The federal government is aggressively cracking down on “forever chemicals.”

Under a new rule effective July 8, 2024, the Environmental Protection Agency (EPA) has officially listed certain types of polyfluoroalkyl substances (PFAS) as “hazardous substances” under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

This changes the game for property owners, buyers, and lenders. PFAS is now considered within scope for environmental reviews, and all parties must ensure proper due diligence is conducted to mitigate any potential liability caused by the presence of these stubborn and highly toxic chemicals.

What are PFAS?

PFAS is a class of 15,000 substances known as “forever chemicals” for their resistance to environmental degradation as well as a tendency to accumulate in the bodies of wildlife, fish, and humans. Once considered “miracle products,” PFAS have a lengthy and colorful history.

Originally discovered in the 1930s by industrial giants Dupont and 3M, polyfluoroalkyl substances (PFAS) have remarkable stain-, water- and oil-resistant properties. Specific formulations were branded as Teflon^TM, Scotchgard^TM, STAINMASTER®, and other household names, and were widely used in consumer and industrial applications, including non-stick cookware, stain protection for fabrics, fire-fighting foam, and car wash solutions.

Unfortunately, PFAS have over time been linked to a host of health concerns including high cholesterol, lower immune systems, liver damage, infertility, hypertension, cancer, and thyroid disease. Researchers are concerned by the presence of PFAS in consumer products, as a 2021 study found PFAS in 100% of breast milk samples tested. Another study found that 97% of U.S. adults have traces of PFAS in their bloodstream.

Although banned from production in the U.S. since 2015, PFAS can still be found in many products, and contamination is an ongoing concern. A rash of industrial accidents in recent years, such as the June 2019 malfunction of a fire suppression system at Connecticut’s Bradley Airport that released 20,000 gallons of firefighting foam into the Farmington River, have led to increased calls for federal and state regulation of these dangerous chemicals. This interactive map, using data from the Environmental Protection Agency and other public sources, shows the locations of nearly 42,000 industrial and municipal sites across the country that are known or suspected manufacturers, users, or dischargers of PFAS.

EPA Takes Action

The EPA under the Biden Administration has been moving toward a more aggressive stance on PFAS.

In October 2021, EPA Administrator Michael S. Regan laid out a “PFAS Strategic Roadmap” that outlined the agency’s long-term plans to regulate the entire PFAS lifecycle. The agency’s three-pronged approach is focused on research into the effects of PFAS exposure and toxicity on human health and the environment, restriction of PFAS entering the air, land, and water “at levels that can adversely impact human health and the environment,” and remediation of existing PFAS contamination.

Following this blueprint, the EPA in late 2023 published a proposal designating two types of PFAS, perfluorooctanoic acid (PFOA) and perfluorooctane sulfonic acid (PFOS), as “hazardous substances” under CERCLA. On April 19, 2024, the EPA signed the final rule, which establishes enforceable limits on these forever chemicals, effective July 8, 2024. Of note, the EPA has ruled that there is no safe level for PFOA and PFOS in drinking water and soil.

The EPA will now require municipal water systems to monitor for five separate PFAS substances, inform the public of their findings, and proactively reduce levels that exceed the new limits. According to the agency, this rule will reduce exposure for approximately 100 million people, preventing thousands of deaths and tens of thousands of illnesses from exposure to these toxic chemicals.

ASTM Standards Address PFAS

As the EPA has taken decisive action regarding PFAS over the past few years, ASTM International has enhanced its own standards addressing these forever chemicals.

ASTM D8535, released in late 2023, provides a testing standard for identifying PFAS in soil using solvent extraction, filtering, and liquid chromatography tandem mass spectrometry. Additionally, the organization established ASTM D8560, a standard for identifying the presence of PFAS in indoor air, and ASTM D7979, a method of testing for 21 different PFAS in non-potable water sources.

