The discussion is being moderated by Dan Duggan, Deputy Managing Editor and blogger at Crain’s Detroit Business and our panelists include:

• Roger Gaudett, Ford Land, (owners’ perspective on redevelopment)
• Mike Deighan, O’Keefe & Associates (discussing making deals and liquidation);
• James Harless, SME (environmental issues)
• Dusty Duistermars, Michigan Economic Development Corporation (incentives)
• Dale Cira, AON Risk (insurance)
• Ken Bowen, Ashley Capital (developer’s perspective)

Yours truly will be fielding any questions on environmental law.

Tune in to our blog tomorrow at 8:30 am!

The post Re-purposing Industrial and Commercial Properties appeared first on Dawda PLC.

McDowell & Associates you could say was a “startup” itself about 34 years ago, and it is now a mid-sized company with offices in Ferndale and Midland, Michigan. McDowell & Associates is a geotechnical and environmental engineering, geotechnical, and construction testing firm which serves developers, construction companies, and industrial clients. One of the company’s specialties is environmental and geotechnical due diligence. Doug McDowell, who oversees the company’s environmental assessment division, is an environmental engineer who has been with the company for about 20 years.

Q: Doug, as you know, there has been a move toward creating cheaper urban space for entrepreneurs who are starting companies and don’t have the financing for expensive rent. With all the vacant buildings around (especially in urban areas like Detroit), there is a huge supply of buildings and land that could serve that need. What has your experience been in Detroit with some of these older buildings?

A: Over the last 5 years or so, we have assisted clients who have purchased over 10 industrial buildings in SE Michigan with square footages between 150,000 and 750,000. Most of the buildings were historic manufacturing facilities. Environmental issues have included abandoned underground storage tanks, waste fill areas, residual PCB contamination, asbestos, lead paint, to name a few. In some cases, Brownfield funding sources were used to offset these environmental expenses. Geotechnical issues have included areas with failed foundations and areas where failure to maintain the sites resulted in building damage.

Q: Many entrepreneurs are eyeing these types of properties because they are so inexpensive. What is your number one recommendation to these perspective buyers/tenants when they look at a building?

A: Do not put significant faith in seller provided environmental information. As with any business deal, time and money are metrics that control the final calculation of success or failure. Establish a relationship of trust with an environmental due diligence team that blends scientific and legal resources. Start environmental due diligence early in the transaction timeline, and provide as much time in the purchase agreement as you can so that you do not get boxed into a corner.

Q: What can a good environmental/geotechnical consultant offer to these prospective tenants/buyers?

A: A good consultant will deliver practical opinions based on its reasoned inquiry and experience. Many consultants get lost in the research project and fail to connect the dots in a manner that allows clients to make well-informed decisions.

We provide environmental assessments ranging from the Phase I Environmental Site Assessment (or history report), the Phase II Environmental Site Assessment (sampling and testing of soil, groundwater, surface water, soil gas, building materials) through the Baseline Environmental Assessment (documents contamination on the property to the State of Michigan and limits liability after purchase.) We incorporate geotechnical investigations into our environmental assessment process in a way that provides cost savings to our clients.

We start every project with our client’s goals in mind. I mean this both in terms of how we endeavor to protect our clients from unforeseen circumstances as well as how we focus on the final development and ultimate site users at the outset of the project.

For example – we were retained to consult on a project where a “pure” environmental consultant had previously conducted significant evaluation of a property to demonstrate that contamination in shallow groundwater would not present a health threat to future users of the property once a building was constructed. What they had failed to consider was how to build a building on the property with a contaminated groundwater table that would have to be temporarily depressed in order to support footing construction. The high costs associated with disposal of dewatering fluids were such that the transaction fell apart, well after the completion of an involved indoor air study.

Q: Is hiring a consultant expensive for a prospective purchaser?

A: Costs vary significantly depending on site conditions, client objectives, future use, and historic uses. However, these costs are typically a very small fraction of the overall development or acquisition cost, even in the depressed real estate market we live in today. In situations where a client attempts to limit scope significantly during the due diligence process to reduce cost, then that client is taking on more risk due to uncertainty.

