Environmental Liability Assessment Tools - QELA

As long as no environmental issues are identified for a given property, the issue of environmental liabilities becomes somewhat of a non-issue for most Buyers or Investors. However, from time-to-time, investments may be made on properties which have had problems in the past or may have current known or potential contamination issues. Aside from the landowner liability protections (LLP) which may be available to both Lenders and prospective Buyers, it may be important to understand how these issues could impact the value of the property. This is especially important information in comparing the purchase price to appraised property value. Most appraisals will not address the impacts of environmental issues on property value.

Often Buyers need to determine these values early in the evaluation process. It is also important to understand if these issues have been (or will be) incorporated into the negotiated purchase price for the property. Sometimes this requires a little “crystal ball” work –as the amount of information to work with at this phase of the assessment is fairly small.

Quantitative Environmental Liability Assessment (QELA) is one tool available to Investors and prospective Buyers to develop a better understanding of the potential financial implications of environmental issues at a property. This financial modeling process uses the available data to set some bounds on the costs that may be incurred over time. This technique is an iterative process –as new or better information becomes available, the cost projections are updated.

For further information contact Caltha LLP at
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Environmental Compliance Audits vs. Environmental Assessments

From time-to-time, Caltha will receive calls requesting an “environmental audit” of a property. Upon further discussion, it is usually determined that they are actually looking for an “environmental assessment”. It is not unusual for the terms “audit” and “assessment” to be used interchangeably. However, the two processes are very different, and understanding the differences is important to appreciating the different outcomes from audits and assessments.

Audits. The goal of an audit is to collect objective audit evidence to compare to specific compliance requirements. An auditor will typically review documentation relating to each compliance requirement. Once an auditor reviews an adequate sampling of documentation, he/she may conclude the auditee is/is not in compliance with the requirements. In the absence of documentation, it is difficult for an auditor to conclude that requirements are being met.

Environmental audits follow a similar approach. First, the purpose is to demonstrate compliance (or non compliance) with specific regulatory requirements. The status of regulatory compliance may be very important to a prospective Buyer of the business, who made need to budget to correct shortcomings.

Assessments. The goal of an assessment (specifically an environmental site assessment) is to conduct an evaluation within a specified level of effort to identify environmental issues relevant to hazardous substances or petroleum (i.e., recognized environmental conditions). In the case of an assessment, the absence of any information indicating that relevant issues exist leads to the conclusion that no recognized environmental conditions exist.

The assessment approach is the accepted practice for evaluating the environmental risks associated with real estate. As stated in the ASTM standard practice (E 1527-05) for these assessments, this approach is “intended to reflect a commercially prudent and reasonable inquiry”; however, it is not meant to be “an exhaustive assessment of a clean property…There is a point at which the cost of information obtained or the time required to gather it outweighs the usefulness of the information and, in fact, may be a material detriment to the orderly completion of transactions.” The assessment practice is “intended to reduce, but not eliminate, uncertainty regarding the potential for recognized environmental conditions …, and … recognizes reasonable limits of time and cost.”

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New Accounting Standards (FIN 47) Provide Useful Environmental Liability Information

Beginning in 2006, more detailed financial information is required to be disclosed by companies relating to their financial liabilities. Many of these liabilities can be related to environmental issues. This information will be significant to the practice of due diligence –however, the application of the new standards is not limited to disclosures associated with mergers & acquisitions.

In March 2005, the Financial Accounting Standards Board (FASB) issued a technical interpretation (FIN 47) to provide better clarity on the expectations for disclosures of future liabilities. These liabilities were associated with likely future costs related to properties, buildings, equipment and other assets Prior to the issuance of FIN 47, liabilities which were difficult to estimate or to predict timing for may not have been disclosed. Often, large environmental liabilities were left undisclosed because ultimate costs and schedule was uncertain. However, statistical methods to estimate probable cost range for liabilities have become an acceptable approach to overcome the uncertainties in reporting these liabilities.

