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Ropes & Gray attorneys provide timely analysis on legal developments, court decisions and changes in legislation and regulations.
Pete Scherer: Hello, my name is Pete Scherer, a counsel here with Ropes & Gray’s commercial real estate investments and transactions practice. I’ve gathered my colleagues Peter Alpert, head of our environmental law practice, and Cory Steinberg, a member of our real estate investments and transactions practice with a background in environmental law, to help me, and hopefully, you, understand the implications of recent federal environmental regulations addressing per- and polyfluorinated substances, or “PFAS.” Peter, what am I talking about?
Peter Alpert: In your own roundabout way, you are referring to the final listing of two PFAS compounds—specifically, PFOS and PFOA—as “hazardous substances” under the Comprehensive Environmental Response Compensation and Liability Act, more commonly known as “CERCLA.” We have been waiting for U.S. EPA to do this since it announced its intentions to list certain PFAS for regulation under CERCLA back in 2021.
Pete Scherer: What does that mean both generally and for the real estate investing community?
Peter Alpert: It’s a big question, and one we can’t tackle meaningfully without first explaining what it means legally and practically for a chemical to be recognized as a “hazardous substance” under CERCLA.
Pete Scherer: Before we go there, Cory, can you explain what the listed compounds are and why they are singled out for listing by the EPA?
Cory Steinberg: Taking a step back, it’s worth noting that more than 20,000 PFAS molecules have been invented by industrial science and used in a huge variety of consumer products—from anything from cookware to firefighting foam. While we are not chemists or toxicologists, we can confidently say that EPA has focused its attention on PFOS and PFOA, at least initially, because these “heavy” molecules are believed to be two of the most dangerous forms of PFAS from a human health perspective.
Peter Alpert: And by “heavy,” what Cory means is these PFAS molecules have eight carbon atoms attached to them rather than, say, six or a lower number—as you have fewer carbons, you’ve got a lighter molecule. Again, as Cory said, we’re not toxicologists, but our consultant friends tell us that for lighter molecules, the science has not yet reached a consensus as to whether they cause harm to human health. Currently, the lighter molecules are not the target of much regulation, although that may vary a little bit in the states—we’ll talk about that later. For now, at the federal level, it’s just PFOS and PFOA that are in play under CERCLA—this could change as we go through time and better understand the health impacts of other types of PFAS. But rather than get hung up today on what types of PFAS are now listed under CERCLA, and what types might be listed in the future, we want to explain what it means for any PFAS to be listed under CERCLA for the first time, and why I think it’s open to us to argue both sides of the question as to whether this is a big event for the real estate industry or not.
Cory Steinberg: It really means that the federal government can, for the first time, require a person or an entity who has legal responsibility under CERCLA for soil or groundwater contamination by hazardous substances to remediate PFAS in the environment or contribute to the cost of that remediation. It also means that if a private party remediates PFAS contamination, that private party may be able to recover its costs from other people or entities that are legally responsible under CERCLA for that release of PFAS.
Pete Scherer: Thanks, Cory. Can you remind me and our listeners who is legally responsible for remediation expenses under CERCLA, as a baseline question?
Cory Steinberg: CERCLA imposes liability on a few classes of responsible parties—namely, former owners of contaminated land, former operators of contaminated land, persons who arranged for hazardous substances to be released on land, transporters of hazardous substances to contaminated land, and, most importantly for this discussion, the current owner or current operator of any land that’s contaminated.
Pete Scherer: Those categories of responsible parties are familiar to me from typical real estate due diligence, but that begs a question, in my eyes, at least—those parties have been responsible parties since CERCLA was first promulgated. What’s new now that PFOS and PFOA have been listed as hazardous substances?