With the advent of Brownfield funding mechanisms to offset due diligence expenses, we have found that our costs become even less of an issue to a deal if Brownfield funding is being considered. The most important part of a transaction is to kick that process off very early and to allow time for everything to be approved by the appropriate government agency prior to spending significant funds.

Q: How long does it take to perform the type of site assessments that you’re talking about?

A: We can complete a site assessment (Phase I through BEA) as quickly as 30 days, but 60 – 90 is comfortable. If Brownfield funding is a consideration, the timeline is driven by local and state agencies that can easily exceed those time periods. We can sprint, but when we do, our client takes some risk of encountering a surprise at the last minute due to the amount of time required to get government agencies to respond to information requests. As a result of our extensive experience in the Southeast Michigan, we have an in-house library of historical resources, copies of MDEQ files, USEPA files, and thousands of boring logs. The information helps us cut down the timeline and uncertainty

Q: Once the site assessments have been performed, is that it or is there more work you would recommend?

A: If a site is contaminated, the purchaser takes on some obligations even with the BEA process. CERCLA has continuing obligations of which an owner of contaminated land must be aware. In Michigan, the purchaser has due care obligations toward future site users and innocent third parties.

We have several clients for whom we complete annual due care compliance visits to help make sure they are on top of the requirements. Though they are in the minority, we have found situations where these follow-up visits are of value.

Q: Can you describe a few of the most common environmental issues that are encountered in these former industrial sites?

A: There are relative easy issues to deal with – asbestos, underground storage tanks, historic fill, surface contamination from historic spills, etc., basically issues that can be handled under the Rules developed to implement Parts 201 and 213 of Act 451.

The more complex issues are those that cross into other regulations such as PCBs (regulated by TSCA), waste fills (where hazardous waste and landfill regulations can be brought into play), clean-ups where materials that might be considered hazardous waste are generated like lead paint or fugitive dust.

Q: Many of these entrepreneurs and startup companies are on tight budgets and may view environmental due diligence as a deal killer so they are tempted to skip the due diligence step. Are environmental issues deal killers? Also, what’s the downside if they don’t perform due diligence?

A: Every purchaser of property, particularly historic industrial property with complex environmental issues, needs to go into the transaction with a due diligence team that he or she trusts. The environmental consultant, environmental legal counsel, and transactional attorney need to be working hand in hand so that the timing and stipulations of the transaction match the issues at hand. In my experience, the deal killers happen when those items are not well orchestrated and a “surprise” during environmental due diligence disrupts things.

Purchasers of suspect land/buildings that view the due diligence process as a box to check, miss an opportunity to identify environmental issues before they get into trouble during development, construction, or refinancing. We view our role in the process as problem solver, not problem identifier. Virtually every environmental problem has a solution. The key is creating a scenario where time is available to solve the problem. While Michigan has a very useful law with the BEA process, there are a few environmental issues that can kill a deal. These typicaly involve extraordinary levels of contamination for which there are no funds available in the deal, or environmental issues are present and the purchaser cannot use the BEA for protection.

Q: What about geotechnical issues?

A: For properties with historical industrial buildings located on them, geotechnical issues that affect foundation support are not normally the driver of the due diligence process. In fact the historical building allows us to look at how the building has performed over its lifetime and get an idea of how the structure will behave in the future. However, in situations where building additions are required to support plans for future use, there can be significant geotechnical issues. Matching an addition to a building that has sat and settled for 50 years or so can be a bit complicated if soil conditions are not ideal.

Q: Last, but not least, you’re a West Point graduate. Does that background help when you are at these sites?

A: West Point was founded by Thomas Jefferson in 1802 to produce critically thinking engineers and leaders at a time when our nation was just beginning to grow and develop. The educational and leadership training was founded on the honor code. That foundation of integrity affects my practice every day. Clients learn very quickly that while they may not like what they hear from McDowell & Associates about their property, they are not going to be sold a bill of goods. We strive to help our clients understand the costs they are going to incur on a development project related to real environmental problems at the outset so that they are not surprised at the end. We bracket our cost estimates with a low estimate (relatively optimistic) and high estimate (relatively pessimistic). Our clients are rarely surprised by the outcome.

