How the New PFAS Ruling Impacts CRE Transactions

Real estate professionals have a lot of questions about how PFAS may impact their deals EPA’s PFAS ruling of July 8, 2024.  The ruling designates two of the most widely used categories of PFAS as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as Superfund). This means that in order to evaluate environmental risk and ensure the protection from environmental liability that CERCLA provides, the Phase I Environmental Site Assessment (Phase I ESA),  must now include evaluation of the presence of PFAS in the same manner as other contaminants. Of course, when a Phase I ESA identifies potential PFAS risk at a site, subsequent evaluation may become necessary. It’s helpful to have a basic understanding of how PFAS risk is assessed and managed during a real estate acquisition.

PFAS and the Phase I ESA

Evaluating a commercial real estate property for PFAS is a bit more nuanced than it is for other contaminants. There are several industries, referred to as “red flag industries” that are potential PFAS contributors. Additionally, because these uses can either be current or historical, the research process to identify these uses can be lengthier and more complex, potentially extending the timeline of the Phase I ESA.

Common red flag industries for PFAS include commercial printing, electronics, plating, fabric and textiles, cosmetics manufacturers, fire protection, food packaging, mining, airports, drycleaners, carwashes and more. There are several ways that PFAS can impact the environment at these types of sites including:

• Subsurface Pathways: Presence of drains, sumps, pits, or other surface and subsurface pathways through which PFAS can enter the environment.
• Topography: Transport of PFAS throughout the site or offsite via surface drainage.
• Waste Discharges: Discharges that could contain PFAS, impacting surface waters from wastewater treatment systems as well as a variety of industrial and commercial sources.
• Air: Emissions that could disperse PFAS.
• Wells: Groundwater sources used for potable water, industrial uses, and irrigation potentially impacted by PFAS.

These pathways, along with groundwater depth and gradient and other physical setting features, are all evaluated to determine potential PFAS risk. Just as with other hazardous substances under CERCLA, PFAS can be categorized as a Recognized Environmental Condition (REC), Historical Recognized Environmental Condition (HREC), Controlled Recognized Environmental Condition (CREC) or a Business Environmental Risk (BER) in the Phase I ESA.  In some cases, A Phase II ESA or even remediation may be recommended. Read on for what these next steps entail.

PFAS and the Phase II ESA

Phase II Environmental Site Assessments for sites known or suspected to be impacted by PFAS can be more costly and time-consuming than for sites with other suspected contaminants. Field sampling requires additional measures to prevent cross contamination and PFAS lab tests are costly and require longer analysis time. Evolving technology and developing standards in this new regulatory environment can take additional time to navigate, as regulations vary by location, use, and jurisdiction.

Remediation/Mitigation of PFAS

The nature of PFAS chemicals and the still-developing regulatory environment present challenges to remediation and mitigation.

Commonly known as “forever chemicals,” PFAS chemical stability makes it resistant to some remediation technologies. “Old school” methods, like dig-and-haul for soil and pump-and-treat for groundwater, are the most obvious cleanup options, though both can be quite expensive. More sophisticated methods are available but can be even more costly and time-consuming. The good news is that these PFAS remediation technologies will generally also remediate other common co-contaminants.

The lack of precedence for remediating and closing PFAS-impacted sites, along with a lack of closure criteria, is another significant challenge. While EPA and some states have set groundwater cleanup levels, the overall process for achieving No Further Action (NFA) or regulatory closure status for PFAS sites is still largely in development across the United States. Due to PFAS being newly regulated, even at the state level, predicting closure costs presents unique challenges due to the uncertainty surrounding closure criteria.

Insurance

In many cases, environmental insurance policies without a PFAS exclusion are still attainable depending on factors such as previous use and geographic location. These policies typically cover remediation, third-party liability, legal defense, transportation, and non-owned disposal sites. For policies with a PFAS exclusion, it may be possible to limit the exclusion to only certain areas of coverage.

Lender liability policies remain widely available without a PFAS exclusion. This is because these policies are typically underwritten based on the borrower’s financials and provide protection solely to the lender. Since these policies are only triggered in the event of default and the discovery of a pollution condition, Environmental Lender Liability policies can be a good option for banks that want to forgo a Phase II ESA and keep the loan on the books.

Moving Forward

Managing PFAS risk and liability requires environmental expertise plus an up-to-the-minute grasp of developing regulations and standards in addition to other PFAS chemicals that could be classified as hazardous substances in the future. An experienced environmental consultant, a knowledgeable environmental attorney, and a skilled insurance broker familiar with emerging contaminants are critical to a successful risk management team. These trusted advisors can guide you through effective environmental due diligence, and if necessary, support you in addressing the impacts of PFAS in your portfolio.