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The Importance of Understanding Both Federal and State Law When Conducting Environmental Due Diligence

  • Chemmie Sokolic
  • Jul 1
  • 7 min read
Confused about Recognized Environmental Conditions, Controlled Recognized Environmental Conditions, Historical Recognized Environmental Conditions, Deminimis Conditions, and findings?
Confused about Recognized Environmental Conditions, Controlled Recognized Environmental Conditions, Historical Recognized Environmental Conditions, Deminimis Conditions, and findings?

During one of my recent “Due Diligence in New Jersey” classes – a 1-day class I’ve had the pleasure of giving many times over the last decade – the following scenario was presented and interesting question was asked:

 

Scenario:

An environmental professional is conducting an ASTM E1527-21 Phase I Environmental Site Assessment (Phase I ESA) in New Jersey.  One of the findings of the assessment included an Area of Concern (as defined by New Jersey state regulation N.J.A.C 7:26E-1.8) where a release of a hazardous substance (HS) previously occurred several years ago and was remediated to the unrestricted use criteria (i.e., “standards” in New Jersey) applicable at that time. 

 

Subsequently, during the current Phase I ESA, the sampling data of the remaining on-site soils were reviewed and were found to be above the current unrestricted use standards. 

 

However, an “order of magnitude analysis” was performed on the sampling data pursuant to the New Jersey Department of Environmental Protection’s (NJDEP’s) Order of Magnitude (OMA) Guidance document, and the sampling data were determined to be within (i.e., not above) an order of magnitude of the current unrestricted use standards.  Therefore, pursuant to the OMA guidance document, even though contamination is present at the Subject Property at concentrations above the current unrestricted use standards, no additional remediation is necessary at this time.


For those unfamiliar with New Jersey’s OMA guidance, I provide the following example as an illustration:

 

The previous unrestricted use standard of the HS in question during the remediation of the release was 100 milligrams per kilogram (mg/kg), and the highest concentration of the HS remaining at the Subject Property after the remediation activities were completed at that time was 20 mg/kg, i.e., beneath the applicable unrestricted standard. 

 

However, at the time of the Phase I ESA in question, the current unrestricted use standard of the HS had been reduced to 10 mg/kg, resulting in remaining soil present at the Subject Property with HS concentrations twice as high – but within an order of magnitude of – the current unrestricted use standard. 

 

In conformance with the NJDEP’s OMA guidance, as long as use of the Subject Property remains consistent and the impacted material remains in place, no further remediation is necessary.

 

Question:

How does one address this exceedance in the Phase I report?  Is the presence of this remaining HS exceedance in the soils at the Subject Property a Recognized Environmental Condition (REC), a Controlled Recognized Environmental Condition (CREC), a Historical Recognized Environmental Condition (HREC), a Deminimis Condition, or simply a “finding”?

 

Addendum

The attendee followed up with me the following morning and referenced Example 7 in Appendix 4 of the ASTM E1527-21 Phase I ESA standard:

 

Example 7—REC, not a CREC or HREC:

During an assessment of a commercial property (i.e., the Subject Property), the assessor learns from regulatory records that a leaking underground storage tank containing petroleum was removed from the Subject Property several years ago.  The information indicates that the responsible party excavated the impacted soil and that the regulatory authority subsequently issued a closure letter based on meeting the unrestricted use criteria at the time.  However, review of the post-excavation data included in the regulatory file revealed that petroleum concentrations in the soils remaining at the Subject Property exceed the current state regulatory levels for unrestricted use (that is, the standards have changed).

 

Result—REC—The release from the leaking tank is not a historical recognized environmental condition because the data show that conditions at the Subject Property do not meet current unrestricted use standards, despite the previous regulatory closure letter that was issued prior to the current cleanup standards.  The release is also not a controlled recognized environmental condition because there are no documented controls applicable to the Subject Property.  The release is a recognized environmental condition (REC).

 

Sounds like Example 7 fits the scenario in our question, right?  The answer to our question should therefore be REC, right?

 

Not exactly, and here’s why:

 

Answer:

The attendee was almost correct regarding the similarity of Example 7 in Appendix 4 to our question’s scenario.  However, in New Jersey, because of the NJDEP’s OMA allowance, the REC has effectively “been addressed to the satisfaction of the applicable regulatory authority or authorities with hazardous substances or petroleum products allowed to remain in place subject to implementation of required controls” (per Section 3.2.17 of the Phase I standard).  Therefore, the presence of impacted soil at the Subject Property with the exceedance of the HS above its current unrestricted use standard constitutes a CREC, NOT a REC.  It is precisely the ability to use the OMA guidance document to avoid further investigation/remediation that turns this REC into a CREC (albeit a CREC is a subset of a REC).