Peter Alpert: What’s new is that PFAS contamination is considered a form of environmental harm actionable under CERCLA—that was never before the case. Until recently, you could acquire land, own and sell land contaminated by PFAS without fear of incurring CERCLA liability or of PFAS becoming an issue for your transaction when you try to sell or finance the property. You also could sell PFAS-contaminated land without fear of any trailing liabilities, say, from a future owner who cleaned it up and sent you the bill. CERCLA didn’t recognize this as a class of chemical or substance that could be the source of liability, and now that has changed.
Cory Steinberg: Yes, that’s right—and not only is this the first time that PFAS could result in CERCLA liability, but the way that the federal government made this happen was unusual. This is the first time in our experience that EPA has added a new chemical to the CERCLA “hazardous substance” list, and they did so directly under CERCLA rather than deferring to pollutant listing and regulating mechanisms of other federal regulatory programs, such as the Clean Water Act—that’s how we would typically expect a “new” contaminant to get added under the reach of CERCLA.
Peter Alpert: And making this even more unusual, Cory, we can’t forget the chemical they listed—which is used in so many industrial and consumer applications, like you discussed earlier—is literally everywhere. It’s in our bodies, it’s in the environment, it’s everywhere—it would be nearly impossible to purchase or do due diligence on any parcel of land in the United States that is not contaminated to some degree by PFAS.
Pete Scherer: Now that we’ve depressed all of our listeners and they’re having nightmares about the third horseman of the apocalypse in the form of PFOS and PFOA, how do we practically view this new regulation? It has to be the case that there’s a practical way for real estate investors to assess and evaluate this PFAS risk in a commercial way. The net result of this new listing can’t be that nobody should buy property in the United States, and nobody can sell property in the United States, because there’s this specter of “Superfund” liability for a ubiquitous contaminant that’s everywhere.
Cory Steinberg: Yes, and we’ve been thinking about how to process the practical impacts of the CERCLA listing for some time. We’ve developed a framework on how to approach PFAS diligence—this draws on the wisdom of risk-based remediation standards, which are prevalent across the environmental community. Specifically, we start with the proposition that not all PFAS contamination creates the same risk to human health or the environment, and in turn, not all PFAS contamination has the same potential to result in CERCLA liability. Our view is that a prospective purchaser or investor in real property should focus on three basic factors in deciding whether a known or suspected PFAS contamination condition is truly a potential source of material CERCLA liability for the landowner—these factors are “Source, Concentration, and Receptor.”
Pete Scherer: That sounds impressive and thoughtful, but I have a more basic question, which is: Shouldn’t I just be able to treat PFAS like any other hazardous substance, order a Phase I, and then claim BFPP status if I’m the purchaser of real estate from after today?
Peter Alpert: Pete, elaborate on that point and what you mean by “BFPP status.”
Pete Scherer: I’m referring to the safe harbor in CERCLA for “bona fide prospective purchasers”—these are individuals or entities that complete a Phase I environmental assessment prior to acquiring real property. If they do so, they have no liability for pre-existing contamination under CERCLA, and I would assume that PFAS is treated the same way as other hazardous substances, or is that wrong?
Peter Alpert: No, I think there’s no distinction in the applicability of the BFPP defense to PFAS or other forms of contamination, so the BFPP defense is theoretically available. But you know, Pete, we have never been that cavalier about relying on BFPP status as the only protection against liability, and we certainly won’t be when it comes to PFAS contamination. First, one reason for that is the BFPP status can be lost quickly after purchase through any alleged failure by you, as the new owner, to take “appropriate care” to prevent the exacerbation of or exposure to the contamination that you inherited. Second, in many states, there’s no such thing as a BFPP-type defense—there’s no diligence-based defense in some jurisdictions—and many of those same states have their own CERCLA-type statutes that create liability for current owners. And many of those same states that don’t recognize the diligence-based defense have been at the vanguard of PFAS regulation at the state level. So, for these reasons, we always recommend assessing the substantive risks created by soil or groundwater contamination and view BFPP status as a “nice thing to have”—you can check that box, but you can’t rely on it—and it’s by no means adequate by itself as a protection against the liability we’re talking about.
