Prevent Your Tenant Mix from Turning Your Property into a 'REC'

Basically, the landowner or prospective purchaser must hire an environmental professional (an “EP”) to complete a series of non-invasive investigations, which satisfy a comprehensive ASTM (“American Society for Testing and Materials”) Phase I (the “Phase I”) regime (ASTM E 1527-05). The purpose of the Phase I is to identify and determine if there are any causes for hazardous materials concern either on or off the property. These causes of concern are termed “RECs.” If there are any RECs, the concern then triggers the need for additional and more invasive testing and subsurface investigation. A landowner, knowing that a future development, redevelopment, sale, or refinancing will, at a minimum, trigger the requirement for a Phase I, would be wise to consider the tenant mix aggressively from an environmental perspective as certain uses may raise a “red flag” for further investigation. Evaluating each tenant use would serve as a critical foundation for a landowner to better protect its asset, to limit the potential necessity for a subsurface investigation in the future, and to help ensure that its property does not become a REC.

In 1986, Congress originally codified the need for pre-acquisition environmental investigation with the so-called SARA amendments to CERCLA. Superfund Amendments and Reauthorization Act of 1986, Pub. Law 99-499. In 2002, Brownfields Amendments to CERCLA required the EPA to establish an enhanced process for evaluating a property's environmental condition and to create an updated standard by which to assess any potential liability for contamination. In November 2006, the EPA finalized the All Appropriate Inquiries (“AAI”) rule (the “Final Rule”), which established the necessary guidelines for this process. The Final Rule effectively established a procedure wherein: 1) an innocent landowner, 2) a bona fide prospective purchaser, and 3) a contiguous property owner could potentially claim certain protections from CERCLA liability. In order to qualify for this protection under the Final Rule, however, the potential claimant must comply with all of the AAI standards, of which there are several, and satisfy certain other standards related to property management.

Compliance with AAI Standards

For starters, the AAI must be conducted by an individual who qualifies as an environmental professional, as defined by the Final Rule, and the inquiries and investigations must be completed within one year prior to the acquisition of a property. The results of the investigation must be compiled in a written report and must include the following: 1) interviews with past and present owners, operators, and occupants; 2) reviews of historical sources of information; 3) reviews of federal, state, tribal, and local governmental records; 4) visual inspections of the facility and adjoining properties; 5) commonly known or reasonably ascertainable information concerning the presence or likely presence of contamination at the property; and 6) the ability to detect the contamination. The EP is to rely on the property owner also: a) to conduct searches for environmental cleanup liens; b) to note any specialized knowledge or experience of the prospective landowner; and c) to note any discordant relationship of the purchase price to the fair market value of the property, as if the property were not contaminated.

Smart Tenant Selection Choices

As with all commercial real estate, there are several ways a shopping center landowner can proactively put its property in a better environmental position for future redevelopment, sale and/or refinancing. One of the ways for a shopping center landowner to accomplish this is by making smart tenant selection choices. Historically and continuing today, fueling stations, auto repair shops and tire, battery, accessories operations (“TBA operations”) have continued to top the list as uses considered likely to pose an environmental concern, or be classified as giving rise to a REC, thus almost automatically triggering the need for a subsurface investigation. Over time and as a result of difficult experiences, the list of uses that spark concern has continued to grow. Uses such as dry cleaners, hair salons, dental offices, elderly housing, and medical facilities may now raise a red flag for environmental professionals when reviewing a site, and may trigger the need for a subsurface investigation. A landlord would be wise to consider in advance what steps might need to be taken by an environmental professional and the prospective purchaser/lender in the event the landowner wishes to sell, redevelop, or refinance its interest in its property.

