ECONOMIC IMPACT ANALYSIS FOR THE PROPOSED ALL APPROPRIATE INQUIRIES REGULATION Prepared for Office of Brownfields Cleanup and Redevelopment US Environmental Protection Agency By ICF Consulting August 3, 2004 This page intentionally left blank TABLE OF CONTENTS EXECUTIVE SUMMARY................................................................................................. ES 1 CHAPTER 1: Introduction .................................................................................................. 1 1 1.1 Liability Under the Comprehensive Environmental Response Compensation and Liability Act ( CERCLA) ...................................................................................................... 1 1 1.1.1 CERCLA, Prior to January 2002....................................................................... 1 1 1.1.2 Small Business Liability Relief and Brownfields Revitalization Act ................. 1 1 1.1.3 Role of " All Appropriate Inquiries" .................................................................. 1 2 1.2 Need for the Proposed Action................................................................................... 1 3 1.3 Regulatory Negotiation as a Rule Making Process .................................................... 1 4 1.3.1 Overview.......................................................................................................... 1 4 1.3.2 The Negotiated Rulemaking for Establishing All Appropriate Inquiries Standards .............................................................................................................................. 1 5 1.4 The Interim Standard for All Appropriate Inquiries .................................................. 1 7 1.5 Analytical Requirements........................................................................................... 1 7 1.6 Organization of This Document ................................................................................ 1 8 CHAPTER 2: Market Effects of the Proposed Rule; Net Social Costs and Benefits ......... 2 1 CHAPTER 3: Affected Sectors of the Economy.................................................................. 3 1 3.1 Affected Entities....................................................................................................... 3 1 3.2 Profile of Firms Providing Phase I Environmental Site Assessments......................... 3 1 3.2.1 Size and Geographic Distribution...................................................................... 3 2 3.2.2 Current Practices............................................................................................... 3 3 CHAPTER 4: All Appropriate Inquiries Regulation .......................................................... 4 1 4.1 The AAI Regulation ................................................................................................. 4 1 4.2 Considered Options .................................................................................................. 4 8 4.2.1 Option 1: Environmental Professional............................................................... 4 8 4.2.2 Option 2: Interview Requirement ...................................................................... 4 9 4.2.3 Option 3: Sampling........................................................................................... 4 9 4.2.4 Use of the ASTM E1527 2000.......................................................................... 4 9 CHAPTER 5: Analytical Approach to Estimating Costs and Benefits............................... 5 1 5.1 Base Case for the EIA .............................................................................................. 5 2 5.2 Timeframe................................................................................................................ 5 2 5.3 Estimated Transactions per Year............................................................................... 5 2 5.4 Projection of Number of Phase I ESAs in the Base Case........................................... 5 3 5.5 Projected Changes in Assessments with the Regulation ............................................ 5 3 5.5.1 Projection of Number of Phase I ESAs.............................................................. 5 3 5.5.2 Projected Number of Transaction Screens Transitioning to Phase I ESAs ......... 5 4 5.6 Estimation of Unit Costs........................................................................................... 5 4 5.6.1 Environmental Site Assessment Activities under Base Case.............................. 5 4 5.6.2 Estimates of Hours per Action ........................................................................ 5 13 5.6.3 Identification of Labor Categories for Actions and Labor Distribution ............ 5 13 5.6.4 Estimates of Other Direct Costs ...................................................................... 5 15 5.6.5 AAI Unit Costs ............................................................................................... 5 16 5.7 The AAI Options .................................................................................................... 5 24 5.7.1 Considered Option 1  Environmental Professional ......................................... 5 24 5.7.2 Considered Option 2  Interview Requirement ................................................ 5 25 5.7.3 Considered Option 3  Sampling ..................................................................... 5 25 CHAPTER 6: Analytical Approach to Estimating Benefits................................................ 6 1 6.1 Benefits After Promulgation ..................................................................................... 6 1 6.2 Interim Period........................................................................................................... 6 4 6.3 Benefits from the Cleanup and Redevelopment of Brownfields ................................ 6 4 CHAPTER 7: Data Collection.............................................................................................. 