I want to turn back to our construct, Cory, “Source, Concentration, and Receptor,” which, by the way, can be easily remembered through the acronym “SCR” or “Seriously Concerning Regulations.” Cory, explain what we mean first by “Source.”
Cory Steinberg: Sure, but I’ll take a step back and just explain for a second the process for doing this analysis. First step is no different than any other real estate diligence exercise on the environmental front and that starts with commissioning a Phase I, which is probably already on every sophisticated real estate investor’s due diligence checklist. We then apply the “SCR” analysis only in those cases where the Phase I identifies known or suspected PFAS contamination on the targeted property.
Pete Scherer: Cory, let me stop you there—I thought that you guys had said that PFAS are ubiquitous. Does that mean that this is a new analytical framework, this “SCR,” that we’re going to have to go through for every single real estate transaction from here on out or is there some way to discern the wheat from the chaff?
Cory Steinberg: It will depend on the environmental consultant you use. The better ones have already become sophisticated in filtering out the “background” PFAS issues, from more concerning property-specific PFAS issues when they’re drafting their Phase I reports. But many consulting firms have really, until now—until this CERCLA listing—taken the position that PFAS evaluation is not relevant and out of scope for a Phase I assessment.
Peter Alpert: Right—well, they can’t do that anymore. All the consulting firms are going to have to deal with PFAS now under the ASTM standard—that’s the American Society for Testing and Materials—they set the standard for doing Phase I assessments. Now that we have the federal listing, that’s another implication, which is consultants writing Phase I assessments can no longer hide behind the absence of any federal listing for PFAS as a reason to ignore PFAS entirely. Some consultants might still take the position that PFAS other than those that were listed—that’s PFOS and PFOA—remain “out of scope” under the ASTM standard, but I think the good ones certainly are going to have a broader vision and are going to include the potential for release of or contamination by PFAS other than the two listed compounds. Moreover, we have states that are regulating other compounds, and I think the federal government, at some point, is going to get around to listing more compounds. So, I think a good Phase I now is prepared by a consultant who’s prepared to address PFAS contamination, filter wheat from chaff, as you said, Pete, and separate all the noise or distinguish the sites that are just impacted in that ubiquitous fashion from the ones that really need to be studied as a potential source of significant liability. We think that in the market for sophisticated environmental diligence reports, you’re going to see thoughtful treatment from the good consultants of PFAS as a potential source of liability, and if not, as lawyers, that’s our job to push back on a report that doesn’t address the issue appropriately.
Cory Steinberg: Taking a step back to “Source,” the first in our “SCR”—the “Source” question goes to how PFAS was released at the subject property. The most problematic releases from an owner or an investor’s perspective, are going to be releases that are attributable to manufacturing PFAS on the property, or the routine use, either intentionally or unintentionally, of PFAS in some manufacturing process that took place on the property. The EPA itself, in an enforcement guidance document that it issued alongside the PFAS listing, said that PFAS manufacturing or usage sites would be the most likely to be targeted for CERCLA investigation and cleanup. This guidance supports our analysis that there’s a low likelihood that the CERCLA listing will lead to real, out-of-pocket liability for the owners of properties where PFAS were released by mechanisms that were not systemic or intentional, such as transport by water or air from other facilities, or, for example, as a result of a small fire that was extinguished with a PFAS-containing foam.
Peter Alpert: It’s important, Cory, to stress that EPA’s enforcement guidance is just guidance—it’s not enforceable, but it does send a strong and useful signal to the regulated community about who the federal government will be targeting for CERCLA liability at PFAS sites. EPA has done this before—they did it years ago for tenants of contaminated property—they issued a guidance document about the practical non-liability of tenants of contaminated property. Ultimately, Congress got around to amending CERCLA a decade later to recognize the immunity of certain tenants, and it may be that as we go through time, the statute might be amended to reflect some of the principles in the EPA’s guidance document—one can hope. I personally would be a fan of immunizing the owners of land that were affected by a firefighting effort using aqueous firefighting foam that contains PFAS, editorializing.