Dry cleaners now are included at the top of the list as creating a REC. Subsurface testing regarding the potential discharge of perchloroethylene (“Perc”) on a property where a dry-cleaning operation (not merely a pickup and drop-off location) is or was located has become standard practice at the direction of either a prospective purchaser or lender. Today, having manifests in hand in an effort to demonstrate that proper removal and storage procedures were taken in the past is simply not enough to outweigh a purchaser's or a lender's concerns. The annual rent a landlord would receive from a dry cleaner over a five year period often does not cover the cost to an owner/operator of an investigation and remediation fees (should a release occur). While there is no sure bet today for landlords to protect themselves from liability due to an on-site dry cleaner, technology has continued to develop, and there is a growing trend in what are considered to be more “environmentally friendly cleaning systems.” Such systems do not use Perc. Nevertheless, such systems need to be reviewed with care to determine whether they actually decrease the environmental risk to the landlord, particularly if the shopping center is served by a septic system. The process is far from perfect and may still cause some environmental professionals to recommend subsurface investigation.

Hair salons and nail salons have quietly but steadily crept up the list of uses giving rise to RECs. Today, many hair salons use hair coloring, perming, and styling products that are “washed” down the drain and discarded into the trash, while nail salons similarly dispose of acetone. These chemicals over time infiltrate the ground through septic systems or pose a separate risk for a landowner in the event there is a sewer leak. While Ohio and certain municipalities specifically require discharges of “hair care products,” or “nail care products” from salons to be plumbed to a holding or containment tank in lieu of being discharged to a septic system, the EPA does not. The EPA does regulate all discharges to groundwater (via septic systems) at hazardous concentrations. Discharges from hair salons and nail care centers potentially may exceed such concentration levels and so would be regulated under federal and state Clean Water Act limits. See 33 USC ”1251-1387.

In the future, we can expect to see further regulations in connection with these uses. It may be wise for a prudent landowner to take proactive steps in this direction on his own. Many landowners today are requiring that both hair and nail salons install a tight tank (containment tank), which is connected to sinks and drains where chemicals pass. This tight tank must be pumped out regularly, as it functions as a holding tank for the water and chemicals that pass through the drain and into the tank. A landowner requiring that a tenant install a tight tank must require documentation showing proper removal and disposal of the contents of the tight tank.

Another general category of uses that has come to be “under the microscope” are dental and medical facilities. There is a growing focus on the waste generated by these types of facilities and how it is handled, both via disposal of the day-to-day waste and in terms of what is left of the buildings, such as radiation within the structure itself; residual radiation can be a demolition/remodeling concern. Metals from dental offices can also give rise to contamination from the metals deposited into septic systems and sewer lines. Massachusetts, for example, has adopted a program to mandate reduced use of certain metals by dentists.

Conclusion

Prospective purchasers and lenders will look to developing case law to set the parameters of compliance with the AAI standards. Through June 2008, case law has yet to be developed (remember that AAI was not implemented until November 2006). Nonetheless, it is likely that for the next several years, prospective purchasers (and lenders) of shopping centers will undertake extensive environmental due diligence. Knowing this, far sighted shopping center owners will benefit by adjusting their tenant mix to avoid (or reduce) the likelihood of the shopping center having a REC. Attorneys in today's market would be wise to advise their clients about the potential exposure they may open themselves up to by allowing certain tenant uses on their property.

Additionally, attorneys should advise their clients on what safeguards can be implemented with various uses in order to be proactive to limit their economic exposure as a seller or owner while helping to create a greener, more financable, and saleable asset for the future. At a minimum, if a shopping center owner decides to lease its property for any “red-flag” uses, certain tenant responsibilities should be inserted into the lease: disposal, reporting, and testing requirements, as well as a separate obligation for the tenant to take all liability for any remediation and/or cleanup of any releases along with an indemnification for the landlord for any exposure from contamination.

A sample “Tight Tank” provision will appear in next month's issue.

Over the past 30 years, an increasing number of properties have been and continue to be classified as having some kind of recognized environmental condition (a “REC”). The REC classification arises from the U.S. Environmental Protection Agency (the “EPA”) crackdown over the past few decades to ensure that property owners and the parties who are responsible for causing the contamination actually share in the cost and burden of the remediation process (42 U.S.C. ”9601 to 9675 (“CERCLA”).

