The Toxic Threat of Vapor Intrusion
Vapor intrusion may soon become an important environmental concern for commercial property owners, buyers, developers and lenders. While this is not a new issue, burgeoning state regulations, upcoming federal guidance and new environmental auditing standards—if passed—may make vapor intrusion a critical factor in commercial real estate transactions.
Fortunately, there are steps to take to prevent it from becoming a serious problem.
Vapor intrusion refers to the potential for contaminants in the soil or groundwater beneath a building to enter the structure due to air movement that flows through cracks or crevices in the basement or lower floors. Theoretically, these contaminant vapors can accumulate and increase to levels that environmental agencies deem hazardous to human health.
Vapor intrusion can be dangerous. In the most extreme example, houses in Hartford, Illinois, have exploded due to gasoline vapor contamination. In the more typical setting, however, it is not clear whether vapor intrusion can present anything more than a theoretical risk.
New and Existing Regulations
During the previous 15 years, most state environmental agencies have generally considered buildings to present a physical barrier to exposure from outside contamination. They have approved numerous remediations that left contamination in place under buildings. State agencies have issued many No Further Remediation (NFR) letters in exactly such instances. But the new concern regarding vapor intrusion may undercut the validity of those NFRs.
New York, for example, has reopened sites with existing NFRs to determine if the prior remedial work was sufficient to protect against vapor intrusion. In Illinois, the state’s Environmental Protection Agency has said that it will not revoke NFRs even if addressing vapor intrusion becomes a regulatory requirement. Still, there is no guarantee that they will not do just that as more information becomes available.
Illinois is also working on new vapor regulations. After years of wrangling with stakeholders and the U.S. Environmental Protection Agency (EPA), state regulators recently recommended that the Illinois Pollution Control Board change the current remediation rules to mandate that vapor intrusion be included as a consideration companies must address before receiving an NFR. These proposed amendments also detail numerous ways that this ground-based pathway of contamination can be remediated. The Pollution Control Board has accepted the rules and asked for public comment, but it is unknown when the decision will be finalized.
The board may be waiting until the federal EPA issues its guidance on vapor intrusion, which is expected this winter, in order to avoid creating any conflicting regulations. Other states may also be waiting for the EPA’s guidance before enacting their own vapor intrusion regulations.
Implications for Commercial Real Estate Transactions
While the regulatory landscape is unsettled, the transactional impact is even more uncertain. The Illinois Environmental Protection Agency, for example, has issued many NFRs in settings where there is contamination beneath buildings. While the agency has said it will not revoke those NFRs except in instances of clear environmental danger, these NFRs do not address vapor intrusion, thereby potentially exposing future owners to liability. In addition, recent standards for environmental audits allow auditors to identify the potential for vapor intrusion based on very little evidence. This will result in far more site assessments recommending physical sampling for vapor intrusion, which is complicated and expensive.
If these assessments identify vapor intrusion as a potential concern, buyers and their lenders will demand further investigation and require remediation of properties. Sellers will encounter the increased costs of sampling and remediation, as well as possible lawsuits from tenants or employees alleging harm from vapors. Development plans may also need to be reworked. Lenders may require that new vapor intrusion NFRs be obtained before closing or insist upon additional collateral or guarantees. These issues can add time, expense and complications to a deal.
Closing the Deal
Commercial real estate buyers should explore all options to protect themselves from environmental liability, regardless of whether an NFR covering vapor intrusion can be obtained. Buyers should conduct due diligence in compliance with all appropriate inquiry rules and require that the seller indemnify them—and back up that indemnity via escrow funds, hold backs, letters of credit, bonds or environmental insurance policies. For their part, sellers should craft limited indemnities and explore the most cost-effective financial assurance methods that will satisfy both buyers and lenders.
Although regulators have not yet finalized vapor intrusion rules, all these related issues are already impacting commercial real estate transactions. Be sure to stay well informed about all potential changes before closing your next deal.