Property Transaction Screens and Desktop Environmental Reviews

There are several levels of due diligence that may assist in limiting environmental liability in connection with property transactions. The most protective form of due diligence is the Phase I Environmental Site Assessment that is conducted in compliance with the United States Environmental Protection Agency (USEPA) “All Appropriate Inquiry” Rule (AAI). Completion of the Phase I ESA in accordance with AAI provides third party liability protection under CERCLA, the Comprehensive Environmental Response, Compensation and Liability Act’ (Superfund). In 2002, the Small Business Liability Relief and Brownfield Revitalization Act, enacted as an amendment to CERCLA, provided a means (AAI) by which buyers of property would conduct due diligence investigations and remain protected from third party liability should a recognized environmental condition become discovered subsequent to the purchase of the property. Short of the performance of a Phase I ESA in compliance with AAI, other lesser means of liability protection have been developed that may be more consistent with known existing conditions and historical information that are available for the site. Even though full CERCLA liability protection is not covered, nor warranted, by the performance of these activities, these due diligence efforts often allow for discovery of and resolution of environmental concerns at subject properties.

The Environmental Questionnaire

The environmental questionnaire is typically completed by the seller or loan officer and consists of several questions designed to help identify environmental issues that may be present at the subject property. The benefit to the questionnaire is the ease with which it can be conducted and the lack of stress it puts on the budget. However, sellers and loan officers may have a vested interest in the property and may hesitate to respond negatively. In addition, they also may not be aware of the property’s history or have the necessary skills to identify issues of potential environmental concern. For these reasons, bankers should always combine a questionnaire with another form of environmental due diligence, such as a site visit or government records search.

Property Transaction Screens

Prepared by an environmental professional, the property transaction screen assessment consists of three parts: 1) a questionnaire for property owners or occupants (the most commonly used is found in a document entitled ASTM E 1528 Practice for Limited Environmental Due Diligence: Transaction Screen Process); 2) a site visit to observe property conditions, and 3) a limited environmental records review. Although the Transaction Screen Assessment was, at one time, an industry acceptable form of liability management in commercial property transactions, with the passage of EPA’s All Appropriate Inquiry rule, a transaction screen assessment can no longer be used to qualify a purchaser for CERCLA liability protection.

Desktop Environmental Review

The Desktop Environmental Review may sometimes be completed in lieu of conducting a Phase I ESA even though this level of environmental due diligence does not meet the USEPA All Appropriate Inquiry Rule. With guidance from an environmental professional, the decision by the lending institution to limit the environmental assessment may be made in certain cases where the history of the property is well known in public record, i.e., undeveloped or recently developed property. The "Desktop Reviews” may be completed by the loan officer but are normally conducted by an environmental professional. Oftentimes, the scope of work may be extended to include a "windshield" site visit, gathering current government documents and environmental records for the site, and reviewing limited readily available historical documents for the site. The downside to this method is that the data are limited to what has been reported to regulatory agencies, and some sites may not contain enough address information to be mapped on a data base. The upside is that this method is easy, inexpensive, and can provide useful data that may include historical information spanning decades. Similar to Transaction Screen Assessments, desktop reviews are not AAI-compliant, and thus, they are not recommended for properties with current or historic high-risk activities, nor are they recommended for high-balance loans.