Will ‘Forever Chemicals’ Be A Forever Challenge For Commercial Properties? Industry Experts Weigh In

Conducting due diligence to ensure an investment is viable is a key aspect of commercial real estate transactions. 

In a typical real estate transaction, this process may include performing risk assessments, physical inspections and cost analyses. But a primary focus of transactional due diligence — and an increasingly important part of CRE risk analysis — is the evaluation of potential environmental hazards.

A commercial property’s environmental risks may include the likelihood of flooding, the presence of hazardous waste, or improper or malfunctioning waste-storage facilities and diesel generators. And while many of these problems may be addressed and solved, some newly discovered hazards known as emerging contaminants can provide additional complications and considerations. This is the case with a particular class of emerging contaminants that includes perfluoroalkyl and polyfluoroalkyl substances, or PFAS. 

Property investors are now asking what happens when these so-called forever chemicals are detected on-site.

“PFAS are a class of chemicals that have unique properties because PFAS compounds consist of multiple carbon-fluorine bonds, or the strongest chemical bond in nature,” said Dave McCarley, principal environmental scientist at RPS, a Tetra Tech company. “Because of these strong chemical bonds, PFAS compounds don't break down naturally and persist in soils and groundwater, which is why they have been called forever chemicals.”

RPS is a global professional services firm that works across a variety of sectors, including property, water, resources, energy, transport, defense and government services. The firm’s contaminated land and remediation team of consultants and engineers helps clients identify and quantify such risks as they relate to CRE transactions.

PFAS compounds developed as fluorinated compounds associated with PTFE, or Teflon, and their unique chemistry led to a number of uses from waxes and soaps to Scotchgard for stain resistance/waterproofing and aqueous film-forming foam for firefighting. Used by firefighters and the military, PFAS can now be detected on military bases, surrounding properties and other commercial properties across the country, McCarley said. 

As of January 2022, the Environmental Protection Agency proposed to designate these substances hazardous under the Comprehensive Environmental Response, Compensation and Liability Act, known as CERCLA or Superfund, and McCarley said the EPA is expected to finalize CERCLA designation as hazardous substances later this year or early next year.

McCarley said the two main PFAS compounds that the EPA is preparing to regulate — perfluorooctanoic acid, or PFOA, and perfluorooctanesulfonic acid, or PFOS — as hazardous substances under CERCLA have only recently become a recognized issue for CRE. The impending regulation will make for an increased emphasis on state regulations and site restoration and remediation programs, he said. 

The joint, strict and several liability in CERCLA for contamination associated with these forever chemicals will present a number of issues for CRE due to the nearly ubiquitous presence of PFAS. As it stands, environmental site assessments conducted by CRE professionals across the nation as part of transactional due diligence under the most recent ASTM format revision don't require an evaluation of PFAS. 

“CERCLA is the same law that birthed the all appropriate inquiry standard, which got CRE professionals and lenders involved in doing transactional due diligence in the first place,” he said. “The industry began to focus on the potential liabilities associated with having a contaminated property and the potential of banks being implicated as a potentially responsible party, or PRP, with ‘deep pockets’ for a Superfund site if they have to take possession of the property in a foreclosure.”

Michael Wilson, vice president of legacy site services at RPS, added that PFAS can be found across an array of industries, including aerospace, construction, medical equipment manufacturing and automotive plants. But the use of PFAS has become so widespread that it can be found across the nation on any property type, which is a concern because it can have negative effects on human health, including increased risk of cancer, high blood pressure and kidney complications.  

“The major route of PFAS exposure is water, whether that’s lakes, rivers or even rainwater that falls into the soil,” Wilson said. “If you’re thinking of purchasing a property, you want to fully understand and quantify the risk profile related to PFAS so those risks can be managed.”

McCarley said that RPS’ role is to identify the PFAS risks that each property presents and then try to quantify and manage those risks. Depending on the severity of the contamination, this may include everything from removing soil from impacted areas and putting up site restrictions to building indemnification or working with a client on legal structures that insulate a prospective purchaser from being tied into legacy liability. 

“PFAS have the ability to move so quickly in groundwater and are widely distributed in soils,” he said. “Trying to find out where they’re coming from can get complicated very quickly. RPS’ engineers and consultants help clients understand the business risks associated with such transactions and configure the appropriate strategies to adequately manage those risks.”

In addition to the environmental and human health-related impacts of PFAS, there can also be implications for due diligence, financing and insurance of commercial properties — that is, of course, as soon as the EPA designates PFAS as a hazardous substance, he said. States across the country, by and large, haven't yet developed regulations covering PFAS remediation. 

Regardless of future PFAS regulations, CRE transactions will be inevitably altered to include the evaluation of PFAS and its subsequent impacts, McCarley said.

“The latest revision of ASTM standards for Phase 1 ESAs did not require PFAS assessment because it was largely developed before the USEPA determination of PFAS regulations under CERCLA and the National Primary Drinking Water Regulation maximum contaminant level, or MCL, for PFAS,” he said. “Consideration of PFAS for assessment as a potential Recognized Environmental Concern, or REC, was optional in this latest version. They will likely be revising the standard to include PFAS assessment as a requirement in the near future.”

Wilson added that investing in properties that are contaminated with PFAS may not be feasible for some. If these sites become eligible for the limitation of liability offered by federal and state brownfield programs in the future due to PFAS contamination, however, some developers and investors may find it financially beneficial. Brownfield programs may even act as a future liability shield, he said.

“A lot of investors and developers are sitting on the sidelines trying to figure out how to get their arms around this risk,” he said. “With PFAS expected to be classified as hazardous as soon as next year, regulatory structure will provide the industry with a clearer understanding of how to approach such deals. Some may even qualify for tax credits and limited liability under the federal or state brownfield programs, improving our environment and communities while providing a meaningful way to bracket the environmental risk associated with these compounds.” 

This article was produced in collaboration between RPS, a Tetra Tech company, and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.