On July 8, 2024, the U.S. Environmental Protection Agency (EPA) will issue a final rule in the Federal Register officially designating perfluorooctanoic acid (PFOA) and perfluorooctane sulfonate (PFOS) as “hazardous substances” under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). This is a major shift in environmental regulation that will have a significant impact on the real estate industry, especially commercial transactions. This move is likely to create uncertainty for the commercial real estate industry and could have far-reaching implications for current property owners and those involved in buying, selling, financing, and developing affected properties.
Understanding PFAS and CERCLA
PFAS, also known as “forever chemicals,” are a large group of synthetic chemicals found in many industrial and consumer products, including firefighting foam, non-stick cookware, water-repellent fabrics, etc. Research has shown that these chemicals are chemically stable and difficult to break down, which means they can persist in the environment and accumulate in soil and water, posing health risks.
CERCLA (also known as Superfund) was enacted in 1980 to address the cleanup of sites contaminated with hazardous substances. By designating PFAS as hazardous substances under CERCLA, the EPA ensures that sites contaminated with these substances are subject to federal cleanup requirements. This change has significant implications for property owners, operators, and potential buyers.
Impact on real estate transactions
Enhanced due diligence requirements
The inclusion of PFAS on CERCLA's list of hazardous substances will require greater environmental due diligence in real estate transactions. Key impacts include:
Comprehensive Environmental Site Assessment (ESA): A Phase I ESA to identify potential contamination must include PFAS screening. If PFAS contamination is suspected, a Phase II ESA with soil and groundwater sampling will be required, increasing the complexity and cost of the assessment. Specialized Testing: A standard environmental assessment must incorporate PFAS-specific testing, requiring specialized knowledge and skills, which can further increase due diligence costs and timelines.
Potential liability for cleaning costs
CERCLA imposes strict liability on property owners and operators for the cleanup of hazardous materials, regardless of negligence, which can have several implications on real estate transactions.
Financial Burden: Property owners, including those who did not cause the contamination, may be subject to significant cleanup costs, which may deter buyers from purchasing contaminated properties. Transaction Risk: Buyers should carefully evaluate their potential liability associated with PFAS contamination, which may include negotiating indemnification clauses or seeking a price reduction to account for anticipated remediation costs.
Impact on property values and marketability
Properties affected by PFAS contamination may see changes in their assessed value and marketability.
Decreased property values: The costs and potential legal liability associated with remediation can reduce property values. Contaminated properties may require significant price adjustments to attract buyers. Marketability challenges: The stigma associated with PFAS contamination can make properties less attractive to investors and lenders, leading to longer market periods and more difficult negotiations.
Legal and Disclosure Obligations
The legal situation surrounding real estate transactions will also be affected.
Disclosure requirements: Sellers are obligated to disclose known PFAS contamination to potential buyers. Failure to do so can result in legal disputes and financial penalties. Increased litigation risk: Transactions involving properties with PFAS contamination may result in more legal challenges as parties seek to apportion responsibility and costs associated with remediation.
Changes in Insurance and Finance
Insurance and lending practices are likely to adapt to the new regulatory environment.
Environmental insurance adjustments: Insurance companies may revise policies to exclude PFAS-related claims or increase premiums for coverage that includes PFAS risks. Environmental liability insurance may become a key component of real estate transactions. Tightening lending standards: Lenders may scrutinize properties more closely for PFAS contamination. Lenders may require extensive environmental assessments and higher reserves to cover potential cleanup costs, affecting loan terms and availability.
Brownfield Redevelopment Opportunities
Although designating PFAS as hazardous substances poses challenges, it also creates opportunities:
Brownfield Incentives: Contaminated properties may be eligible for federal and state brownfield redevelopment programs, which offer financial incentives such as grants, tax credits and low-interest loans for cleanup and redevelopment. Specialized Investments: Developers with expertise in environmental remediation may find new opportunities to transform contaminated sites into viable commercial or residential properties, especially in areas where there is strong support for brownfield projects.
The designation of PFAS as hazardous substances under CERCLA creates significant regulatory, financial and operational challenges for real estate transactions. Enhanced due diligence, potential liability for cleanup costs, impacts to property values, increased disclosure requirements, and changes to insurance and lending practices are some of the important consequences that could result from this change. However, it also opens the door for strategic investments in brownfield redevelopment.
Real estate professionals, investors and lenders need to stay informed and proactive to manage these new risks and opportunities. By adapting to the changing regulatory environment, stakeholders can mitigate the negative impacts and capitalize on new possibilities for growth and redevelopment in the real estate market.