Alert

PFAS as CERCLA Hazardous Substances: Impact on Commercial Real Estate Transactions

July 2, 2024

On July 8, 2024, the U.S. Environmental Protection Agency (EPA)’s Final Rule in the Federal Register officially designating Perfluorooctanoic Acid (PFOA) and Perfluorooctanesulfonic Acid (PFOS) as “hazardous substances” under the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA) will become effective. This represents a significant shift in environmental regulation with profound implications for the real estate sector, particularly in commercial transactions. The move will also likely create uncertainty within the commercial real estate industry, which could result in broad impacts for current property owners and those involved in buying, selling, financing, or developing affected properties.

Understanding PFAS and CERCLA

PFAS, often referred to as “forever chemicals,” are a large group of synthetic chemicals found in many industrial and consumer products, including firefighting foams, non-stick cookware, and water-repellent fabrics. Research has shown that these chemicals’ chemical stability and resistance to degradation make them persistent in the environment, leading to potential accumulation in soil and water which could pose health risks.

CERCLA, commonly known as Superfund, was enacted in 1980 to address the cleanup of sites contaminated with hazardous substances. By designating PFAS as hazardous under CERCLA, the EPA ensures that sites contaminated with these substances are subject to federal cleanup requirements. This change significantly impacts property owners, operators, and potential buyers.

Implications for Real Estate Transactions

Enhanced Due Diligence Requirements

The inclusion of PFAS in the list of hazardous substances under CERCLA necessitates more rigorous environmental due diligence in real estate transactions. Key impacts include:

• Comprehensive Environmental Site Assessments (ESAs): Phase I ESAs, which identify potential contamination, will need to include PFAS screening. If PFAS contamination is suspected, Phase II ESAs involving soil and groundwater sampling will become necessary, increasing the complexity and cost of assessments.
• Specialized Testing: Standard environmental assessments must now incorporate PFAS-specific tests, requiring specialized knowledge and techniques that can further increase due diligence costs and timelines.

Potential Liability for Cleanup Costs

CERCLA imposes strict liability on property owners and operators for the cleanup of hazardous substances, regardless of fault. This can have several effects on real estate transactions:

• Financial Burden: Property owners, including those who did not cause the contamination, may face significant cleanup costs, which can deter buyers from purchasing contaminated properties.
• Transactional Risks: Buyers must carefully evaluate the potential liability associated with PFAS contamination. This might involve negotiating indemnity clauses or seeking price reductions to account for anticipated remediation expenses.

Impact on Property Values and Marketability

Properties affected by PFAS contamination are likely to see changes in valuation and marketability:

• Depressed Property Values: The costs associated with remediation and potential legal liabilities can reduce property values. Contaminated properties may require substantial price adjustments to attract buyers.
• Marketability Challenges: The stigma associated with PFAS contamination can make properties less attractive to investors and lenders, potentially leading to prolonged market times and more challenging negotiations.

Legal and Disclosure Obligations

The legal landscape surrounding real estate transactions will also be impacted:

• Disclosure Requirements: Sellers are obligated to disclose known PFAS contamination to potential buyers. Failure to do so could result in legal disputes and financial penalties.
• Increased Litigation Risks: Transactions involving properties with PFAS contamination might lead to more legal challenges as parties seek to allocate liability and costs associated with remediation.

Shifts in Insurance and Financing

Insurance and financing practices are likely to adapt to the new regulatory environment:

• Environmental Insurance Adjustments: Insurers may revise policies to exclude PFAS-related claims or increase premiums for coverage that includes PFAS risks. Environmental liability insurance might become a critical component of real estate transactions.
• Tighter Lending Criteria: Lenders will likely scrutinize properties for PFAS contamination more closely. They may require extensive environmental assessments and possibly higher reserves to cover potential cleanup costs, affecting loan terms and availability.

Opportunities for Brownfield Redevelopment

While the designation of PFAS as hazardous substances presents challenges, it also creates opportunities:

• Brownfield Incentives: Contaminated properties can qualify for federal and state brownfield redevelopment programs, offering financial incentives like grants, tax credits, and low-interest loans for cleanup and redevelopment.
• Specialized Investment: Developers with expertise in environmental remediation might find new opportunities in transforming contaminated sites into viable commercial or residential properties, especially in areas with strong support for brownfield projects.

The designation of PFAS as hazardous substances under CERCLA introduces significant regulatory, financial, and operational challenges for real estate transactions. Enhanced due diligence, potential liability for cleanup costs, impacts on property values, increased disclosure obligations, and shifts in insurance and financing practices are some of the critical outcomes we may see following this change. However, it also opens doors for strategic investments in brownfield redevelopment.

Real estate professionals, investors, and lenders must stay informed and proactive in managing these new risks and opportunities. By adapting to the evolving regulatory landscape, stakeholders can work to mitigate the negative impacts and leverage new possibilities for growth and redevelopment in the real estate market.