Two general types of liabilities are recognized:

ARO (Asset Retirement Obligations). AROs are liabilities associated with the ultimate closure, dismantling, disposal and clean up associated with a company’s assets. These could include real estate, buildings or other structures or equipment.

ARO example: A company generates a hazardous waste in its process. These wastes are piped to an on-site process which stabilizes the waste, allowing it to be disposed of a non-hazardous waste at a much lower cost. As a condition of operation, once the equipment is no longer used, the company is required to conduct an extensive and expensive decontamination of the processing equipment and all processes that generated the waste. Because the timing of this liability could not be predicted, the company did not recognize these costs. Under the new accounting requirements, this may be an ARO, and may need to be included in financial disclosures.

CARO (Conditional Asset Retirement Obligations). These are a subset of AROs; however, in this case, the magnitude of the costs and/or the timing of the obligation are outside the direct control of the company.

CARO example: A company has been named as a Responsible Party (RP), along with several other companies for a landfill Superfund site. The agency responsible for the cleanup is conducting studies and implementing some preliminary cleanup actions, however, it may be several years before the final remedial plan is developed. This case may clearly represent a CARO. The company has been identified as an RP and will ultimately be required to reimburse the agency for their portion of cleanup cost. However, the overall cost, their proportional cost and the timing of the obligations are all uncertain.

One of the reasons that the FASB felt that AROs should be accounted for, even considering these types of uncertainties, is the availability of accepted mathematical and statistic approaches to generating reasonable estimates for the liabilities. These tools will combine the existing available information with the level of certainty to prepare an overall liability projection. These projections typically represent the likelihood of specified costs being exceeded (e.g., 10% likelihood that costs will exceed $15M).

For further information contact Caltha LLP at
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Environmental Risk Assessment - Simplified Process To Incorporate Risk Into Assessments

Whether intended to address regulatory compliance, or potential environmental / human health impacts, most assessments will ultimately strive to characterize “risk”. There are many possible definitions for “risk”; however, in its simplest form risk could be characterized as:

“How Bad” x “How Likely”

Considered independently, neither of these elements of risk is particularly useful. Considered together, the assessment will place the issues identified into context and allow for informed decisions on urgency and priority of individual issues.

“Risk Assessment” as a practice can be highly technical and requires specialized skills. Risk assessments performed to evaluate potential environmental or human health impacts require significant time and resources. However, on a smaller scale, the basic principles of risk assessment can be easily applied to other types of assessments and can be very useful in communicating results to management and to set priorities. Here we consider the key steps to characterize risk in its most basic form.

Develop an Inventory. The initial step in the process is to extract specific issues from the assessment. The nature of these issues will depend on the type of assessment performed, the goals of the assessment, and the level of detail of the assessment.

As an example, individual “findings” from a regulatory compliance audit might become elements of this inventory. In many cases, the inventory represents the end result of the assessment, and no further evaluation of “risk” is considered. Risk can also be considered separately from the process of developing an inventory, using the assessment report as an input.

Consider Potential Consequences. For each element of the inventory, potential consequences need to be determined. For individual elements, there may be multiple potential consequences. For example, for a hypothetical issue involving lack of required spill control measures at a chemical receiving dock, potential consequences might include:
Capital improvements to come into compliance
Clean up costs associated with potential future spills
Fines and enforcement action

Consider Potential Severity of Consequences. This evaluation addresses “How Bad” in the basic risk equation. For many cases, the severity needs to be translated into a common unit of measurement, which is usually COST. The evaluation can be quantitative (e.g., “low cost”, “high cost”), or can be quantitative, where projected cost values are assigned to different consequences.

Both qualitative & quantitative approaches can work very well. Qualitative approaches have the advantage that they take less time and tend to highlight the criteria issues. These few issues might then be carried forward for more quantitative evaluation.