We thank Doug McDowell of McDowell & Associates for taking the time to provide his insight on due diligence associated with industrial property reuse.

The post Interview – an Environmental Consultant’s Perspective on Industrial Property Reuse appeared first on Dawda PLC.

The new standard provides clarification for environmental professionals and Phase I ESA users. Included within the changes are the following concepts:

1. Simplification of the definition of “recognized environmental condition”.
2. New defined term “controlled recognized environmental condition” (CREC) to address continuing obligations and limitations on use.
3. Vapor migration evaluations are mandatory under the new standard.
4. Environmental professionals must explain in greater detail their rationale for reviewing or not reviewing a regulatory file.

In summary, it is likely that the EPA’s “all appropriate inquiry standard” will change to reflect the new ASTM-E1527-13 Standard published in November. The new standard should be become law sometime in late December or early January. It is important that all environmental documents be updated to reflect this new standard and care should be taken to ensure implementation of it in your business endeavors.

The post Alert: Phase I ESA Changes appeared first on Dawda PLC.

A properly conducted environmental audit is necessary for the future landowner to determine whether the property has contamination present and to demonstrate that the landowner made such a reasonable inquiry. For those entities that are considering the purchase of a historically contaminated parcel and are pursuing status as a bona fide prospective purchaser and innocent landowner status, or parties that are pursuing Brownfield grants awarded under CERCLA, they will want to comply with this change in ASTM’s standard for undertaking a Phase I audit.

By way of background, in 2002 the Brownfield Amendments to CERCLA set forth a requirement that EPA develop regulations and standard practices for conducting an all appropriate inquiry. EPA in 2005 referenced ASTM E1527-05 as setting forth the standard for conducting a Phase I Environmental Site Assessment and the EPA in 2008 updated this to incorporate ASTM E2247-08.

When the ASTM Association completed its preparation of the ASTM E1527-13, it contacted the EPA and requested a determination as to whether EPA considered ASTM’s revised standard as being compliant with the All Appropriate Inquiries Rule. EPA has made it clear that the issuance of this final rule is a determination, based on EPA’s finding that the ASTM E1527-13 standard is compliant with All Appropriate Inquiry Rules.

This final rule originally went out to public comment in August of 2013, and EPA received significant adverse comments and EPA chose to withdraw the rule on October 29, 2013. With this passage of the final rule on December 30, 2013, EPA made it clear that it will now proceed with amending the All Appropriate Inquiry Rule to reference ASTM E1527-13 and will allow for public comment on that specific issue.

The post Changes to Phase I Environmental Audits (Part I) appeared first on Dawda PLC.

It is EPA’s belief that ASTM E1527-13 is an improvement over prior standards as it increases the level of inquiry done by future property owners making property transaction decisions. It also assists new property owners in defining any continuing obligations they may have when operating on a historically contaminated site and how to maintain any liability protection afforded by CERCLA.

ASTM E1527-13 include multiple changes to the definitions of key terms in Phase I audits, including:

(1) Recognized Environmental Condition (REC) – A REC under ASTM E1527-13 includes any release, or likely threat of a future release of a hazardous substance or petroleum products to the environment or property. De minimis conditions are generally not considered REC’s.

(2) Historical Recognized Environmental Conditions (HREC) – This new standard for a HREC contemplates that prospective purchasers will pursue additional information regarding the nature of the historical release of the property so as to make an informed decision regarding their potential future use of the property. A HREC designation is limited to past releases that have been addressed to an unrestricted residential standard and meet applicable regulatory standards. This may require a comparison between cleanup standards used at time of the remediation and cleanup standards in place at the time of Phase I audit is prepared.

(3) Controlled Recognized Environmental Conditions (CREC) – This new category is for a release that may have been cleaned to something less than unrestricted use, such as to commercial/industrial standard. Hazardous substances are allowed to remain on site and there are risk based restrictions such as institutional controls.

(4) De minimis Conditions – While an environmental consultant may consider minor conditions as de minimis, this does not include a CREC.

(5) Migrate and Migration – This includes the movement of vapors.

