Forever Chemicals Present Significant Challenges for Commercial Real Estate
See this article as it originally appeared in the Commercial Observer.
In recent years, PFAS — or “forever chemicals” — have emerged as a major topic of concern for landowners, business owners and environmental and real estate professionals as regulators focus more attention on the management and regulation of these substances. A number of events this year have increased the public’s awareness of PFAS and raised concern among real estate professionals regarding the regulatory and liability impacts of PFAS on real estate.
In February, a court approved a $1.1 billion settlement of a class action against Dupont for the negligent manufacturing, handling and disposal of PFAS substances, and the withholding of information regarding their harmful effects on human health and the environment. Even more impactful on the commercial and industrial real estate community were regulatory actions taken by the Environmental Protection Agency during the first half of this year. Together, they send a strong signal that PFAS chemicals will present unique and increasing challenges for real estate owners and those working in the real estate industry.
The Scope and Impact of PFAS
PFAS is the common name for per- and poly-fluoroalkyl substances, a large, complex group of synthetic substances first created in the 1940s. Thousands of these chemicals are used in consumer, commercial and industrial products, and the substances and their management will pose one of the greatest environmental challenges of our time.
There are a number of factors that make PFAS substances both unique and extremely challenging. For one, it’s estimated that certain PFAS chemicals can take more than 1,000 years to break down and they migrate easily, leading to long-term contamination of soil, groundwater and air. PFAS substances are ubiquitous. They have been discovered everywhere, from the largest metropolitan areas to the most remote islands. PFAS can be found in the blood of most people around the world, and are associated with a whole suite of serious health risks.
The broad range of commercial and industrial properties potentially contaminated with PFAS necessitates thorough environmental assessments for real estate transactions. Although the regulatory and financial exposure associated with these contaminated properties is far from clear at this point, it is certain that as regulators increase their efforts to manage this unique group of contaminants, transaction costs will increase and property values for some properties will be negatively impacted.
New PFAS Regulations Create Real Estate Challenges
The EPA’s new drinking water standards for PFAS will have a profound impact on the cost of operating public water systems. They will also impact real estate development projects with small community water systems or private drinking water wells. As a practical matter, developers will need to investigate for PFAS and ensure that the drinking water does not contain any detectable PFAS.
The EPA published a final rule in May which designates two specific types of PFAS (PFOS and PFOA) as “hazardous substances” under CERCLA. This opens up owners of PFAS-contaminated properties to potential strict liability lawsuits under CERCLA by private parties and regulators for cost recovery and contribution for PFAS contamination cleanups. The final rule underscores the EPA’s intention to clean up PFAS-contaminated properties. Moreover, the increased liability exposure imposed on property owners by the final rule will most likely complicate real estate transactions and require comprehensive due diligence to mitigate risks.
Impacts on Transactions
The EPA's recent actions will have an immediate impact on certain real estate transactions. Typically, a prospective buyer will conduct a Phase I Environmental Site Assessment (ESA) in order to be eligible for certain environmental liability protections under federal and state laws. It also gives the purchaser a limited understanding of the potential environmental conditions related to the property.
In certain instances a Phase II ESA will be required. If PFAS substances are found, even at trace levels, the purchaser may request additional testing to determine the scope of contamination, further increasing due diligence costs and time. The lack of comprehensive regulatory standards in regard to the level of PFAS contamination requiring remediation at a property, and the scope of remediation required, will undoubtedly create additional uncertainty for prospective purchasers.
Based on the new drinking water standards promulgated by the EPA, purchasers are likely to see remediation action levels much lower than other regulated contaminants. As a result, purchasers will certainly request more concessions, or walk away from transactions.
The financial community's response to PFAS-contaminated properties also remains a critical concern. Lenders may reassess their willingness to finance properties contaminated with PFAS, reflecting their concern for the broader economic impacts on property values.
Gary B. O’Connor is co-chair of the Real Estate, Energy, Environmental and Land Use practice at the Connecticut law firm Pullman & Comley.
Reprinted with permission from the Commercial Observer