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The SELLER has provided me with a Phase
1 ESA and I have received a "Reliance Letter" from
the company that prepared the ESA. Do I need anything
more?
Yes, you do. In November 2005, the requirements placed on Users of ESA reports became more stringent. In addition to the Reliance Letter, each person wishing to use the ESA report must also fulfill all the User Responsibilities outlined in ASTM E 1527-05. Even with a Reliance Letter, Users who do not fulfill their User Responsibilities may not be eligible for the Landowner Liability Protections they hoped to obtain.
Furthermore, because the new requirements published in November 2005 also require significant updates to an ESA after 180-days, Users also have to be aware of the date when the ESA report was issued. If the report needs to be updated, it may be more cost effective for a new User to be added to the list of Users in the report, rather than through a separate Reliance Letter.
For clarification, a Reliance Letter does not provide a User with any warranties or guarantees that a property does not have contamination. The Reliance Letter simply functions to establish the recipient as a User of the report.
More importantly, it is significant to recognize that the needs of BUYERS and SELLERS are inherently different. An ESA prepared for the SELLER may not identify all the information that a BUYER would need to evaluate the business aspects of an acquisition, even if the ESA adheres to the ASTM standard.
Links to further information:
Regulatory
Briefing: Reliance Letters & All Appropriate Inquiry
Regulatory
Briefing: Landowner Liability Protections
E-Assessment
Notes: Article on Assessing Environmental Liabilities as a SELLER
Bankers
E-Notes: Article on Changes to ASTM Phase I Requirements
The SELLER will not permit access to the
property to conduct an ASTM Phase 1 ESA. Is this
a problem? This is a common problem. SELLERS are often are very
sensitive to unduly concerning employees to potential
changes in
ownership. In some cases, limited access, such as a
walk-through, can be provided, but not access to knowledgeable
on-site
employees. The ASTM standard requires interviews with
knowledgeable staff.
This should not prevent you from conducting your own
independent evaluation of the property. Many useful
resources can be
accessed without involving on-site staff. An ESA report
can be prepared using the available information, and
the missing data can be referenced as an "exception" to
the ASTM standard.
Should I conduct a Phase 1 ESA, even
if I am not involving a lender?
The advantage of conducting an ESA most often cited
is that it can establish you as an "innocent landowner",
allowing some protection against CERCLA liability.
The more tangible benefit of conducting an ESA is the
knowledge gained in conducting a formal assessment
of a property.
This benefit is greatly augmented by adding issues
to the ESA that are often outside the scope of a standard
ASTM
Phase 1. This could include:
- Describing the manufacturing process
-
Evaluating environmental compliance
- Identifying potential "bottlenecks" created
by permit limits or regulations
- Considering environmental compliance implications
of your future plans for the facility
- Assessing impacts of upcoming regulations
on a facility
- Understanding the current environmental
management system.
- Evaluating the status of asbestos, lead-based
paint and other issues typically excluded from a Phase
1
ESA
Links to further information:
E-Assessment
Notes: Article on Role of Compliance Assessment in Due Diligence
I need
to estimate future environmental costs for a large
portfolio of facilities. Time & resources will
not allow me to inspect each facility. How can I
estimate future costs?
The constraints of time & resources affect most due
diligence work. Several tools can be used to allow you
to use your time and resources to their fullest extent
to develop a technically sound and reasonable projection
of future costs.
Computerized approaches are used to project not only
future costs, but also to communicate the uncertainty
in these
projections. Critical data gaps can also be identified.
Computerized approaches can be useful to quickly develop
an array of options and prioritize follow-up activities
at specific locations.
Links to further information:
E-Assessment
Notes: Article on Quantifying Environmental Liabilities
Bankers
E-Notes: Article on Liability Projections
What is a "Quantitative Environmental Liability Assessment"?
A Quantitative Environmental Liability Assessment (QELAsm)
is a formalized approach used by Caltha to project future
costs associated with environmental issues
in a due diligence exercise. The resulting projections
are often
incorporated into financial models to evaluate
proposed
business plans.
Historically, environmental cost projections have
focused on "Superfund"-type liabilities. Huge costs
were incorporated, with very little chance of actually
incurring those costs. This approach tended to reduce the
usefulness of the projections, as well as reducing the "credibility" of
the preparers.
A QELAsm integrates the projected costs
associated with a wide range of environmental management
issues:
- On-going environmental compliance
- Future regulatory changes
- Capital improvements for regulatory compliance
- Remediation costs for future accidents
- Remediation costs for past releases
- Operational costs
- Other costs
The QELAsm process
should be tailored to each company's
assessment needs and is based on defined outcome
scenarios. These scenarios can based on specific information gained
during the due diligence, past or current ESAs,
or other industry knowledge to define the likelihood
of incurring
certain costs.
Links to further information:
E-Assessment
Notes: Article on New Accounting Standards for Environmental Liabilities
How can I project my future costs,
especially considering the limitations of the available information?
Information is ALWAYS limited. The more limited that
data base, the greater degree the uncertainty in
the projection.
It is important to make full use of the data base
to develop the best educated future cost estimate,
while
at the same
time capturing and communicating this uncertainty.
A well-constructed QELAsm cost projection
should communicate the uncertainty in the result.
For example,
the result
may indicate that based on the available information,
there is a 95% chance that future costs will
exceed $ 478,000,
and a 5% chance they will exceed $ 890,000. Most
often, this level of uncertainty is understandable
by business
developers using the information, who can then
decide the level of risk they are willing to
accept. If
the level
of uncertainty is too great, the good QELAsm process
also clearly identifies the key data gaps that
will reduce
uncertainty.
I manage leased property. Do I need to conduct
a Phase 1 ESA after a change in tenants? Probably not; however depending on the nature
of the businesses your tenants operate, it
may be
advisable to conduct a
walk-through assessment and discuss lease
close-out requirements. Once vacated, the condition of
the property
needs to
be documented prior to a new tenant occupancy.
Generally, office and retail operations tend
to have little or no hazardous materials
or wastes. These
types of operations
will be relatively low risk and therefore
no technical
support may be required.
Manufacturing and some service operations
tend to use, store and dispose more hazardous
materials
and
petroleum
products. These operations may have special
permits to dispose of wastes and have
trained their employees
on
proper material handling and disposal
requirements. If these types
of materials remain once a tenant vacates
the property, the OWNER may be responsible
for
their proper handling
and disposal. If the OWNER does not have
the required permits or trained employees,
the
costs to address
wastes will
be much greater.
Links to further information:
E-Assessment
Notes: Article on Environmental Liabilities Associated With Leased Properties
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