(6) Release – Has been revised to parallel CERCLA and excludes releases solely associated with the workplace.

The ASTM Standard also provides greater guidelines as to the significant role environmental consultants have to thoroughly review reasonably available regulatory agency files and records. The consultants should verify agency information and confirm information taken from databases. With respect to undertaking regulatory agency file and record reviews, ASTM E1527-13 provides a more standardized framework for verifying what is known about environmental conditions on the property.

A more complex and significant change in the scope of the Phase I audit includes, an

assessment of the potential for vapor releases. By redefining the definition of migration to include the movement of vapors from hazardous substances, Phase I assessment will include an assessment of the indoor air pathway. At a minimum the ASTM E1527-13 standard suggests that a Phase I assessment of a historically contaminated site, should consider the vapor intrusion pathway, just like any other exposure pathway. Because this is the Phase I assessment it may be sufficient to conclude that given the release of hazardous substances from contaminated soil or groundwater, vapor intrusion is a potential REC. This is especially true in the case of off-site releases on to the property. Some environmental consultants may address this issue in the Phase I audit, without collecting air or subsurface samples. A more detailed discussion regarding vapor intrusion and the ASTM Standard will be discussed in the blog entry to follow.

The EPA in making its announcements of the final rule acknowledges that ASTM’s new standard constitutes a consensus of an esteemed technical committee. EPA has stated that ASTM E1527-13 having already been published it is considered a public printed standard. The EPA has suggested that this standard is well known and readily available to prospective purchasers and sellers. The EPA does not discuss the potential confusion and lack of clarity that may exist for parties that do not have ready access to ASTM standards.

The EPA intends to specifically incorporate ASTM E1527-13 and by rulemaking it will revise the All Appropriate Inquiry Rule to reflect this standard change. The EPA states that this final rule became effective immediately, per its issuance on December 30, 2013, without the usual 30-day waiting period prescribed by the Administrative Procedures Act (APA) because this rule change does not

“create any new regulatory requirements or take other action for which effective parties would need time to prepare before the rule takes effect. Rather, this action merely offers parties the option of using an additional ASTM International Standard to conduct all appropriate inquiries. Today’s rule does not require that any party use this standard. Therefore, this revision became effective on the date of publication.” (70 Fed. Reg. 79321)

Therefore, technically, one could argue that ASTM E1527-05 is still an acceptable standard for a Phase I audit for CERCLA purposes, until EPA completes its rulemaking process.

The post A Closer Look at ASTM E1527-13 ( Part II ) appeared first on Dawda PLC.

This concern over vapor intrusion as an exposure pathway was first raised by toxicologists evaluating the correlation between indoor air quality and human health. Toxicologists reviewed the effects of human exposure to low level volatile organic compounds and carcinogens such as benzene and concluded that there is a cancer risk posed to building occupants from vapor migration into the building.

The concern over vapor intrusion include an initial assessment during the Phase I audit, to evaluate the risk for vapor intrusion. The generally accepted protocol for testing is set forth in ASTM E2600-10 entitled, “Standard Guide for Vapor Encroachment Screening on Property Involved in Real Estate Transactions.” For most consultants the focus for assessing the risk posed by vapor intrusion will be on sites where volatile chemicals are present. These typically include sites where gasoline and dry cleaning have contaminated the subsurface soils and groundwater, below or near a building. Then this contamination may accumulate so that vapors can find pathways through cracks or crevices into the indoor air. This indoor air pathway can be of particular concern in many modern airtight buildings. The focus of the analysis is defining the Vapor Encroachment Condition, which is “the presence or likely presence of vapors in the subsurface of the targeted property caused by the release of vapors from contaminated soil or groundwater either on or near the targeted property”.

Lenders in real estate transactions have also raised their concern over how to quantify the risk posed by vapor intrusion and how to meet the standard recently adopted ASTM E1527-13. Because ASTM added movement of vapors in the subsurface to the definition of “migrate”, a Phase I audit will include an assessment of the migration of vapors from soil and groundwater as a part of the evaluation of whether hazardous substances have likely migrated within the property.