Consider the Likelihood of Consequences. Here the “How Likely” portion of the risk equation is considered. Once again, both qualitative & quantitative approaches can work well. However, the qualitative approach has the strong advantage. Qualitative evaluation might assign values ranging from “High Likelihood” to “Very Unlikely”.

In considering likelihood, the evaluation may include some assumptions which will affect the results. For example, for our hypothetical example above in which a chemical receiving dock lacked spill control measures required by regulations, the evaluation could assume that the company has a policy to be in compliance with regulations. Therefore, it could be assumed that the required controls will be installed (i.e., “high likelihood”) and therefore the potential for incurring costs associated with future spills will be reduced.

By incorporating RISK into the assessment, it becomes easier to communicate the results and to prioritize follow up actions.

For further information contact Caltha LLP at
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Conducting Phase I ESA as Seller - "Why Would a Seller Conduct an Environmental Site Assessment?"

In most property transactions, the Buyer and the Lender(s) have a keen interest in the condition of the property. This information, in part, is obviously used to determine the price offered for the property and/or business. During this period, the Seller is most vulnerable –information gathered by the Buyer can be used to negotiate a lower purchase price. But, more importantly, a Seller can be responsible for any clean up or other actions required, whether or not the Buyer actually closes on the property. This information also becomes part of the record which may need to be disclosed to future prospective Buyers, in the event that the current Buyer drops out.

Therefore, Sellers need to be actively involved in all assessments of their properties. This article highlights some of the key considerations all Sellers should bear in mind.

First –expect that prospective Buyers will conduct an environmental assessment of the property. Because Landowner Liability Protections (LLPs) are available to prospective purchasers only if they performed an Environmental Site Assessment prior to closing, many Buyers will routinely conduct an assessment, regardless of any perceived risks. Beyond this, most Lenders will require some level of environmental review prior to issuing any loans. Assuming that prospective Buyers will want some level of environmental assessment, the first question Sellers should ask themselves is whether or not to conduct an assessment themselves, and provide a copy of the report to perspective Buyers. This obviously adds a small “up front” cost to selling the property; however, there are some clear benefits with this approach…

• Allows the Seller to preview the same information the Buyer will have access to;
• Identifies any issues early, allowing time to address them, rather than learning of issues from the Buyer late in the transaction process;
• Avoids further environmental reviews, if the reports are accepted by the Buyer and/or Lender

For further information contact Caltha LLP at
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Environmental Liabilities Associated With Leased Properties

The question of liabilities associated with leased properties comes up frequently. The question usually takes two forms – first, what are my liabilities associated with site contamination during and after the lease period?, and second, who is responsible for permits while I operate on a leased property?

Contamination Liabilities. The liabilities associated with environmental releases and site contamination are not significantly different if properties are leased. If a site is found to be contaminated, you may be considered a Responsible Party. This is true even if contamination is caused by future Owners or Occupants; especially if you can not document the property condition at the time you vacated the property.

Compliance Liabilities. The issue of environmental compliance tends to be less straight forward, and can be effected by specific terms agreed to in a lease. However, in the absence of other information, it is best to assume that all permits associated with your processes are your responsibility.The compliance obligations for equipment or processes that are maintained by the property Owner, or shared services with other occupants often become less clear – but should to be defined. One example might be an emergency generator used to supply power to several tenants in a building.

For further information contact Caltha LLP at
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Are Transaction Screens Still Useful In Evaluating Environmental Risks?

In August of 2004, the U.S Environmental Protection Agency (USEPA) promulgated a final rule that eliminated the use of Transaction Screens for the purposes of avoiding Superfund (CERCLA) liability. This action has left many prospective Buyers and Lenders wondering if Transaction Screens have any value anymore. As background, in 1996 the USEPA published interim guidance for meeting the “all appropriate inquiry” test under Superfund. In summary, if a prospective buyer or lender could demonstrate they had conducted “all appropriate inquiry” before buying a property and determined that there was no evidence of contamination, they have the opportunity to be considered an “innocent landowner”. If the property is subsequently found to have contamination, the new owner may not be directly responsible for the costs of the clean-up.