Why? 

To understand in more detail why the CREC determination applies in our scenario, one should note the following:

 

1.      The CREC definition in the Phase I standard (Section 3.2.17.1(1)) states, in part: “…the environmental professional shall review reasonably ascertainable documentation, such as no further action letters (or similar certifications or approvals) issued by the applicable regulatory authority or authorities, or, in the case of self-directed actions, documentation and relevant data that satisfy risk-based criteria established by the applicable regulatory authority or authorities.” This section supports the use of the NJDEP’s OMA Evaluation Guidance document in the determination regarding this Finding (i.e., that it is a CREC).

 

2.      The CREC definition (Section 3.2.17.1(2)) clarifies further that a REC being “subject to implementation of required controls” refers to “activity and use limitations (AULs) or other property use limitations” [PULs].  In other words, though the term “controls” is not specifically defined in the standard, it is intimated to refer to AULs and PULs.

 

A property use limitation is defined in the Phase I standard (Section 3.2.67) as a “limitation or restriction on current or future use of a property in connection with a response to a release, in accordance with the applicable regulatory authority or authorities that allows hazardous substances or petroleum products to remain in place at concentrations exceeding unrestricted use criteria.” 

 

Even though the release may have occurred years ago, the limitation/restriction on the property use in connection with that previous release still applies today.

 

The property use limitation, in our scenario, is that, simply put, even if the current use of the Subject Property meets all regulatory requirements, future use of the subject property is not [necessarily] unrestricted because of the known exceedance above current unrestricted standards that remains at the property.  For example, one would likely be unable to operate a daycare center at the property if no such daycare center is currently in operation there.  Another limitation includes the use of that impacted material even at the Subject Property; for example, one could not simply excavate that impacted material (even though it may meet regulatory requirements to be left in place today due to being “grandfathered” in due to the OMA allowance) and use it at another area of the Subject Property without the creation of another area of concern that would then require investigation and remediation.  

 

3.      Finally, as intimated in Section 3.2.17.1(4) of the Phase I standard, should there be a change of use at the property or other reason to evaluate the soil exceedance based on a future event/use – e.g., the property is being converted to a daycare center or the impacted soil has been handled such that it is now required to be below unrestricted use standards – the “control” (i.e., the NJDEP’s OMA allowance with resulting PUL) may no longer be applicable and further remediation may be necessary.  Should such an event occur, and a subsequent Phase I was conducted in which this exceedance was reevaluated as a finding during the assessment, the current “CREC” would instead constitute a REC, not a CREC.

 

Conclusion:

Sometimes it's clear whether a finding in a Phase I ESA constitutes a REC, CREC, HREC, de minimis condition, or is just a finding.  However, sometime it isn’t. 

 

A thorough knowledge of both the ASTM E1527-21 standard as well as the applicable state and local laws and regulations for the Subject Property is critical in arriving at a sound and appropriate conclusion in a Phase I ESA report. 

 

Moreover, since the conclusions in a Phase I ESA report can often have a very real impact to a property transaction, including substantial liability for one or more parties to the transaction, such as the prospective purchaser and/or lender, it’s imperative that great care be taken to ensure the report’s conclusions are appropriate.


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Chemmie Sokolic is Principal at the FalconRE Group, and is an industry leader in the commercial and industrial real estate due diligence field, with more than 24 years’ experience. He has conducted over 1,000 due diligence assessments, inspections, and reviews at a diverse array of properties, from multi-family residences, retail complexes, and real estate portfolios, to larger and more extensive industrial, commercial, and manufacturing facilities.


Chemmie provides his clients with expert real estate due diligence services by evaluating current and past property uses and conditions, and identifying potential risks, liabilities, and constraints associated with the property’s current and potential future uses. Chemmie is also a NJ-Licensed Real Estate Salesperson, and is the Due Diligence and Development Consultant at Wolf Commercial Real Estate.


Chemmie holds a B.S. in Environmental Science, a M.S. in Environmental Management & Water Resources, and a Real Estate M.B.A.


Chemmie is an active member of the ASTM Committee E50 on Environmental Assessment, Risk Management, and Corrective Action, including the E1527 Phase I Task Group and other ASTM Standard Task Groups, was the final editor of the E1527-21 Phase I ESA standard, assisted in the design of ASTM’s Environmental Professional certification program, and is an ASTM-certified Instructor. Chemmie has written numerous white papers and articles regarding environmental due diligence, and has been published and cited in several industry and trade journals.

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