FEDERAL “ALL APPROPRIATE INQUIRY” RULE: A NEW PHASE IN PHASE Is? August 2004

Overview EPA’s AAI RuleEPA’s AAI Rule Future of ASTM E StandardFuture of ASTM E Standard What Does AAI Mean?What Does AAI Mean?

EPA’s “All Appropriate Inquiry” Rule Background Behind- the-Scenes Negotiations Nuts & Bolts of Draft Rule

AAI Rule: Background-Brownfields Law 3 important components3 important components 1. Amended “innocent landowner defense” 2. Added two new landowner liability protections: contiguous property owner: protects buyer from contamination caused by migration of hazardous substances from off-sitecontiguous property owner: protects buyer from contamination caused by migration of hazardous substances from off-site bona fide prospective purchaser: protects buyer who knowingly purchases contaminated propertybona fide prospective purchaser: protects buyer who knowingly purchases contaminated property

AAI Rule: Background-Brownfields Law Now property owners have 3 avenues of protection IF “all appropriate inquiry” conducted before purchase so…. 3. Congress mandated that EPA “establish standards and practices for the purpose of satisfying requirement to carry out all appropriate inquiries”3. Congress mandated that EPA “establish standards and practices for the purpose of satisfying requirement to carry out all appropriate inquiries” - Two-year deadline (by January 11, 2004) - Statute lists 10 criteria EPA must include…

AAI Rule: Background-Brownfields Law 10-Point Criteria for All Appropriate Inquiry Rule: 1. Results of inquiry by environmental professional 2. Interviews with past and present owners, operators and occupants 3.Reviews of historical sources 4.Searches for recorded environmental clean-up liens 5.Reviews of federal, state and local government records…

AAI Rule: Background-Brownfields Law 10-Point AAI Criteria (cont’d) 6. Visual inspections of property and adjoining properties 7. Specialized knowledge or experience 8. Relationship of purchase price to value of property if not contaminated 9. Commonly known or reasonably ascertainable information about property 10. Degree of obviousness of contamination at property

Development of AAI Rule: Regulatory Negotiations

AAI Rule: Negotiations Under Federal Advisory Committee Act (FACA), EPA chose to write AAI rule by “Regulatory Negotiation” (reg-neg)Under Federal Advisory Committee Act (FACA), EPA chose to write AAI rule by “Regulatory Negotiation” (reg-neg) Why reg-neg?Why reg-neg? Solicit input from stakeholders in the processSolicit input from stakeholders in the process Minimize disruption to current real estate marketMinimize disruption to current real estate market Facilitate implementationFacilitate implementation Reduce significant public commentsReduce significant public comments

AAI Rule: Negotiations (cont’d) EPA invited representatives of “affected and interested stakeholder” groups including:EPA invited representatives of “affected and interested stakeholder” groups including: Real estate developersReal estate developers LendersLenders Environmental professionalsEnvironmental professionals Federal, state, local and tribal governmentsFederal, state, local and tribal governments Environmental interest groupsEnvironmental interest groups Environmental justice communityEnvironmental justice community

AAI Rule: Negotiations (cont’d) EDR was a “Resource Participant”EDR was a “Resource Participant” –Attended all committee meetings –Provided technical expertise and guidance to the committee –EDR’s Phase I ESA market data being used in EPA’s Regulatory Impact Analysis

AAI Rule: Final Consensus Draft After 8 months and more than 100 hours of debate during 2003After 8 months and more than 100 hours of debate during 2003 Reg-neg committee agreed on Final Consensus Draft AAI rule on November 14, 2003:Reg-neg committee agreed on Final Consensus Draft AAI rule on November 14, 2003: CFR Part 312 – Standards for Conducting All Appropriate Inquiries Performance-based approach, relies on environmental professionals’ judgmentPerformance-based approach, relies on environmental professionals’ judgment