I want to get back to our construct. The next factor in the framework, Cory, is “Concentration.” Pete, what I mean by that is how much PFAS is there in soil, groundwater, surface water, or other environmental media at the property that you’re studying. If these concentrations are “low,” then the condition is not likely to result in significant liability—that’s a logical point, but one that needs to be made.
Pete Scherer: Peter, is that an illusory point? I’ve read in the trade press that regulators are requiring cleanup of concentrations as low as five or 10 parts per trillion. It seems that “low” is effectively “zero” in this case.
Peter Alpert: Yes, it’s true that “low concentration” in the context of PFAS means “absurdly low,” and that’s because we’re familiar with most other environmental contaminants, say, metals and petroleum, are measured and deemed risky in the part per million or, in many cases, the part per billion range—we don’t usually think about these things in terms of parts per trillion, but we have to with PFAS. Still, it’s measurable—the laboratories can do this—there’s a measurable floor for PFAS below which it is unlikely that any remedial action will be required. And by the way, when we see “low” concentrations, we probably don’t have one of those problematic “Sources” that Cory described. So, “Source” and “Concentration” go a bit hand in hand. Furthermore, there are many types of PFAS that, no matter the concentration, are not now, and not foreseeably, considered to be toxic or the subject of any remedial requirements, so this question about “what type of PFAS” is part of the “Concentration” analysis.
Cory, could you please explain what we mean by the last element of the analysis, which is “Receptor”?
Cory Steinberg: Sure, so by this we mean who or what is affected by the PFAS condition. Regulators are most concerned about PFAS releases that pose a threat to public or private drinking water supplies—the water in private or public supply wells—or PFAS releases that are causing harm to fish or wildlife in a water body or wetland. In the absence of what we call a “sensitive receptor,” like a drinking water well or a biodiverse wetland, even a significant PFAS release from an industrial operation may not be concerning in a way that affects the financial underwriting of an investment in a property.
Pete Scherer: Cory, interestingly, at least to me, you didn’t include in your “Receptor” list people in the buildings on the PFAS-impacted land. Was that intentional or are there concerns that PFAS, like some other contaminants, could create a risk, if it’s in the soils, to the occupants inside a building?
Cory Steinberg: That’s a great question, Pete. The science is really still developing on whether or not PFAS in soil or groundwater under or a near a building could affect the health of the building, but PFAS in soil and groundwater are not currently considered to be a threat to indoor air quality through volatilizing and being breathed in through the air. Based on the best available information, when we do a “Receptor” analysis, we’re not focusing on vapor intrusion as a pathway, but we’re definitely keeping our eyes open, reading, talking to our best consultant colleagues, and keeping tabs on scientific literature on this subject. We’re really focusing on “Receptor,” we’re focusing on public health through drinking and physical contact, and through wildlife impact of the people or habitat that are on or beyond the boundary of the property.
Peter Alpert: Not to say, Pete, that we couldn’t imagine being involved in a transaction where, let’s say, we’re trying to sell a property and we’re on the sell-side creating a narrative about the PFAS contamination on the property, and we’re not seeing any sensitive receptors who are tangibly affected by the release condition, and we have a counterparty, a buyer, who raises an issue, such as vapor intrusion or something else that we don’t necessarily agree with, with respect to risk. We do rely, in that context, primarily on a good consultant on our team to have a sophisticated discussion, a mature discussion, with the counterparty’s consultant about calibrating our concern from a “Source, Concentration, and Receptor” level. As lawyers, we defer that discussion primarily to technical people, but these are early days and we can expect some counterparties to be excessively conservative when we’re on the sell-side, and when we’re on the buy-side, we can expect sellers to be maybe excessively cavalier about this. But we know how to think about these things because we’ve been thinking about PFAS risk and associated regulatory risk for quite some time now—we didn’t just start considering this with the federal listing a few weeks ago.