In their interim guidance, USEPA identified two ways to demonstrate that “all appropriate inquiry” had been made. The first is a Phase 1 Environmental Site Assessment (ESA) done in conformance with the ASTM standard practice. The second was a Transaction Screen, done in conformance with a separate ASTM practice. The advantage of conducting a Transaction Screen was that it could be done at a significantly lower cost. Because of the lower cost, the industry saw an increased use of Transaction Screens. USEPA eliminating Transaction Screens as a means of protecting the Buyer’s or Lender’s financial liabilities meant many organizations were faced with the question of whether to stop using Screens all together.

So why conduct a Transaction Screen? In practice, Lenders may be protected from direct financial responsibility for environmental problems. However, prospective purchasers of the property (their customer) do not have this protection. Therefore, the financial burden of a contaminated property is indirectly borne by the bank, as a reduction in the value and marketability of the property. Although Transaction Screens do not meet the standard of “all appropriate inquiry”, Screens may provide important information to both parties to evaluate the business risk associated with a transaction.

In some cases, the risks for contamination on the property are low – for example, on undeveloped or agricultural properties. Prospective Buyers may be more interested in evaluating risks associated with past contamination at neighboring sites which could impact their property. In this case, the prospective Buyer may be looking for a pass-fail evaluation; if there appear to be issues, they will decline the opportunity to buy and look somewhere else. In this case, the Transaction Screen method may provide just the information needed.

In the end, avoiding bad risks is the goal of all parties. Transaction Screens, if properly constructed, can still be an cost-effective tool in evaluating these risks.

For further information contact Caltha LLP at
info@calthacompany.com
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ASTM Standard, E1527-05 - What Changed in the Practice of Environmental Site Assessments?

In 2006, the requirements for gaining landowner liability protections (LLPs) through "all appropriate inquiry" became more stringent. Although some of these new requirements involved the technical practice of conducting phase I environmental site assessments (ESA), many of these requirements were directed at the persons who order these assessments. These include prospective and current landowners, tenants and Lenders.

These new requirements left many parties wondering what changes they will need to implement to assure that they will have access to the various types of landowner liability protections, if needed. Some of these "new" requirements are not new at all. The changes made on the Federal level include some which simply strengthen and provide increased focus on requirements which had already been in place.

So what were the key changes that organizations ordering a Phase I ESA needed to be aware of?

Increased scrutiny to age of the ESA documents. In the past, ESA reports that were issued greater than 180-days before the date of the property transfer might be valid, although the Standard Practice recommended reviewing certain areas and updating the report. In some cases, prospective Buyers and Lenders used ESA reports that were quite old (i.e., years). The new requirements for ESA reports placed much more specific limits on how long an ESA report is valid. In summary,

• Within 180-days of report issuance - Valid
• Between 180-days and 1-year - Not valid without specific revisions
• After 1-year - No longer valid
  

The two key dates for organizations need to track are 1) date report was issued, and 2) date of property transfer (closing). If closing is delayed, and if the revised closing date extends beyond the 180-day limit, the ESA report will need to be revised before closing.

Increased emphasis on documenting “User Responsibilities”. Every ESA report must identify the “User(s)” of the report. Although Users have had responsibilities in the past, the revised Standard Practice provided much more specific responsibilities for Users. The Standard also made it clear that all Users of the report must complete these responsibilities; failure of any User to complete the requirements may result in a determination for that User that “all appropriate inquiry” was not made, and therefore landowner liability protections may be denied. It is important to emphasize that the environmental professional who prepares the ESA report is not responsible for completing the User’s responsibilities.

Although the Standard makes the User requirements much more vital, it also makes it much easier for Users to document that they have met these requirements. The Standard provides a “User Questionnaire” which will guide Users though these requirements. The response to the new emphasis on User requirements can be fairly straight forward. First, each User needs to be identified. Second, each User should complete the User Questionnaire and provide all other documented evidence that they have met the requirements.