AAI Rule: Nuts & Bolts of Consensus Draft

Major Areas Impacting Conduct of Phase I Definition of “environmental professional”Definition of “environmental professional” Expanded government records reviewExpanded government records review Historical researchHistorical research Data gapsData gaps New interview and site visit requirementsNew interview and site visit requirements Phase I shelf lifePhase I shelf life

AAI Rule: Professional Qualifications Who can conduct AAI?Who can conduct AAI? Committee sought to limit conduct of environmental inquiries to those qualified to make necessary judgment callsCommittee sought to limit conduct of environmental inquiries to those qualified to make necessary judgment calls Draft rule contains hotly debated, controversial definition of “environmental professional”Draft rule contains hotly debated, controversial definition of “environmental professional”

AAI Rule: Minimum EP Requirements Professional/Educational Qualifications RelevantExperience PE or PG license/registration 3 years Federal or state license/certification to perform environmental inquiries 3 years B.A./B.S. degree or higher in relevant discipline (engineering, environmental science or earth science) 5 years B.A./B.S. degree or higher (grandfather clause) 10 years

AAI Rule: Minimum EP Requirements AAI rule allows consultants who do not meet EP definition to conduct Phase Is under AAI, provided that:AAI rule allows consultants who do not meet EP definition to conduct Phase Is under AAI, provided that: - Inquiry is conducted “under the supervision or responsible charge” of someone who does - But EPA’s preamble will recommend that the site visit be conducted by an EP!

AAI Rule: Minimum EP Requirements To ensure accountability, EP’s report must state:To ensure accountability, EP’s report must state: “[I, We] declare that, to the best of [my, our] professional knowledge and belief, [I, we] meet the definition of Environmental Professional as defined in § of 40 CFR 312.” “[I, We] have the specific qualifications based on education, training, and experience to assess a property of the nature, history, and setting of the subject property. [I, We] have developed and performed the all appropriate inquiries in conformance with the standards and practices set forth in 40 CFR Part 312.”

Government Records Review KEY AREA OF DEBATE: How extensively do government records of nearby or adjoining properties need to be reviewed? Should E 1527’s search distances be used? Two extremes on committee: -Search out 1 mile for all databases -Adopt ASTM E search distances

Government Records Review (cont’d) For databases listed in E , search distances in AAI rule are consistent, except: DatabaseAAI ASTM E CERCLIS NFRAP 1/2 mile 1/8 mile Delisted NPL 1/2 mile Target property State brownfields 1/2 mile n/a Records of registered storage tanks Adjoining property USTs: adjoining ASTs: n/a

Government Records Review (cont’d) INSTITUTIONAL AND ENGINEERING CONTROLS (Activity and Use Limitations) Controversial issue for EPA committee:Controversial issue for EPA committee: Availability: not all states have recordsAvailability: not all states have records Inconsistency across states: different database namesInconsistency across states: different database names Cost/time involved in obtaining such recordsCost/time involved in obtaining such records but…. but….

…More states developing such inventories, so Consensus:Consensus: Institutional controls ½ mile Engineering controls ½ mile Departure from ASTM E Departure from ASTM E Government Records: ICs/ECs

Government Records: Local/Tribal “…Federal, tribal, state and local government records or databases of government records of the subject property and adjoining properties must be reviewed…” (AAI consensus draft) Local records review now mandatoryLocal records review now mandatory Under ASTM E , local records “may be checked” at EP’s discretionUnder ASTM E , local records “may be checked” at EP’s discretion If local USTs, brownfields available, state records alone are insufficientIf local USTs, brownfields available, state records alone are insufficient

Government Records: Local/Tribal Tribal records MUST be reviewedTribal records MUST be reviewed New requirement beyond ASTM E New requirement beyond ASTM E Tribes maintain records of USTs, LUSTsTribes maintain records of USTs, LUSTs Some environmental records housed at tribal officesSome environmental records housed at tribal offices

