© 2010 Environmental Data Resources, Inc.

EDR’s 2011 WEBINAR SERIES:

Protecting Your Bank from Vapor Intrusion Liability

Wednesday, February 16, 2011

Purpose of Today’s Call

• Provide multiple perspectives from experts in the field on the importance of assessing vapor intrusion risk upfront.

• Explain what vapor intrusion means to a lender’s own liability.• Outline ASTM’s process for assessing vapor intrusion risk on

loan originations, foreclosures and refis today.• Give you one lender’s first-hand account of adding vapor

intrusion to his environmental policy.• Most importantly, arm you with information to protect your

institution—and your borrowers—from vapor intrusion liability.

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Today’s Speakers

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• Dianne Crocker, Managing Director/Market Research Group, EDR

• Brendan Lowrey, Attorney, Thompson & Knight LLP, Dallas

• Anthony Buonicore, CEO, The Buonicore Group and Chairman of ASTM’s Task Group on Vapor Encroachment

• Mike Tartanella, Environmental Risk Specialist – AVP, Capital One Bank, Manhattan

© 2010 Environmental Data Resources, Inc.

Overview of Forces Driving Vapor Intrusion onto the

Playing Field of Environmental Due Diligence

Presented by: Dianne P. Crocker, Senior EconomistManaging Director, EDR’s Market Research Group

What Is Vapor Intrusion?

• Vapor intrusion generally occurs when there is a migration of volatile chemicals from contaminated groundwater or soil into an overlying building.

• Volatile chemicals can emit vapors that may migrate through subsurface soils and into indoor air spaces of overlying buildings in ways similar to that of radon gas seeping into homes.

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Why Is Vapor Intrusion In The Forefront?

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• Awareness of the health effects surrounding vapors migrating from a contamination source has grown considerably in recent years.

• Lawsuits against property owners, especially residential properties, are establishing precedents for vapor intrusion liability.

• Federal and state regulators are taking action.• Increased attention on vapor intrusion conditions is raising urgent

questions about dealing with the associated risk.

VI and Lenders’ Due Diligence• Foreclosures are making lenders unwilling owners of sites with

vapor intrusion issues.• Refinancings/foreclosures by banks are uncovering vapor intrusion

issues that were addressed during original environmental due diligence.

• Loan cycle for properties financed in the 1995-2005 time period is beginning to turn over, old Phase Is do not meet today’s risk criteria:• For example, low levels of dry cleaner solvents that may not

have been on anyone’s radar screen in the ’90s now exceed the screening level for vapor intrusion in some states.

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How Aware Are Banks of Vapor Intrusion?

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• 40% of surveyed risk managers work at banks with VI policies:• Up from 18% two years ago• Less prevalent at community banks (only 22% have VI policies)

Sources: EDR’s Annual Benchmarking Surveys of Financial Institutions. 2008, 2009, 2010.

VI in the Real World

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The Property Owner No One Wants To Be

• Boston:• Property owner bought site after diligent due diligence• Site part of NFA reopeners for VI risk• 1 of 12 sites in state deemed to pose “imminent threat to

human health” • Two years later, still incurring monitoring costs even

though there is no current evidence of chlorinated solvents under buildings at the site.

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Word from Attorneys Across U.S.

• “When access to healthy air is impacted, it becomes a personal issue. VI cases get emotional very quickly and become about more than just actionable levels.”

• ~Stuart Lieberman, Lieberman & Blecher, Princeton, NJ• “If there’s a reasonable chance of vapor intrusion on a

property, you had better be looking at it.”

~Shannon Little, Holland & Knight, San Francisco• “Vapor intrusion is not new. It is already in the minds of many

lenders who face the reality in today’s market that they might get properties back.”

~Allison Edgar, Parker Poe LLP, Charlotte, NC

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Impact of VI Awareness in the Market

• The rules of the game have changed—and quickly.• Because of that:

• Attorneys are asking consultants and lenders to include VI as part of their Phase I ESA scopes of work.

• ASTM released a consensus-based approach for screening out vapor intrusion risk.

• A growing number of banks are adding vapor intrusion to their policies.

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The Legal Perspective on Vapor Intrusion:Protecting Your Bank

Brendan LowreyThompson & Knight LLP1722 Routh StreetDallas, Texas 75201

Brendan.Lowrey@tklaw.com214-969-1134 (phone)972-977-2635 (cell)214-999-1502 (fax)

Overview

• Why is vapor an issue?• How does it affect lenders?• What can you do to protect your bank?

Why is Vapor An Issue?

• Vapor is an issue because• U.S. EPA and states are evaluating vapor, and• Plaintiffs are maintaining claims based on vapor.

U.S. EPA’s Focus on Vapor Intrusion

• Evaluating vapor at certain sites• Revising its Superfund Hazard

Ranking System• Revising its vapor guidance

State-Level Attention on Vapor Intrusion

• Some have rules.• Some have guidance.• Some are

reopening sites.