In an effort to provide a road map or plan to address the issues, the EPA continues to further develop its regulations to make sure that the responsible parties are being held responsible (“the polluter pays”). The EPA has developed a methodology enabling various “innocent” parties to limit their liability regarding a contaminated property. This approval is embodied in the so-called 2002 Brownfields Amendments to CERCLA. See Small Business Liability Relief and Brownfields Revitalization Act (2002) Pub. Law 107-118. In many cases, Brownfields protections have proved to be an incentive to development as a particular contaminated property might not be a candidate for redevelopment if these guidelines were not in place. The methodology created by the EPA, while a vast improvement toward targeting the responsible parties, still places a significant burden on a landowner and prospective purchaser wishing to limit their environmental liability.

The Need for an Environmental Professional

Basically, the landowner or prospective purchaser must hire an environmental professional (an “EP”) to complete a series of non-invasive investigations, which satisfy a comprehensive ASTM (“American Society for Testing and Materials”) Phase I (the “Phase I”) regime (ASTM E 1527-05). The purpose of the Phase I is to identify and determine if there are any causes for hazardous materials concern either on or off the property. These causes of concern are termed “RECs.” If there are any RECs, the concern then triggers the need for additional and more invasive testing and subsurface investigation. A landowner, knowing that a future development, redevelopment, sale, or refinancing will, at a minimum, trigger the requirement for a Phase I, would be wise to consider the tenant mix aggressively from an environmental perspective as certain uses may raise a “red flag” for further investigation. Evaluating each tenant use would serve as a critical foundation for a landowner to better protect its asset, to limit the potential necessity for a subsurface investigation in the future, and to help ensure that its property does not become a REC.

In 1986, Congress originally codified the need for pre-acquisition environmental investigation with the so-called SARA amendments to CERCLA. Superfund Amendments and Reauthorization Act of 1986, Pub. Law 99-499. In 2002, Brownfields Amendments to CERCLA required the EPA to establish an enhanced process for evaluating a property's environmental condition and to create an updated standard by which to assess any potential liability for contamination. In November 2006, the EPA finalized the All Appropriate Inquiries (“AAI”) rule (the “Final Rule”), which established the necessary guidelines for this process. The Final Rule effectively established a procedure wherein: 1) an innocent landowner, 2) a bona fide prospective purchaser, and 3) a contiguous property owner could potentially claim certain protections from CERCLA liability. In order to qualify for this protection under the Final Rule, however, the potential claimant must comply with all of the AAI standards, of which there are several, and satisfy certain other standards related to property management.

Compliance with AAI Standards

For starters, the AAI must be conducted by an individual who qualifies as an environmental professional, as defined by the Final Rule, and the inquiries and investigations must be completed within one year prior to the acquisition of a property. The results of the investigation must be compiled in a written report and must include the following: 1) interviews with past and present owners, operators, and occupants; 2) reviews of historical sources of information; 3) reviews of federal, state, tribal, and local governmental records; 4) visual inspections of the facility and adjoining properties; 5) commonly known or reasonably ascertainable information concerning the presence or likely presence of contamination at the property; and 6) the ability to detect the contamination. The EP is to rely on the property owner also: a) to conduct searches for environmental cleanup liens; b) to note any specialized knowledge or experience of the prospective landowner; and c) to note any discordant relationship of the purchase price to the fair market value of the property, as if the property were not contaminated.

Smart Tenant Selection Choices

As with all commercial real estate, there are several ways a shopping center landowner can proactively put its property in a better environmental position for future redevelopment, sale and/or refinancing. One of the ways for a shopping center landowner to accomplish this is by making smart tenant selection choices. Historically and continuing today, fueling stations, auto repair shops and tire, battery, accessories operations (“TBA operations”) have continued to top the list as uses considered likely to pose an environmental concern, or be classified as giving rise to a REC, thus almost automatically triggering the need for a subsurface investigation. Over time and as a result of difficult experiences, the list of uses that spark concern has continued to grow. Uses such as dry cleaners, hair salons, dental offices, elderly housing, and medical facilities may now raise a red flag for environmental professionals when reviewing a site, and may trigger the need for a subsurface investigation. A landlord would be wise to consider in advance what steps might need to be taken by an environmental professional and the prospective purchaser/lender in the event the landowner wishes to sell, redevelop, or refinance its interest in its property.