Review of Historical Sources KEY AREA OF DEBATE: How prescriptive should AAI rule be? How much research is enough? CONSENSUS: Very general requirementsVery general requirements Leaves decisions about research timeframe, data sources and search intervals up to environmental professional’s judgmentLeaves decisions about research timeframe, data sources and search intervals up to environmental professional’s judgment

Review of Historical Sources (cont’d) Research timeframe: -AAI: EP must “…cover a period of time as far back in the history of the subject property as it can be shown that the property contained structures or from the time the property was first used for residential, agricultural, commercial, industrial, or governmental purposes.” -versus - ASTM: “…back to property’s obvious first developed use, or back to 1940, whichever is earlier”

Review of Historical Sources (cont’d) How much historical research is sufficient?How much historical research is sufficient? In all areas of AAI, environmental professionals must seek to gather information that is:In all areas of AAI, environmental professionals must seek to gather information that is: –“publicly available; –obtainable from its source within reasonable time and cost constraints; and –which can practicably be reviewed…”

Data Gaps Extensive, NEW requirements for data gaps 1. Identify gaps 2. Identify sources consulted to address them 3. Comment on significance of gaps 4. If data gaps prevent EP from reaching opinion about property, gaps must be noted in EP’s opinion in written report

Data Gaps (cont’d) Data gaps language raises bar for consultantsData gaps language raises bar for consultants Emphasizes need to conduct comprehensive research using all “reasonably ascertainable” sources to avoid gapsEmphasizes need to conduct comprehensive research using all “reasonably ascertainable” sources to avoid gaps Must demonstrate attempt to fill gapsMust demonstrate attempt to fill gaps Sampling may be conducted to address data gaps, but is not requiredSampling may be conducted to address data gaps, but is not required

Interviews “…interviews with past and present owners, operators and occupants” (10-point AAI criteria) KEY AREA OF DEBATE: Strong arguments for involving community in environmental inquiryStrong arguments for involving community in environmental inquiryversus Concerns about:Concerns about: –Time –Cost –Confidentiality

Interviews (cont’d) COMPROMISE: Mandatory interview(s) with one or more (as necessary) owners or occupants of neighboring properties only in cases of abandoned propertiesMandatory interview(s) with one or more (as necessary) owners or occupants of neighboring properties only in cases of abandoned properties Otherwise, up to EP’s professional judgment (similar to ASTM E )Otherwise, up to EP’s professional judgment (similar to ASTM E )

Visual Inspection “…visual inspections of the facility and adjoining properties” (10 point AAI criteria) KEY AREAS OF DEBATE: Will AAI require visual inspections of adjoining properties?Will AAI require visual inspections of adjoining properties? What if consultant cannot get access to target property?What if consultant cannot get access to target property?

Visual Inspection (cont’d) CONSENSUS: 1)visual on-site inspection of the subject property must be conducted; and 2)visual inspection of “adjoining properties from the subject property line, public rights-of-way, or other vantage point.” Similar to ASTM E except….

Visual Inspection (cont’d) In “unusual circumstance” of inability to gain site access, EP must:In “unusual circumstance” of inability to gain site access, EP must: 1. Visually inspect property from “nearest accessible vantage point” 2. Document efforts taken and explain reason for failure 3. Document other sources of information consulted and comment on significance of failure to conduct visual on-site inspection

AAI: Shelf Life Under AAI,Under AAI, –Phase I valid without updating if not more than 180 days old –180 days to 1 year, certain components must be updated: interviews;interviews; reviews of government records;reviews of government records; visual inspections; andvisual inspections; and declaration of EP.declaration of EP.