Case Developments on Vapor Intrusion

• Vapor is being used as an alternative theory.

• RCRA citizen suits:• “May” is expansive.• Endangerment ≠ actual harm.• Primary jurisdiction/abstention

not applicable.• Is fear alone enough?

How does vapor affect lenders?• Direct liability

• CERCLA defenses and “continuing obligations”

• Secured lender protections and “due care”

• Liability as record owner

How Does Vapor Affect Lenders? (cont’d)

• Disclosure and fraud issues• Borrower or collateral impairment

How Can You Protect Your Bank?

• Treat vapor in the same manner as soil or groundwater contamination.

• Integrate vapor into your risk management strategy/policy.

• Don’t ignore “closed” sites.• Perform comprehensive due diligence

on refi’s and foreclosures.

How Can You Protect Your Bank? (cont’d)

• Engage a competent consultant.• Give them adequate time and

compensation.• Consider an explicit requirement to

perform vapor assessments.• Stay aware.

How Can You Protect Your Bank?

Vapor Intrusion andProtecting Your Bank

Brendan LowreyThompson & Knight LLP1722 Routh StreetDallas, Texas 75201

Brendan.Lowrey@tklaw.com214-969-1134 (phone)972-977-2635 (cell)214-999-1502 (fax)

© 2010 Environmental Data Resources, Inc.

ASTM E 2600-10

Vapor Encroachment Screening Standard:

A Game-Changer for Property Due Diligence

Presented by: Anthony Buonicore, CEO, The Buonicore GroupChairman, ASTM Task Group on Vapor Encroachment

Overview

• Background• Capsule Summary• Legal Appendix• Implications for the Conduct of Property Due Diligence• What Lenders Can Do

Background

• Vapor migration/intrusion becoming an increasing concern at government agencies:• Federal

• 2002 Draft Guidance being updated.• 2011: HRS being revised to include vapor pathway.

• State • 30 states now have guidance.• NY, MA, CA, others have re-opened closed sites because of

vapor pathway concerns. • Stakeholders in real estate transactions are recognizing the need for

vapor migration screening to be a part of their property environmental due diligence.

Background (cont’d)

• In March 2008, ASTM E2600-08, Standard Practice for Assessment of Vapor Intrusion into Structures on Property Involved in Real Estate Transactions, was published.

• Revised in June 2010 as ASTM E2600-10, and renamed Standard Guide for Vapor Encroachment Screening on Property Involved in Real Estate Transactions.

• Directed at the potential for hazardous vapors to migrate to or reach the subsurface of a property involved in a real estate transaction (resulting in a Vapor Encroachment Condition or VEC)

Capsule Summary of E 2600-10 Two Levels of Screening for VECs

Tier 1:

• Focuses on known or suspect contaminated sites in a specific “area of concern.”

• If such a site exists in the AOC, the environmental professional applies professional judgment on whether it may result in a VEC.

• If so, Phase I EP must then determine if the VEC is a REC and, if a REC, decide with the client what further investigation, if any, may be warranted.

Area of Concern (AOC)• Measured from target property boundary to

known or suspect contaminated property.• 1/3rd mile for known or suspect contaminated

sites with Chemicals of Concern (volatile/semi-volatile hazardous substances).

• 1/10th mile for known or suspect contaminated sites with Petroleum Hydrocarbon Chemicals of Concern.

• May be reduced significantly in cross-gradient and down-gradient directions if groundwater flow direction is known or can be inferred.

Most Prevalent Sources of Concern in AOC

• Present and former gas station sites • Present and former dry cleaner sites • Present and former industrial sites, particularly those using

chlorinated solvents for degreasing and parts cleaning• Former manufactured gas plant sites • Former hazardous waste disposal sites• Present and former garbage landfills

Capsule Summary of E 2600-10 cont’d

Tier 2

• Focuses on the contaminated soil and groundwater plumes from any contaminated sites in AOC and their proximity to TP.

• May be accomplished by: • Reviewing what is in regulatory agency files, or • If no plume data is available, by soil gas sampling

at property boundary.• If a VEC is identified in Tier 1 screening, Tier 2

provides a scope of work that can be used for further investigation

Legal Appendix in E 2600-10• Purpose specifically to discuss relationship between E 1527-05,

CERCLA, AAI and E 2600-10

CERCLA:

• Definition of “release” in CERCLA covers vapor migration in the subsurface - 42 USC 9601 § (22).

• Courts have included costs for investigation and remediation of hazardous substance vapors as potentially recoverable response costs under CERCLA.

• EPA’s 2002 Draft Vapor Intrusion Guidance document developed for use at CERCLA, RCRA Corrective Action and Brownfield sites.

and E 1527 Phase I ESA is CERCLA-driven.