Of course, there were other new requirements, most of which need to be met by the environmental professional preparing the ESA report. For the party ordering the ESA, two items need to be verified –1) that the environmental professional meets the qualification requirements, and 2) that the new ASTM Standard, E1527-05, is used to complete the assessment.

For further information contact Caltha LLP at
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EPA Setting Qualification Requirements for Individuals and Companies Conducting Phase I Environmental SIte Assessments

One of the more controversial changes made by US EPA in their final “all appropriate inquiry” rule was a strict definition of who is qualified to prepare Phase 1 ESAs. With this final rule, some persons currently preparing ESA reports will no longer be qualified to do so. The final rule defines a “qualified professional”. An ESA must be prepared under the direct supervision of a qualified professional. The rule states that a person may be considered qualified if they met one or more of the following criteria:

1. They hold a relevant professional license, plus three years experience conducting ESAs
2. They has a relevant college degree, plus five years experience conducting ESAs
3. They have a minimum of ten years experience conducting ESAs

Relevant experience to meet these requirements must be full-time, and must include conducting environmental assessments and/or investigations. Of course, individual States can require more stringent or additional requirements. For example, to be considered a qualified professional in Illinois, the individual must be covered by Professional Liability Insurance (minimum $500,000 coverage); under current Small Business Administration (SBA) Loan programs, a minimium of $1 million Professional Liability Insurance is required.

There are two consequences from this change. First, some individuals or companies who have been conducting ESAs in the past may no longer be considered qualified to do so. Second, ESAs must now be more closely supervised by a qualified professional; for ESA preparers who were not already providing this level of supervision, the level of effort –and cost –to prepare an ESA will increase. Other ESA Preparers who were already meeting this standard should not see a cost impact due to this more stringent requirement.


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Prospective Buyers Liability - Is a Contaminated Property Ever “Clean”?

A prospective Buyer is reviewing an environmental disclosure form from the Seller to evaluate potential liabilities. The form indicates that the property has had contamination issues in the past; however, the Seller indicates that the property was remediated and “the State has said the property is clean”.

At this point, an astute Buyer will have some additional questions and will be seeking some assurances. Understanding why this is a concern requires some background on how site cleanups are conducted. Generally, a “risk-based” approach to remediate sites is used. This means that sites are typically cleaned up to reduce risks to an acceptable level –not to remove all contamination.

Because of this, approvals given by regulatory agencies for past cleanups should be considered “AS-IS, WHERE-IS” approvals. The risk-based approach used in cleaning up contamination is a rational, scientific approach that reduces risks to acceptable levels, but may allow some contaminants to remain on the property. Numerous factors may be considered in determining how much and where contaminates can be left. Properties used for industrial sites may be allowed to leave higher levels of contaminates compared to office or retail sites. Likewise, higher concentrations of contaminants may be left if they are located several feet below the ground, compared to the same chemical in surface soils.

So what does this have to do with the Buyer’s risks?
The “AS-IS, WHERE-IS” nature of agency approvals for past cleanups means that future changes at the property may reopen the contamination issue, and potentially require further cleanup. For example, if the new property owner plans to expand buildings, change drives and parking, or otherwise move soils around the site, deeper contamination can be encountered and moved, changing the opportunities for exposure to contaminants. Even changing the type of business conducted on the property could change the basis for the earlier risk-based cleanup. Anything done at the property that could result in additional remediation will increase the new Owner’s risk.

So what’s a Buyer to do?
Just because a property has had contamination issues in the past should not necessarily mean it represents an unacceptable risk for the prospective Buyer. However, the Buyer needs to:

• Understand the nature of the contamination left in place, if any.
• Consider any future changes the planned for the property, and how these relate to past contamination.
• Understand the use-limitations, pre-notification and other agency requirements that go along with previous cleanup approvals.

