Both the Environmental Site Assessment (ESA) and the Environmental Transaction Screen (ETS) permit the user to satisfy one of the requirements for the innocent landowner defense with respect to CERCLA (Superfund) liability.

The choice of levels of due diligence includes consideration of: 1) the cost of the due diligence, 2) the risk requirements of the lending institution, and 3) the environmental conditions on and near the property.

The ETS is appropriate:

For newly constructed buildings on previously undeveloped land

For sites with a known history of non polluting uses such as a dentist office in a converted retail or residential building

When the lending institution is agreeable based on their loan amount and risk tolerance

The ETS is significantly less expensive and time consuming than the ESA.

ERAS has cleared hundreds of properties of environmental impairment and has also identified several former gasoline stations based only on the ETS process. If conditions require, the ETS can be expanded into an ESA project.

The ESA is appropriate when:

  • Sites in commercial areas have histories of industrial operations or current/previous complete available information regarding
  • The borrower may not have chosen the lender or will quickly resell the site
  • Sites in commercial areas have histories of industrial operations or current/previous complete available information regarding
  • The borrower may not have chosen the lender or will quickly resell the site
  • The current or future lending institution requires the more standardized ESA petroleum related businesses
  • Historical uses for baseline knowledge.
  • The owner or lending institution desires

KEY CONCLUSION: Specific Sections of ETS and ESA reports should be reviewed for key information pertaining to environmental conditions at the subject site.

The ETS report is a shorter more concise report than the ESA report. However, the main elements related to potential risk of ownership should still be contained in the report. These include an evaluation of the current and historical uses of the Property and adjacent sites and possible impact of contamination from nearby leak sites. The banker or other user should be able to quickly determine the risk and whether more property research should be performed. A good consultant will provide timely and advance recommendations if this is necessary.
Both the ETS and ESA report should include:

  1. the type of development on the Property and current use
  2. the historical uses
  3. the type of nearby development
  4. the proximity and number of nearby sites of risk.

All of this should be prominently contained in the Introduction and/or the Conclusions and Recommendations.

For the ESA report the important sections include 1) the Current Uses, near the beginning of the ESA report. The historical uses of the Property are summarized, along with the very important historical gap analysis in the Conclusions and Recommendations. The potential impact of off-site contamination is summarized in the Off-site Sources section.

By review of these limited portions of the ESA report, the reviewer can evaluate the consistency of the data and the ensuing conclusions. For example, are there current or past uses or large gaps in use that could indicate a risk to value?Is there sufficient technical evaluation of off-site sources to make definitive conclusions of the current or future risk? If there are issues that pose a risk are they clearly defined with the proper recommendations to resolve them expediently?

KEY CONCLUSION: While an ETS does not provide protection under the innocent landowner defense it may still be appropriate for certain types of properties.

In practice, banks and other financiers of property should realize the innocent landowner defense is designed to protect a landowner from catastrophic financial loss. Because an important goal would be to avoid even having to defend, the ESA project can be considered insurance against this loss. The decision to perform an ETS must be considered an initial process to decide whether to buy the comprehensive policy. The lending institution must be able to depend on a good environmental consultant to help evaluate a specific property for environmental risk whether an ETS or complete ESA.

The Environmental Transaction Screen (ETS), referred to by SBA as a Transaction Screening Analysis (TSA) should be performed under the new standard ASTM 1528-06. The standard specifically states that this project does not provide protection under the CERCLA “innocent landowner defense”. That is because qualifying for the innocent landowner defense requires All Appropriate Inquiry (AAI). This condition is met by performing the scope of work outlined in the new standard for Environmental Site Assessment (ESA) projects (ASTM 1527-05). The use of the ETS will be guided by 1) the type of Property; 2) the expertise and risk tolerance of the user and perhaps most importantly, 3) the information developed in the course of the inquiry.

The innocent landowner defense appears to be subject to interpretation on a case-by-case-basis in the judicial system. The courts have generally ruled that an owner of a contaminated site becomes a potentially responsible party (PRP) simply because they are the owner. Generally the courts have upheld the innocent landowner defense if 1) a prior party was the sole cause of the contamination; 2) the previous owner is a liable party; 3) the new owner did not know about the contamination and undertook appropriate inquiry at the time of purchase and 4) the owner took due care once the contamination was discovered.

The following is a brief synopsis of the changes to the ETS due diligence process based on the new ASTM standard.

The ETS project is designed for environmental assessments of properties that are considered to be “low risk”. The scope of these projects are performed following the guidelines of 2006 standard ASTM 1528-06 which replaces the previous ASTM standard dated in 2000. Although there has been much fanfare about how the new ETS removes the protection of the “innocent landowner defense” liability protection, the bottom line is: will the ETS project minimize, to the extent possible, the risk of financing a given property?

ERAS will carefully follow the new standard that dictates the historical sources of information to be used, that is either Sanborn Fire Insurance Maps or city street directories (published by, among others, Polk and Haines).

Due to a lack of these sources in many areas, it will be necessary to either supplement these sources, by review of more traditional building department records or substitute the traditional historical sources. There may be additional cost for some projects to follow the new standard as well as continuing to provide sufficient due diligence.