Legal Appendix in E 2600-10 cont’d

EPA’s All Appropriate Inquiries:

• “The conduct of AAI appropriately includes consideration of whether volatile chemicals from a CERCLA release have migrated to or encroached upon the subsurface of the property…”

• The environmental professional under the AAI Rule must provide “an opinion as to whether the inquiry has identified conditions indicative of releases or threatened releases of hazardous substances…on, at, in, or to the subject property.” 40 CFR 312.11(C)(I)

…and E 1527-05 is AAI-compliant (per EPA reg).

Legal Appendix in E 2600-10 (cont’d)

ASTM’s E 1527-05 Phase I ESA Standard:

• Section 1.1.1, REC definition…“means the presence or likely presence of any hazardous substances or petroleum products [irrespective of whether they are liquids, vapors or solids] on a property under conditions that indicate an existing release, a past release, or a material threat of a release…into structures on the property or into the ground.”

Legal Appendix in E 2600-10 (cont’d)

Conclusion:

“An ASTM E 1527-05 Phase I investigation being CERCLA-driven and compliant with AAI must address vapor migration analogous to the way it addresses contaminated groundwater migration.”

Implications for the Conduct of Property Due Diligence

• Vapor migration needs to be considered analogous to contaminated groundwater migration in a Phase I investigation.

• The only question for a lender’s environmental professionals is:• How will vapor migration be evaluated? Should ASTM E 2600-10 be

used or some other methodology?• Tier 1 VEC Screening in E 2600-10 provides a quick and inexpensive

methodology in a Phase I to conduct a screen for vapors migrating on or to the target property.

• If Tier 1 screening performed as part of a Phase I indicates a VEC, the environmental professional needs to decide if VEC is a REC.

• If the VEC is a REC, the scope of work associated with Tier 2 VEC Screening in E 2600-10 can be used for the Phase II follow-on investigation (assuming the REC decision is based solely on vapor migration).

What Lenders Can Do To Manage VI Risk

1. Revise your environmental policy to clarify that in ASTM E 1527-05 Phase I environmental site assessments, EPs need to screen for the potential of hazardous vapors to reach the subsurface of the target property.

2. Specify to your environmental professionals that the preferred method to conduct the screening is by using the Tier 1 methodology in ASTM E 2600-10.

3. If environmental professionals do not use the E 2600-10 methodology, specify that they need to include in their Phase I ESA report what methodology they did use, and provide supporting documentation.

© 2010 Environmental Data Resources, Inc.

Vapor Encroachment Issues:

One Lender’s Perspective

Presented by:Michael T. TartanellaEnvironmental Risk Specialist – AVPCapital One BankNew York, NY

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Lender Awareness

• The Bank’s awareness is related to two perspectives:

1. Policy and Legal issues (and how that relates to Bank policy)

2. Due diligence issues.

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1. Policy and Legal Issues

• Very simply: If a vapor issue is considered a “release” and a “release” is potentially considered a REC, then we must include vapor issues as part of the Phase I process if we are to be compliant with ASTM / AAI.

• Bank policy dictates that our Phase I reports must be

compliant with ASTM / AAI.

• Legal community indicating provisions in RCRA (and not CERCLA) as the primary vapor legal risk for property owners and potentially Banks. Triggers for RCRA cases less prohibitive.

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2. Due Diligence Aspects

• Ultimately one of the primary factors in our risk assessment is the health & safety of our subject building.• That is why vapor issues are so important for us.

• If there is an off-site, third party known release, then why am I concerned about soil/groundwater issues on the subject property? • My concern is whether my building has been

impacted and from my perspective, a Vapor Intrusion/IAQ study is an excellent form of due diligence.

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How the Bank Will Incorporate VI

• We will require our consultants to include some form of a VE screen in the Phase I. Our SOW will be revised to include this VE requirement.

• We will not dictate how a consultant performs a VE screen. There are many scenarios where a standard regulatory database review (along with the local geological-hydrogeological data) can be utilized to perform a screen.

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Final Thoughts

• A vapor scenario must be considered a potential REC based on the definition.

• Vapor encroachment must be considered in a Phase I environmental site assessment to be compliant.

• Banks will need to keep track of the legal cases involving vapor to determine liability perspectives.

• From the Bank’s perspective, the vapor intrusion/IAQ study really makes sense.

The Bottom Line

• Good vapor intrusion analysis upfront is good for:• Reducing risks to human health.• Protecting the borrower and the bank.• Tailoring a mitigation strategy if VI issues are present.• Ensuring smooth transactions.

• Knowledgeable environmental professionals are great resources.

• New tools are emerging to allow banks to screen out vapor intrusion concerns easily and cost-effectively.

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Thanks for Joining Us

• Stay tuned for upcoming webinars on best practices in lenders’ environmental due diligence:• May: Environmental Due Diligence Matrix for Lenders• July: Top 10 Best Practices for Lenders

• Look for email with valuable information:• Evaluation of today’s event and ideas for new topics.• Follow-up information on today’s event with link to replay.• A list of valuable vapor intrusion resources.

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