The environment is big news. Witness the rising popularity of “green” products, hybrid vehicles and organic produce, not to mention the far-reaching impact made by former Vice President Al Gore’s Oscar-winning documentary on global warming. The increased focus on the environment probably comes as no surprise to stakeholders in commercial real estate transactions, who have been tuned into environmental issues for decades. With federal regulators taking a closer look at commercial real estate today and with myriad federal, state and local environmental laws on the books, stakeholders must be conscious of a property’s environmental status more than ever. The following is a look at four new issues affecting commercial real estate transactions today.

EPA’s Inquiry Rule

Although it took effect Nov. 1, 2006, the industry still is in the midst of adapting to the Environmental Protection Agency’s All Appropriate Inquiry (AAI) rule, which governs the steps commercial property purchasers must take to avoid federal cleanup liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). While several banks, particularly larger institutions, require property purchasers to follow the rule across the board, arguing that if the borrower is protected, the bank is as well, many purchasers and their lenders are screening properties using an AAI-compliant Phase I environmental site assessment or its acceptable alternative – ASTM’s newly updated E 1527-05 standard – on a case-by-case basis.

When CERCLA liability is a concern, stakeholders should be aware that AAI differs from the formerly accepted protocol, ASTM’s E 1520-00 standard. For starters, only environmental professionals who meet EPA’s requirements for experience, education and certification can perform or sign off on an inquiry, although the rule does allow consultants who do not meet the “environmental professional” (EP) definition to conduct an inquiry providing they’re under the supervision of someone who does.

The AAI rule also raises the bar in terms of environmental records review – all records required under the previous standard plus those from local government agencies and Indian tribes must be searched. What’s more, the environmental professional must search for records of engineering and institutional controls, a function previously assigned to the property purchaser. In terms of historical data, research must go back as far 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.” The EP must also address and explain any data gaps encountered during the investigation.

The party seeking CERCLA liability protection has responsibilities too. He or she must search for recorded environmental cleanup liens; consider ‘specialized knowledge’ of the subject property and adjoining properties; and take into consideration the relationship of the purchase price to the value of the property, if not contaminated.

FDIC Guidelines

In response to the rule, and because “the potential adverse effect of environmental contamination on the value of real property and the potential for liability under various environmental laws have become important factors in evaluating real estate transactions and making loans secured by real estate,” FDIC recently issued updated “Guidelines for an Environmental Risk Program.” The agency’s first update in 13 years not only recommends that banks establish formal environmental due diligence policies, but urges them to consider adopting AAI when it is appropriate.

In defining an environmental risk program, FDIC recommends that banks include a tiered approach to conducting an “initial environmental risk analysis” during the application process and a more detailed “structured environmental risk assessment” when appropriate. During the application process, the guidance states that “an initial environmental risk analysis needs to be conducted.” This step may “allow the institution to avoid loans that result in substantial losses or liability and provide the institution with information to minimize potential environmental liability on loans that are made.” In performing this preliminary analysis, data may include present and past uses of the target property, any actions involving environmental government agencies, and possibly a site visit. If environmental concerns are raised, a more detailed “structured environmental risk assessment” may be necessary. It is within this second tier that the FDIC envisions case-by-case decisions about the type of due diligence best suited to each investigation, including whether AAI is “appropriate or necessary.” (In determining whether AAI is warranted, lenders should consider known information about the property and its neighbors – including whether the properties are listed in any environmental databases such as a state leaking underground storage tank list – over loan size. It is usually in the lender’s best interest to require AAI to ensure liability protections whenever there are unresolved incidents (spills, leaks or releases) on or adjoining the property regardless of loan amount.

FDIC also recommends that the lender’s environmental risk assessment extend over the life of the loan. Potential environmental concerns, such as changes in business activities at the property, should be monitored, according to the agency.

Vapor Intrusion

An issue that went unrecognized until the 1990s, when the Massachusetts Department of Environmental Protection discovered that volatile chemicals from polluted soil and groundwater could make their way into the air of overlying buildings, vapor intrusion is now a nationwide problem complicating myriad commercial real estate deals. Not only can vapor intrusion harm human health, causing a wide range of symptoms; it can also lower property values and create liability for property owners.

Currently, there is a lack of knowledge and a great deal of confusion regarding vapor intrusion testing, acceptable limits and cleanup methods. Although potential liability exists, most Phase Is exclude a vapor intrusion assessment, in part due to a conflict in the current industry standard. ASTM E 1527-05 seems to include vapor intrusion in its definition of a ‘recognized environmental condition’ (for example, “Â… release of any hazardous substances or petroleum products Â… into structures on the property Â…”), while at the same time excluding it under Section 12, which lists indoor-air quality as a non-scope consideration.

Because there is no vapor intrusion industry standard – although federal and state guidelines exist – ASTM International approved a task group, E50.02.06, to address the problem. Working closely with EPA and Interstate Technology & Regulatory Council (ITRC) – organizations responsible for two other major vapor intrusion guidance efforts – the group expects to publish its vapor intrusion standard this fall. Until that time, lenders and borrowers should ask what is included in a Phase I before the job gets under way, and tack on a vapor intrusion assessment at sites where human exposure is a concern.

Clandestine Drug Labs

Known on the street as crystal meth, crank, speed, chalk and ice, the highly addictive drug methamphetamine is not only harmful to users, who can experience spikes in blood pressure, hot flashes, nausea, sores, mood swings, convulsions and organ damage, it’s also wreaking havoc on the environment. A growing national menace, meth production leaves behind six pounds of toxic waste for every pound of drug produced. Byproducts usually are poured down household drains, flushed down toilets or thrown in yards, where they can remain for years. Residues from the cooking process also can remain on drapes, floors, countertops and other surfaces, posing a long-term risk for residents. No area is immune: The U.S. Drug Enforcement Administration says that a clandestine drug laboratory (CDL) has been found in every state over the past five years; in the last decade, nearly 50,000 labs have been seized. Highly portable, labs have been found in homes, apartment, garages, barns and even cars.

Easily produced using common household items like coffee filters, mason jars, ammonia and plastic tubing, plus chemicals such as ephedrine and pseudoephedrine found in over-the-counter medications, meth is leaving in its wake a growing list of highly contaminated properties that need to be addressed. As with vapor intrusion, though, there is no federal standard, although regulators are taking notice.

Records on properties tainted by toxic materials related to meth production are becoming more numerous. More than 20 states maintain CDL records and there also is a federal database.

Commercial property stakeholders should know that any property associated with an enforcement action related to former-meth-lab activity has the potential for environmental contamination in any drainage system on the subject property as well as in surface water bodies. If a state drug enforcement agency responds, it will dispose of chemicals and byproducts at the property, but may not address environmental issues regarding leftover chemical residue, potential groundwater contamination and toxic fumes that can linger for years.

Developing and regularly reviewing and updating an environmental policy based on current information, particularly in industrialized New England where contamination is widespread, can help lenders and their commercial real estate clients better manage risk and keep regulators at bay. Luckily, from a quick and inexpensive environmental data package delivered right to a desktop computer, to a detailed Phase I environmental site assessment, many environmental concerns can be addressed early in the transaction before they become big problems.