Pete Scherer: That’s an interesting point. As an aside, it’ll be interesting to see in the market whether we see some of our clients viewing a degree of conservatism on the part of lenders or other market participants as an opportunity to take advantage of the regulatory and scientific uncertainty to secure some good assets that some are fearful of, but which fear is not backed up by scientifically supported evidence.
Peter Alpert: Yes, I think that’s the value we can add is there will be people running for the hills, and that’s not going to be us or our clients because, hopefully, we have a rational view, and we can take advantage of that when there may be excessive conservatism from other people. Every case is going to be different, though—I can’t predict how an “SCR” analysis will play out at any given property. Sometimes the property is being acquired not as a going concern but as a redevelopment site. If you have PFAS in the ground, it doesn’t matter really what the “Source” was, the “Concentration,” or the “Receptor,” as you may have to address it, manage it, and remediate it when you redevelop the property. But in the standard case, going concern or developed property, “SCR,” I think is an appropriate framework for calibrating our concern about PFAS risk and liability at the federal level. So, again, the focus in that analysis is on how the PFAS was released, what the resulting level of contamination is, and what harm the release is causing. This will help us, I think, to separate the vast majority of properties where the federal listing is not consequential from the very few properties where it might be.
Pete Scherer: That’s really helpful and I think a good framework, Peter. This podcast is timely based on the recent federal listing. How should the investing community view properties located in states that are requiring PFAS contamination to be cleaned up? What happens, for example, if we applied the “SCR” analysis from a CERCLA perspective and there’s a benign result where we’re in one of these more PFAS-progressive states, could there be an additional level of analysis that an investor or a lender needs to undertake to understand the risks associated with a given site?
Peter Alpert: I don’t really think so. First of all, I’ve said we’ve honed this analysis through the work we’ve already been doing in those PFAS-progressive states. I think the framework applies conceptually at the federal or the state level. If a state regulates PFAS contamination, then, for starters, you can’t be comfortable—I want to remind you of this—that just having a Phase I will protect you from the liability as a BFPP, and the Phase I should instead be used to thoughtfully assess any state-specific factors or differences that may affect the liability analysis in addition to “Source, Concentration, and Receptor.” But I think “Source, Concentration, and Receptor” are the starting point in all the states as well, but we may go beyond that—we’re going to have to know state law and have a consultant who’s well-versed in state law. There may be some states that require a landowner to take action to prevent the migration of PFAS beyond the property, even if currently the condition is not posing a risk to offsite receptors. And there may be some states where you have enforcement policies—the state agency is targeting entities for liabilities under state law in a way that is more aggressive or broader than what EPA has articulated at the federal level. So, I’m not poo-pooing state differences, but I think the framework works pretty much everywhere because we developed it in the states.
Cory Steinberg: It’s also important to keep in mind that a lot of states have not listed any PFAS under their state Superfund laws, or even have state Superfund laws to begin with. In those states, the chief concern is whether the two federally listed compounds are present on a given property at levels that might cause the federal government to intervene. But in these PFAS-progressive states—meaning those that have state Superfund laws and have been using them for some time now to tackle PFAS (such as New York, New Jersey, Massachusetts, California, and Wisconsin)—the risk presented by PFAS from an investor’s perspective is much higher because those states tend to regulate more than just the two federally listed compounds, PFOA and PFOS, and they have a much lower bar for designating a site for cleanup in the first place. It’s generally the case that a contaminated property is much more likely to be put on a state “site” list than to be put on the National Priorities List, which is the federal Superfund list.
Pete Scherer: To pause you there, Cory, and take a quick step back, remind me what would cause the federal government to intervene or for a property to be added to a state’s “site” list. Isn’t there also a marketability and financeability risk to take into account when diligencing a property for PFAS?