Dry cleaners now are included at the top of the list as creating a REC. Subsurface testing regarding the potential discharge of perchloroethylene (“Perc”) on a property where a dry-cleaning operation (not merely a pickup and drop-off location) is or was located has become standard practice at the direction of either a prospective purchaser or lender. Today, having manifests in hand in an effort to demonstrate that proper removal and storage procedures were taken in the past is simply not enough to outweigh a purchaser's or a lender's concerns. The annual rent a landlord would receive from a dry cleaner over a five year period often does not cover the cost to an owner/operator of an investigation and remediation fees (should a release occur). While there is no sure bet today for landlords to protect themselves from liability due to an on-site dry cleaner, technology has continued to develop, and there is a growing trend in what are considered to be more “environmentally friendly cleaning systems.” Such systems do not use Perc. Nevertheless, such systems need to be reviewed with care to determine whether they actually decrease the environmental risk to the landlord, particularly if the shopping center is served by a septic system. The process is far from perfect and may still cause some environmental professionals to recommend subsurface investigation.

Hair salons and nail salons have quietly but steadily crept up the list of uses giving rise to RECs. Today, many hair salons use hair coloring, perming, and styling products that are “washed” down the drain and discarded into the trash, while nail salons similarly dispose of acetone. These chemicals over time infiltrate the ground through septic systems or pose a separate risk for a landowner in the event there is a sewer leak. While Ohio and certain municipalities specifically require discharges of “hair care products,” or “nail care products” from salons to be plumbed to a holding or containment tank in lieu of being discharged to a septic system, the EPA does not. The EPA does regulate all discharges to groundwater (via septic systems) at hazardous concentrations. Discharges from hair salons and nail care centers potentially may exceed such concentration levels and so would be regulated under federal and state Clean Water Act limits. See 33 USC ”1251-1387.

In the future, we can expect to see further regulations in connection with these uses. It may be wise for a prudent landowner to take proactive steps in this direction on his own. Many landowners today are requiring that both hair and nail salons install a tight tank (containment tank), which is connected to sinks and drains where chemicals pass. This tight tank must be pumped out regularly, as it functions as a holding tank for the water and chemicals that pass through the drain and into the tank. A landowner requiring that a tenant install a tight tank must require documentation showing proper removal and disposal of the contents of the tight tank.

Another general category of uses that has come to be “under the microscope” are dental and medical facilities. There is a growing focus on the waste generated by these types of facilities and how it is handled, both via disposal of the day-to-day waste and in terms of what is left of the buildings, such as radiation within the structure itself; residual radiation can be a demolition/remodeling concern. Metals from dental offices can also give rise to contamination from the metals deposited into septic systems and sewer lines. Massachusetts, for example, has adopted a program to mandate reduced use of certain metals by dentists.

Conclusion

Prospective purchasers and lenders will look to developing case law to set the parameters of compliance with the AAI standards. Through June 2008, case law has yet to be developed (remember that AAI was not implemented until November 2006). Nonetheless, it is likely that for the next several years, prospective purchasers (and lenders) of shopping centers will undertake extensive environmental due diligence. Knowing this, far sighted shopping center owners will benefit by adjusting their tenant mix to avoid (or reduce) the likelihood of the shopping center having a REC. Attorneys in today's market would be wise to advise their clients about the potential exposure they may open themselves up to by allowing certain tenant uses on their property.

Additionally, attorneys should advise their clients on what safeguards can be implemented with various uses in order to be proactive to limit their economic exposure as a seller or owner while helping to create a greener, more financable, and saleable asset for the future. At a minimum, if a shopping center owner decides to lease its property for any “red-flag” uses, certain tenant responsibilities should be inserted into the lease: disposal, reporting, and testing requirements, as well as a separate obligation for the tenant to take all liability for any remediation and/or cleanup of any releases along with an indemnification for the landlord for any exposure from contamination.

A sample “Tight Tank” provision will appear in next month's issue.