Consultants have been wrestling with the issue of what changes should be made in the scope of the Phase I audit to include an assessment of vapor intrusion. But, the more complex questions are developing standards for assessing vapor intrusion in the course of a Phase I audit.

By its very nature vapor migration can move in any direction and can migrate through a myriad of routes, including utility lines making sampling difficult. Further complicating the ability to characterize vapor intrusion is the fact that such vapors are affected by soil chemistry, the presence of groundwater, site specific factors, seasonal changes, barometric pressure, the operation of any heating, ventilation and cooling systems, the use of chemicals on the property, proximity to other businesses and motor vehicles. Some within the scientific field have argued that there is a great deal of uncertainty inherent in vapor intrusion studies that fail to take into consideration the complex factors that effect this exposure pathways. Results are often inconsistent and time sensitive for the consultant making any determination that chemicals present in vapor are attributable to subsurface soil or groundwater conditions is almost impossible, given the inability to eliminate all other sources

Consultants are also evaluating the unique challenges posed by this risk pathway, and there is some lack of consensus on, how to;

1. Properly communicating what the risk is to property owners;

2. Identify which properties merit a vapor intrusion investigation;

3. Determine background level for vapors;

4. Determine how much testing is sufficient to characterize conditions;

5. Prepare a model that considers alternative factors;

6. Manage the identified risk;

7. Respond to changing thresholds, screening values and guidelines;

8. Identify all sources; and

9. Eliminate factors such as HVAC systems or operational chemicals.

Just as consultants have improved their vapor sampling methodology, better methods are being developed to manage this risk. While at first glance cleaning up of contaminated soils or groundwater may be a permanent fix for vapor intrusion, there are less expensive alternatives that may be available. Some of these potential remedial measures include;

1. Increasing the HVAC’s capacity to increase air exchanges;

2. Use of passive systems to vent conditions below the building slab;

3. Active systems and fans to blow vapors away;

4. Use of impermeable layers beneath the concrete slab so as to create a barrier that prevents the vapors from entering the building.

Consultants are debating the consequences of having not tested for vapor intrusion in conjunction with past property transactions and what that might mean in demonstrating sufficient due diligence and conducting a sufficient appropriate inquiry. Environmental attorneys and property owners may also need to explore what the risk of vapor intrusion means in the context of past purchase and their redevelopment plans.

As concern over vapor intrusion continues to pick up steam, others have raised the question of what this means in the field of toxic tort litigation. Even without adequate data to demonstrate cause and effect, plaintiffs’ attorneys have eyed this pathway as an additional count in litigation. Previously cases in which plaintiffs have not demonstrated direct exposure from hazardous waste on an abutting property, may now find they can bring a viable claim for injury from exposure to vapors migrating in crevices in the ground. All of these liability scenarios can be potential nightmares for property owners unless they follow the evolving science and are prudent in addressing historical contamination and assessing indoor air. We will continue to follow these developments.

The post Vapor Intrusion and the Audit Process ( Part III ) appeared first on Dawda PLC.

In 1031 Lapeer, the tenant sought to void a lease with its landlord because the landlord failed to disclose that the premises were contaminated. The trial court ruled in favor of the tenant and the Court of Appeals upheld it because Part 201 Section 16 specifically states that if a party knows or is on notice that its property is contaminated, then it shall not transfer an interest in the property unless it has provided notice of that fact and the general nature of the contamination to the transferee. Based on the ruling in 1031 Lapeer, the notice requirement applies to sellers and landlords and failure to adhere to it can create a pretty harsh result – voiding the transaction.

Lenders have keyed in on this issue for obvious reasons; if their landlord or borrowers have redeveloped a contaminated property but have not disclosed the existence of the contamination to the tenants, the landlords are at risk of losing tenants (and thus the rent). With the current glut of retail and office space, this could mean a loss of income and the lender being saddled with a contaminated parcel – not a desirable picture from the bank’s point of view.

If you are a landlord that did not notify your tenants that the property they are renting is a Part 201 facility before they signed the lease, the bank may request that you provide the notice after the fact before the bank commits to refinance.

How do you handle that? Very carefully and with good legal counsel!

The post Baseline Environmental Assessments and Landlord Refinancing appeared first on Dawda PLC.