Buyers and sellers of commercial property now have one more environmental issue to complicate transactions: vapor intrusion. Vapor intrusion is not a new issue but burgeoning state regulations, upcoming federal guidelines, and new environmental auditing standards will result in vapor intrusion becoming a bigger part of the large suite of environmental concerns facing property owners, buyers, developers and lenders. This article discusses what vapor intrusion is, how it can be resolved and what steps you can take to avoid vapor intrusion becoming an issue in commercial property transactions.

Q: What is vapor intrusion?

A: Vapor intrusion refers to the potential for contamination in the soil or groundwater beneath a building to enter into it via air movement through cracks or crevices in the basement or lower floors. This only happens with certain types of chemicals such as those associated with gasoline (i.e. benzene) or dry cleaning (TCE/PCE) that evaporate over time and can be carried with air currents from the subsurface below a building into the building itself. Theoretically, these contaminant vapors can accumulate and increase to what environmental agencies consider hazardous levels, especially in newer, more airtight buildings.

Q: Why is this a problem now?

A: This has actually always been recognized by environmental agencies as a potential problem but they lacked the analytic tools to measure the potential for the movement of contaminated vapors from soil or groundwater into buildings. Several models have been developed to support this analysis but there is still a great deal of uncertainty about how this actually works. To a certain extent it’s a problem because a number of environmental agencies have said it is.

Q: Is vapor intrusion really dangerous?

A: It can be. In the most extreme example, houses in Hartford, Ill. have exploded due to gasoline vapor contamination. In the more typical setting, however, it is not clear that vapor levels present more than a theoretical risk based on longer time exposures than most people experience. For example, remediation requirements could be based on airborne contaminant levels that are far less than those considered problematic under the Occupational Safety and Health Administration (OSHA) for eight hour workplace exposures.

Q: Would an agency require remediation due to vapor intrusion?

A: Possibly. For the last 15 years, the Illinois Environmental Protection Agency (IEPA), and most other state environmental agencies, have generally considered buildings to present a physical barrier to exposure from contamination and have approved of numerous remediations that left contamination in place under buildings. IEPA has issued many No Further Remediation (NFR) letters in exactly such instances. Although these agencies were following their own risk protocols by allowing buildings to serve as caps over contamination, the new concern for vapor intrusion will undercut the apparent validity of those NFRs. While IEPA has said that it will not revoke those NFRs even if addressing vapor intrusion becomes a regulatory requirement, there is no guarantee that they won't do just that. Vapor intrusion concerns have led other states, such as New York, to reopen sites with existing NFRs to determine if the prior remedial work was sufficient to protect against vapor intrusion.

Q: So there are regulations now?

A: Almost. After years of wrangling with stakeholders and the U.S. EPA, IEPA proposed amendments to the Illinois Pollution Control Board to change the current remediation regulations (known as the Tiered Approach to Corrective Action Objectives or TACO) to include vapor intrusion as an additional pathway to be addressed to obtain an NFR. The Board has accepted the rules and asked for public comment, but it is not known when the Board will make them final. The Board may be waiting until U.S. EPA issues guidance on vapor intrusion in December 2012, in order to avoid any conflicts with the rules.

Q: How do the rules work? A: They identify vapor intrusion (identified for TACO purposes as indoor inhalation) as another risk pathway to be addressed. The pathway can be eliminated or considered remediated by:

1. Reducing contamination in soil or groundwater to established cleanup levels based on the proximity to a building,
2. Recording a deed restriction prohibiting the construction of a building above the contamination, or
3. Installing and agreeing to continually operate and maintain equipment that vents vapors from beneath the building to the outside air.

Q: What’s the problem?

A: As unsettled as the regulatory landscape is, the transactional impact is even more uncertain. First, IEPA has issued many NFRs in settings where there is contamination beneath buildings. While the IEPA has said it will not revoke those NFRs except in instances of clear environmental danger, these NFRs do not address vapor intrusion and potentially expose 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 Phase I environmental site assessments that recommend physical sampling for vapor intrusion. Compounding the problem is the fact that the IEPA and many consultants do not view indoor air testing for vapors within buildings as a reliable method because there are so many additional sources of contaminants including cigarette smoke, cleaning supplies, dry cleaned clothes and copiers. The only effective method for testing to demonstrate compliance with these standards is to sample the underground air, known as soil vapor, a process which is, of course, more complicated and expensive. This view will not stop other consultants from recommending indoor air testing which will inevitably result in both false positives and negatives, more confusion and costlier transactions.

Q: What will this do to real estate deals?

A: Complicate them. Undoubtedly, with Phase I reports identifying vapor intrusion as a potential environmental concern, buyers and their lenders will demand further investigation and require remediation of properties. An existing NFR on a property will no longer give assurance that the property is “clean.” Sellers will have to deal with the increased costs of sampling and remediation, as well as possible lawsuits from tenants or employees alleging harm from vapors. Development plans may need to be reworked if a building cannot be located above contamination or requires air handling systems to reduce the impact. Lenders may require that new “vapor intrusion” NFRs be obtained before closing or insist upon additional collateral or guarantees. Vapor intrusion issues will add time and expense and require a sound strategy to get the deal done.

Q: What strategies will help close the deal?

A: Buyers will want to explore all options to protect themselves from environmental liability, regardless of whether an NFR covering vapor intrusion can be obtained. For example, buyers should conduct due diligence in compliance with the “all appropriate inquiry” rules to obtain “innocent purchaser” protections from liability as an owner of a contaminated site. They can also require that the seller indemnify them, and back up that indemnity via escrow funds, hold backs, letters of credit, bonds or environmental insurance policies.

Sellers will likely want to craft limited indemnities and explore the most cost effective financial assurance mechanisms that will satisfy buyers and lenders. They must also have competent environmental consultants who are experienced with vapor intrusion issues. Although U.S. EPA and IEPA have not yet finalized vapor intrusion regulations and guidance, the myriad of legal and technical issues discussed above are already becoming the new reality for commercial real estate transactions. IEPA will review and approve NFR requests involving vapor intrusion based on the proposed rules, and issues have already come up in transactions. It is important to be well informed about the new reality for commercial real estate transactions when closing your next deal.