Archive for November, 2014

Vapor Intrusion – When A State Petroleum Program Eligibility is Not the End of the Story

November 5th, 2014

Recently, a consultant delivered a phase I environmental site assessment (“Phase I”) associated with an active gas station/convenience story facility (“C&G site) to a lender client, which report identified that there had been an historical release of petroleum products reported to the state regulatory agency, that soil and groundwater impacts above target levels had been confirmed, and that the site had been deemed eligible for state-funded cleanup. That sounds like a positive result, since an owner/borrower (who doesn’t exacerbate the existing release, or cause/experience new releases) should have no or clearly identified out-of-pocket deductible costs associated with the historical incident.
However, there is a new condition, commonly called vapor intrusion conditions (also known as vapor encroachment conditions, collectively “VIC”) in the American Society for Testing & Materials (ASTM) due diligence standard E1527 (the real estate “Due Diligence Standard” acknowledged by the by the USEPA as an acceptable part of the Federal All Appropriate Inquiry standard for purchaser and lender liability protections), which may now cause lenders additional cause for concern when reviewing the suitability of commercial real estate for loans. This is because this newly included condition is associated with impacts to the indoor air quality of an onsite (or offsite) facility, and can result in liability issues (for employees/workers especially, who might be subject to longer term exposure to negative indoor air quality conditions). The VIC is a new recognized environmental condition (REC) which may trigger a Phase II recommendation.
In the subject assessment, the consultant identified the potential for a VIC to exist and recommended additional assessment. Now, it is important to understand that the VIC was only recently identified as a REC, per changes to the ASTM standard in 2013. Previously, the All Appropriate Inquiry standard viewed VICs as optional, not required elements. Under the current standard, VICs are mandatory elements for consideration.
It is also important to remember that an identified petroleum impact will not always trigger a VIC finding; since a VIC is situational – for example, if the soil or groundwater is located away from the onsite facility, then the amount of the release and/or the groundwater flow direction may influence the potential for vapor migration and the associated applicability of a VIC.
In this particular situation, the Phase I assessment indicated that a release of petroleum products had been reported at the subject C&G site in the late 1980s. The release had been investigated, soil and groundwater impacts had been identified, and application to a then-existing state cleanup fund had been submitted and accepted. This sounds quite straightforward, with a known impact and a solvent responsible party. Under the old ASTM standard, the VIC would not have been a REC. However, since 2013, VICs can now be identified as RECs, and the consultant in this situation determined that a REC designation was appropriate.
The consultant was asked to provide a proposal for a VIC survey, and the borrower and lender are reviewing their options as to how best to proceed. In a prospective purchase situation, options may include requesting that the seller participate in the cost of the VIC survey (since the current facility operator may be operating in an impact condition exposing the employees/workers and therefore the potential for liability exists), or the VIC survey could be a negotiating point for a purchase price reduction. If the borrower is an owner who declines to undertake the survey, the lender should include that as a risk condition in determining whether to proceed with the loan. The takeaway is that VICs represent a new environmental condition which may need to be evaluated as part of appropriate due diligence in CRE loan matters.