For further information contact Caltha LLP at
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Environmental Compliance Assessments - Quality Assurance in Day-to-Day Assessments

“The EHS manager for a large facility arrives at work to find an agency inspector looking to review his hazardous waste storage area. He accompanies the inspector on the tour and, along with the inspector, discovers numerous deficiencies in labeling and storage practices. He spends the remainder of the morning in a conference room with the inspector going over the deficiencies and discussing potential Notice of Violation and fines.

Upon return to his office, the EHS manager finds on his desk the weekly inspection report for the hazardous waste storage area, completed just after the inspector’s review.

The weekly inspection report indicates No Issues, as it does each week”

This story is true. In this case, upon further review, it was discovered that the staff from the department given the responsibility to conduct inspections were given no training on what the regulations actually required. Although inspections were being conducted as scheduled, the results were providing no value to the organization.

Various types of inspections and compliance assessments are conducted at most facilities to comply with regulatory requirements. Inspections are often required under hazardous waste regulations, SPCC requirements, wastewater permits and other types of permits. These “day-to-day” assessments are no less important than formal facility audits or compliance assessments, yet some organizations put much less emphasis on assuring their quality.

Recent regulations are becoming much more specific about who within the organization should or can conduct these assessments. This is based on two primary factors:

Experience – what are the minimum qualifications required for staff conducting compliance assessments?, and
Training – what training is required to demonstrate that staff meet these minimum qualifications?

Some of the regulatory requirements are very specific in this regard. For example, in New York, only “qualified staff” can conduct routine facility stormwater inspections. Qualified personnel are “those who possess the knowledge and skills to assess conditions and activities that could impact stormwater quality…, and who can also evaluate the effectiveness of BMPs.” In addition, qualified staff must also be trained in accordance with the State’s requirements.

To address these constraints, organizations need to 1) evaluate their “pool” of staff available to conduct inspections, 2) determine which individuals meet the minimum requirements, and 3) provide the required initial and reoccurring training.

By becoming more systematic, organization can be assured they meet their regulatory obligations. More importantly, they can also be assured that their “day-to-day” efforts to assess compliance provide reliable results and actually reduce regulatory liabilities.

What Are US SBA's “Environmentally Sensitive Industries”?

The revised SBA environmental policy includes a list of businesses, identified by their NAICS Industrial Classification Code, that are considered “environmentally sensitive industries”. The types of businesses included are quite broad; including some that may not typically be thought of as high risk:

Most types of light and heavy manufacturing
Wholesalers, including equipment and machinery
Gas stations
Transportation companies
Rental & Leasing companies
Hospitals, care centers, laboratories
Golf courses, skiing facilities, marinas, campgrounds
Equipment and machinery repair
Others

U.S. SBA’s Revised Environmental Policies & Procedures

On March 18, 2008, the U.S. Small Business Administration (SBA) released a revision to its procedures under the Lender & Development Companies Loan Programs (SOP 50-10(5)). These new procedures go into affect on May 1, 2008. Some of the key changes are procedures related to environmental assessments detailed under the Environmental Policies & Procedures requirements. This Regulatory Briefing summarizes some of the key elements of these new SBA requirements.

The goal of the policy is to identify properties that have a higher risk for environmental contamination, and to assure that if contamination is present, it is addressed in a manner that reduces the potential liability of SBA and the lender. The basic structure is SBA requires an Environmental Investigation of ALL COMMERCIAL property loans it is securing; The level of the Environmental Investigation will depend on the risks for contamination.

The determination of the appropriate level of Environmental Investigation will follow a formal process path, so that Lenders can quickly determine what documentation SBA will require for individual loans. At a minimum, the investigation will require an evaluation of current and past uses, and completion of an Environmental Questionnaire. The SBA Environmental Policy also provides specific guidance on steps required based on the results of the environmental investigation.

In August 2008, SBA made some revisions to their requirements, which mainly changed loan value thresholds.

Here are two links for more information:

Summary of SBA Environmental Review Requirements

Subsequent Revision to SBA Environmental Review Requirements