.”
In summary, the EPA’s rule change will necessitate a more thorough and PFAS-focused approach to environmental due diligence in commercial real estate, with implications for liability, property valuation, and the overall transaction process.
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