AAI: Shelf Life (cont’d) If more than one year has passed since environmental inquiry was conducted, all information must be “…collected or updated within one year prior to the purchase date of the subject property.”If more than one year has passed since environmental inquiry was conducted, all information must be “…collected or updated within one year prior to the purchase date of the subject property.” “Previously collected information must be updated to include relevant changes in the conditions of the property…”“Previously collected information must be updated to include relevant changes in the conditions of the property…” Under ASTM, it is acceptable to update only select components of “old” Phase IsUnder ASTM, it is acceptable to update only select components of “old” Phase Is

AAI Rule: Next Step Ball in EPA’s court:Ball in EPA’s court: Prepared draft rule using Final Consensus DocumentPrepared draft rule using Final Consensus Document Wrote preamble with guidance, interpretationWrote preamble with guidance, interpretation Provided OMB with final Economic Impact Analysis (cost impacts)Provided OMB with final Economic Impact Analysis (cost impacts) Published proposal package in Federal Register on August 26, 2004Published proposal package in Federal Register on August 26, day public comment period expires October 25, day public comment period expires October 25, 2004 Final rule by late 2005 (tentative)Final rule by late 2005 (tentative)

Future of ASTM E Standard

ASTM E : Current Status Until EPA finalizes AAI rule, ASTM E (and ASTM E ) will satisfy AAI requirementUntil EPA finalizes AAI rule, ASTM E (and ASTM E ) will satisfy AAI requirement E 1527 (as revised) could be recognized by EPA in AAI rule if standard is “fully compliant” with final AAI ruleE 1527 (as revised) could be recognized by EPA in AAI rule if standard is “fully compliant” with final AAI rule Next milestone is “pre-compliance review” of revised E 1527 by EPANext milestone is “pre-compliance review” of revised E 1527 by EPA ASTM hopes to publish updated E 1527 as EPA finalizes AAI rule (mid 2005-tentative)ASTM hopes to publish updated E 1527 as EPA finalizes AAI rule (mid 2005-tentative)

What Does AAI Rule Mean?

AAI Rule: The Bottom Line What we know:What we know: –Environmental due diligence will change –Consultants have to do more, document more What we don’t know:What we don’t know: –How much of an impact? –Who will be required to comply? –More Phase Is? –Fewer providers?

AAI Rule: Consultants’ Expectations Mixed reactions from consultants:Mixed reactions from consultants: -Significant increase in level of effort -Little effect, already go beyond E 1527 standard -Could increase insurance costs due to flexibility in AAI rule -More Phase IIs conducted to fill data gaps

Predictions About AAI Rule’s Price Impact More than 60% of EDR’s DDD attendees in 6 cities predict price increase of 11% or more More than 60% of EDR’s DDD attendees in 6 cities predict price increase of 11% or more Chicago Dallas Houston Los Angeles Minneapolis Scottsdale

AAI Rule: Market Impact Impact will extend beyond CERCLA liability concernsImpact will extend beyond CERCLA liability concerns Likely to see trickle down effect in marketLikely to see trickle down effect in market Rating agencies (Moody’s, S&P, Fitch) could adopt AAI/ASTM converged standardRating agencies (Moody’s, S&P, Fitch) could adopt AAI/ASTM converged standard Federal agencies could require AAI and…Federal agencies could require AAI and… State governments may adopt AAI ruleState governments may adopt AAI rule Some users still plan to predominantly use E 1527 for detailed guidance, standardization of processSome users still plan to predominantly use E 1527 for detailed guidance, standardization of process

AAI Rule: Market Impact ASTM E 1527 will be revised to reflect new AAI requirements and remain the “de facto” standard practice for environmental due diligenceASTM E 1527 will be revised to reflect new AAI requirements and remain the “de facto” standard practice for environmental due diligence AAI could result over time in higher quality Phase Is because of the more stringent EP definition and the price of Phase Is will increase slightly (10-15%)AAI could result over time in higher quality Phase Is because of the more stringent EP definition and the price of Phase Is will increase slightly (10-15%)

What Can You Do Now? Read consensus draft for familiarity with possible changes, terminology, new defenses Read EPA’s proposed rule at Prepare for modifying your services as necessary to meet AAI, revised E 1527 Be cautious!