Peter Alpert: I think, Pete, you may have asked two different questions. Let me tackle the first one, which is how a contaminated property becomes the subject of federal rather than state cleanup liability and oversight. For the recent federal listing of the two PFAS compounds to have real impact on the current owner or operator of a site, the federal EPA has to designate the land in question for inclusion on the federal Superfund list—that’s the National Priorities List that Cory just mentioned. There are exceptions, but generally, it’s a high bar for a contaminated property to make the federal Superfund list. EPA has to go through an elaborate process—looks like a rulemaking process with notice and public comments—and they have to study and rank the site for factors, such as the implications of the site on public health. One factor in EPA’s analysis might be whether the state government in that jurisdiction is capable of overseeing the remediation of the property and motivated to do so. Most contaminated “sites” in the United States are within the jurisdiction of the relevant state’s land cleanup program and are never considered seriously for inclusion on the federal Superfund list. One thing that mitigates the pain for the real estate industry of the federal listing is the unlikelihood that most land would ever make the federal Superfund list in the first place. What was your second question, Pete?
Pete Scherer: It was how does PFAS contamination affect the marketability or financeability of the property? As you just said, it seems like the risk of any one site being added to the National Priorities List is low, but is that the end of the analysis?
Peter Alpert: No—just because we don’t expect the target property to hit the National Priorities List, it’s not the end of the analysis. And that’s not going to be standing alone, that’s not going to be adequate comfort for your lender if you’re trying to finance the acquisition, or your buyer if you’re trying to sell the property. These are early days, of course—this will be a difficult process of education for lenders, buyers, and other participants in our transactions. They may be overly alarmed by the federal listing—we talked earlier about an excessively conservative reaction to this development. But our framework, we think, is defensible, rational, conservative, and it’s also easily explained as an appropriate and commercial way to measure PFAS risk for all stakeholders in a transaction. And many of these market participants have already been sensitized and educated about the issues that we’re talking about, as these issues have played out for several years now in the laboratories of those PFAS-progressive states. I think this brings us full circle to the point that the federal listing of the two compounds is both a big event and a non-event. It is a big event for properties with significant PFAS contamination that are near sensitive receptors and are located in states that have not previously regulated in this area. It may be a minor event in those PFAS-progressive states that have been forcing PFAS investigation and remediation for some time now.
Pete Scherer: That’s the situation now, but over a short period of time, might additional states become “PFAS-progressive” or could additional PFAS compounds be added to the CERCLA hazardous substances, or is there material risk of EPA becoming more aggressive in its enforcement guidance? I would think that from an investor’s perspective, you would be concerned in having to think about these future potential developments.
Peter Alpert: We don’t mean to suggest here we’ve landed on the definitive framework and it’s static—we invented this thing and we’re going to use it—it has to be very fluid. For the real estate sector, this is perhaps the most dynamic and potentially impactful environmental regulatory development in recent memory, other than climate, which is not a regulatory development—it’s a phenomenon, which real estate investors have to be very sensitive to how it affects the asset, the holding of the asset, and the sale of the asset—but PFAS ranks up there with climate in that category. The differences are these regulations are going to be changing continuously. There may be states that don’t regulate now that come into the fold—we’ve seen already that there are states that don’t have contaminated land programs for PFAS but are trying to get PFAS out of consumer products. So, this is not necessarily a red state/blue state kind of thing—this is happening everywhere on some level, so we do need to be watchful. But for now, this is the recommended approach, focusing on “Source, Concentration, and Receptor,” and we think that this framework will be durable even as the list of states changes, and the list of compounds changes and expands.
Cory Steinberg: That’s all the time that we have for today, but, of course, I know I speak on behalf of all of us when I say that we’re happy to field any questions that any listeners may have, and folks should feel free to reach out to any of their usual Ropes & Gray contacts if they have questions about these emerging environmental issues. Thank you so much for listening. If you enjoyed today’s discussion, please subscribe and listen to this series on Apple or Spotify. And thank you again so much for listening.