Most critically for lenders, the latest ASTM Phase I ESA Standard, released late in 2021 and approved by the EPA in December 2022, recognizes the emerging danger and potential litigation associated with contaminants such as PFAS. Although PFAS were listed previously under “Non-Scope Considerations,” now that the EPA has recognized PFOS and PFOA as hazardous substances under CERCLA, ASTM E1527-21 requires the potential presence of these contaminants to be evaluated as part of the Phase I environmental review.

States Take Center Stage

While the EPA takes action on PFAS at the national level, states are not sitting back. According to Safer States, a national alliance of environmental health organizations, 34 states have introduced more than 300 policies addressing PFAS, and 28 states have PFAS laws and regulations on their books.

Eleven states, mostly in the Northeast, have established drinking water standards for PFAS, including Maximum Contaminant Levels (MCLs). Another 12 states have adopted guidance levels, notification levels, and/or health advisories for certain PFAS. In addition, as of April 2024, 30 State Attorneys General have filed lawsuits against PFAS manufacturers, citing contamination of water supplies and other environmental resources.

What Lenders Should Do Now

Prior to July 8, 2024, potential PFAS contamination of a subject property was considered a Business Environmental Risk (BER). Now, following the implementation of the EPA’s new rule, PFAS impacts will be considered a Recognized Environmental Condition (REC) if known or likely to impact the property.

PFAS contamination represents a rapidly evolving area of environmental risk. Commercial real estate lenders should closely monitor all regulatory and legislative developments in their regions, and make sure to keep PFAS on their radar screens for all new and existing deals.

Specifically, we recommend the following steps:

• Know the regulations: As PFAS regulations are in a state of flux, make sure you understand all requirements in your jurisdiction and keep an eye on changes to local, state and federal environmental laws related to PFAS and water contamination.
• Consider specialized insurance coverage: Depending on the situation, obtaining Secured Creditor Environmental Insurance may be advisable. Such policies are designed to cover the lesser of the outstanding loan balance or cost of remediation, and/or protect against third-party claims of damage in the event of both loan default and property contamination.
• Consider requiring environmental indemnification: Another way to hedge against possible liability if the property is considered high risk for contamination is by including an Environmental Indemnification clause in your loan closing documents. Consult with an experienced real estate attorney to craft appropriate language to best protect your interests as the lender.
• Avoid taking over management of the collateral: Under CERCLA, secured creditor liability is triggered generally by an event of default, and when the lender takes over active management of the property, either during the term of the loan or following foreclosure. As the lender, it is best to put the onus on the borrower to demonstrate full environmental compliance, rather than getting deep into the day-to-day operations.
• Conduct proper environmental due diligence: It goes without saying, but as the lender you are responsible for ensuring a comprehensive, independent environmental review is performed on all real estate collateral prior to closing. The level of review varies based on the type of collateral, size of the loan, and associated risks, but make sure that all required PFAS contamination assessments are included. Now that the EPA has recognized PFOS and PFOA as hazardous substances, their presence at a subject property is considered a REC and should be included in the Phase I scope of review.

If the possibility of PFAS contamination is established during the Phase I and it’s determined that a Phase II ESA is needed, lenders can expect the process to take longer and cost more than in the past. The expected turnaround for lab analysis is lengthier, so lenders should take this into account for prospective CRE deals.

The rapidly changing landscape of PFAS regulatory compliance reinforces the importance of maintaining a comprehensive environmental risk management program at your institution. For resource-strapped financial institutions, it is often a challenge to stay on top of the latest guidance from the EPA, ASTM International, state agencies, the SBA, and bank and credit union regulators, among others.

Partnering with a trusted, experienced third-party risk management firm can help ease this burden. ORMS is dedicated to helping lenders effectively and efficiently manage their environmental risks, allowing them to do what they do best: focus on their borrowers, portfolio growth, and the pursuit of new business opportunities. When you’re ready to learn more, reach out to your Risk Management Experts at info@orms.com.

Please note the information contained in this article should not be construed as legal advice. Lenders should consult with their risk management professional to determine the level of environmental due diligence required for each individual project.