Michigan aims to tackle complications associated with vapor intrusion and emerging chemicals.
Environmental law and regulations are always in flux, which can be troublesome for commercial real estate professionals who must assess the potential liability associated with any transaction. States differ in addressing environmental considerations, which are constantly changing, but examining Michigan's recent action can help highlight the challenges and opportunities for commercial real estate professionals.
At the end of 2018, Governor Richard Snyder signed legislation that revised how the state developed its cleanup standards, updating its requirements as well as allowing disputes regarding no further action requests to be appealed to a review panel.
Two other issues that have arisen in the last few years are vapor intrusion and so-called “emerging chemicals.” These are issues that, just a few short years ago, consultants, regulators, and developers did not focus on at all. Vapor intrusion has been on the radar of many in commercial real estate, but it still has not sorted itself out. Michigan's environmental agency, along with those of other states, regularly approved site closures or no further action letters without considering vapor intrusion. Instead, officials emphasized protecting drinking water, minimizing contact with contaminants by residents or workers, or reducing exposure to surface water bodies and animals.
Vapor intrusion relates to the possibility that some chemicals in the groundwater or soil near a building will volatilize, or turn into vapor, and migrate into occupied space. This occurs with dry cleaners, gas stations, and other operations that used chlorinated solvents. This concern is particularly acute relative to residential properties. New York began focusing on this in the mid-2000s and, in 2008, became the first state to require landlords to inform tenants about exceedances of indoor air guidelines.
Proper due diligence is more important than ever. Even if your lender doesn't require it, it's always advisable to conduct a Phase I Environmental Site Assessment.
Michigan has gone through a few iterations on this issue. At present, the state has a set of non-binding generic standards with a site-specific standard generator. When dealing with new construction, in many cases, it may be easier to include a vapor barrier or a passive vapor extraction system (like radon systems) rather than spending time and money studying and documenting the extent of contamination. The technology to retrofit existing buildings is improving, and costs are coming down. Still, it is often necessary to undertake significant and expensive studies before being able to effectively retrofit a building over or near volatile contamination.
In the last two years, articles, studies, and governmental actions have proliferated relating to the class of chemicals falling under the umbrella name of PFAS (or poly- and perfluoroalkyl substances). These man-made chemicals are found in everyday products such as stain-proof carpeting, nonstick cookware, waterproofed footwear, firefighting foam, and fast-food wrappers. Their health effects are only just beginning to be understood; reports show that virtually everyone in North America has some level of these compounds in their bodies. At this point, there is no clear consensus on what levels of these compounds are safe. The federal government has not set maximum contaminant levels for PFAS chemicals, but it has issued draft interim guidance setting a non-binding health advisory standard and preliminary remediation goal of 70 parts per trillion. (One part per trillion is about a single drop of water in an Olympic-size swimming pool.) Several federal bills are pending on this subject, though nothing has passed.
Michigan is one of a handful of states taking an aggressive approach to these compounds. The state is in the process of developing rules and is expected to have some of the nation's toughest standards in 2020 for seven or more PFAS compounds in the parts per trillion.
Most likely, previous phase II environmental site assessments did not test for these compounds. Now, they are on the testing checklist, even though monitoring is difficult and expensive. Even more troubling is what to do with these chemicals once they are found on a property. Most contaminated materials can be removed and landfilled, vented to the atmosphere, or chemically destroyed. But PFAS are often called “forever chemicals” because they are so stable and difficult to break down. Prospective developers need to be concerned because states are just beginning to understand how to manage these compounds. In fact, many landfills are reluctant to accept wastes with PFAS fearing the chemicals will leach out of the waste and into collection systems. Additionally, those responsible for treatment systems are starting to demand that industrial and landfill customers test for PFAS and limit their discharges. This is a serious challenge.
Proper due diligence is more important than ever. Even if your lender doesn't require it, a Phase I Environmental Site Assessment (ESA), which looks at the property's use, history, and neighbors, is always advisable. If the Phase I ESA reveals environmental concerns, a Phase II ESA (soil, groundwater, or other sampling) may be recommended to determine if there is contamination. Although these environmental assessments are necessary to satisfy lenders, they also can provide a buyer with liability protection under state or federal law. These protections are not panaceas in all cases, and you should consult with legal counsel.
These issues must be considered as developers and investors begin to proceed with site selection. While not typically a dispositive issue, developers should think about the cost of devices to prevent vapor intrusion as part of the cost of their projects. Most developers are familiar with radon systems, and like those systems, during the construction phase, vapor barriers and extraction systems are relatively inexpensive and unobtrusive. Retrofitting an existing building - particularly an occupied building - is much more cumbersome. In either case, there may be government supports for these systems - both loans and tax increment financing.
Although they tend to be more limited to former landfills, industrial sites, and some dumping areas, developers should certainly evaluate PFAS as part of their acquisition decision process because of the costs of cleanup and the current uncertainties relating to cleanup standards and technology. PFAS may complicate and delay the development process depending on how badly groundwater is impacted.
Even if you are protected from liability, contamination may impair your ability to use the property, seriously injuring its value. These new issues, particularly PFAS, are less understood and may take more study to quantify their impacts on a potential development. Also, a Phase I ESA may not evaluate issues such as lead paint, asbestos, radon, or mold, or whether the business at the property complies with applicable laws and regulations or what regulatory issues may be triggered by business changes under consideration.
As noted above, in addition to the typical questions relating to environmental liability protection and due care, developers should ask their environmental consultants and legal counsel about the possibility that vapor intrusion controls may be needed and their cost and the possibility that PFAS may be present and how it might impact the development. A potential business buyer should focus on regulatory compliance as well as just whether the property can get “a clean phase I.” Developers should also ask about the availability of state and local incentives to fund environmental work. Retaining the right consultant and asking the right questions are essential to help ensure maximum information and maximum protections for everyone involved.