Phraseology regarding Recognized Environmental Conditions in Phase I Assessments

January 28th, 2013 by Geoffrey di Mauro Leave a reply »

1 October 2012

Recently, a lender client received a Phase I Environmental Site Assessment from the consultant of a prospective purchaser for review and (the borrower hoped) use in a proposed loan transaction.  The subject property had been used, both historically and at present, as a recycling and salvage yard.  The consultant’s report identified that there had been environmental impacts at the property associated with historical discharges; however, the impacts had been fully addressed and remediated sufficient for the Florida Department of Environmental Protection to issue written Site Rehabilitation Completion Orders (SCROs) and No Further Action determinations (NFAs).  The consultant’s phase I stated that all known impacts had been addressed, and that the consultant did not advocate undertaking any additional environmental assessment.

The consultant’s conclusion was written as follows: This phase I assessment revealed no evidence of significant recognized environmental conditions (RECs)  in connection with the property ; other than the historical and current operations of the site as a recycling and salvage yard, these activities may be considered an  REC.”   The lender had concerns with the way this conclusion was written.  First, what did the consultant mean by “significant” RECs, and second, how did the consultant justify stating that the lawful and permitted use of the site, as a recycling and salvage yard, itself constituted a REC.   With regard to the first issue, the American Society for Testing and Materials (ASTM) defines the term “recognized environmental condition ” as the presence or likely presence of hazardous substances as defined by CERCLA, and petroleum products on a property under conditions that indicate an existing release, a past release or a material threat of a release into the ground, groundwater or surface water.   The term “significant” is subjective and is not identified by ASTM as a legitimate qualifier of the term REC; either there are RECs at a site or there are not.  Furthermore, if the consultant considered the ongoing operation of the site as a REC under its permitted use, what specific elements did the consultant identify that was resulting in a release (not already addressed to the satisfaction of FDEP) or material threat of release – the lender therefore sought clarification from the Consultant, to either list out the current RECs (significant or otherwise) or to rephrase the conclusion.

The consultant initially responded that they could withdraw the word “significant” from the conclusion, agreeing that the ASTM standard did not provide for graduated levels of RECs; there either were “RECs” or there were not. However, the consultant was initially resistant to revising the text to drop the characterization of the current use of the site as a REC, stating that the current operation was inherently risky, with the potential for releases present on a daily basis.  The Lender responded that, under that interpretation, any lawful business operations following normal industry business practices, and which used or handled hazardous substances, such as gas stations, pool supply stores selling liquid chlorine or muratic acid, or manufacturing facilities, would always be considered as having RECs.  The lender acknowledged that the potential for a REC to occur at such facilities might be higher than at other types of commercial facilities, like a professional office complex or shopping mall.  However, the lender also understood that just because normal business operations might involve compliance with standard industry practices, but if there was no evidence of negligence or willful misconduct, such operations should not meet the definition of a “material threat of release.”

The consultant ultimately agreed that the prior impacts, having been addressed and received SRCOs and NFAs, could be identified as merely historical/resolved (not current) RECs, and that the current operations only represented a potential for creation of a REC.  Therefore, the consultant agreed to revise its conclusion as follows: “This phase I assessment revealed no evidence of recognized environmental conditions (RECs)  in connection with the property.  Because of the historical operations of the site as a recycling and salvage yard, these activities may be considered an historical REC, and as a potential REC based upon current operations- [no further assessment warranted]”.  This new text allowed the lender to meet its underwriting criteria and the loan closed.  

The takeaway here is that intended recipients of Phase I assessments have a legitimate right to ensure that the report accurately reflects the current state and status of a property and its current uses, and that relying parties have the right to raise questions about how the author of the report is interpreting and characterizing the data.