7 1 7.1 Source for the Annual Number of ESAs ................................................................... 7 1 7.1.1 Environmental Data Resources, Inc................................................................... 7 1 7.2 Distribution of Properties by Size ............................................................................. 7 1 7.3 Unit costs ................................................................................................................. 7 2 7.3.1 Estimates of Hour Burden................................................................................. 7 2 7.3.2 Estimates of Other Direct Costs ........................................................................ 7 6 7.3.3 Incremental Cost   AAI Regulation .................................................................. 7 6 7.3.4 Incremental Cost   Considered Option 3 ........................................................... 7 9 7.3.5 Estimates of Hourly Labor Costs..................................................................... 7 10 CHAPTER 8: Estimates of Costs ......................................................................................... 8 1 8.1 Base Case Estimates ................................................................................................. 8 1 8.1.1 Phase I ESA...................................................................................................... 8 1 8.1.2 Transaction Screen............................................................................................ 8 2 8.1.3 Total Cost ......................................................................................................... 8 3 8.2 Estimates under the Proposed AAI Regulation.......................................................... 8 4 8.2.1 Hour Burden for Conducting Interviews at Abandoned Sites............................. 8 5 8.2.2 Phase I ESA Cost.............................................................................................. 8 6 8.2.3 Total Cost ......................................................................................................... 8 8 8.3 Estimates under Considered Option 1   Environmental Professional ........................ 8 9 8.4 Estimates under Considered Option 2   Interview Requirement.............................. 8 11 8.5 Estimates under Considered Option 3   Limited Sampling .................................... 8 13 8.6 Estimates associated with the use of the ASTM E1527 2000 standard .................... 8 15 8.7 Summary of Annual Cost Estimates....................................................................... 8 16 CHAPTER 9: Sensitivity Analyses....................................................................................... 9 1 9.2 Sensitivity Analysis 2  Volume of Transaction Screens Transitioning to Phase I ESAs ...................................................................................................................................... 9 3 9.3 Sensitivity Analysis 3   Variability in Property Transactions.................................... 9 4 CHAPTER 10: Small Entity Analysis ................................................................................ 10 1 10.1 Affected Industries ................................................................................................. 10 1 10.2 Definition of Small Firms ....................................................................................... 10 1 10.3 Size Distribution and Number of Small Firms......................................................... 10 2 10.4 Cost Impact on Small Firms ................................................................................... 10 5 10.5 Cost Impact on Small Governmental Jurisdictions .................................................. 10 6 10.5.1 Number of Small Governmental Jurisdictions ................................................. 10 6 10.5.2 Number of Potentially Affected Small Governmental Jurisdictions ................. 10 7 10.5.3 Cost Impact on Small Governmental Jurisdictions .......................................... 10 8 10.6 Cost Impact on Small Not for Profit Organizations ................................................ 10 9 BIBLIOGRAPHY...................................................................................................................... i Appendix I: Proposed AAI Regulation ................................................................................ I 1 Appendix II: Summary of Main Differences between the AAI Standard and ASTM E1527 2000........................................................................................................................................ II 1 Appendix III: Unit Cost Estimates for the AAI Regulatory Option 3 ............................. III 1 Appendix IV: EDR's Methodology for Estimating the Volume of ESAs......................... IV 1 Appendix V: Volatility in Property Transactions................................................................ V 1 LIST OF EXHIBITS ES 1: Summary of Incremental Per Assessment Cost Estimates............................................ ES 4 ES 2: Summary of Annual Cost Estimates ( in millions), Discounted at Three Percent .......... ES 5 ES 3: Summary of Annual Cost Estimates ( in millions), Discounted at Seven Percent .......... ES 5 Exhibit 3 1: Number of Phase I ESAs Conducted Annually and the Average Pricing Nationally, 1997 2002........................................................................................................................ 3 3 Exhibit 4 1: Summary of the Statutory Requirements............................................................... 4 8 Exhibit 5 1: Distribution of Labor, by Labor Category........................................................... 5 15 Exhibit 5 2: The AAI Regulatory Requirements and the Phase I ESA Activities .................... 5 17 Exhibit 5 3: The Expected Changes in Phase I ESA Activities under the AAI Regulation ...... 5 18 Exhibit 5 4: Distribution of Labor, by Labor Category under an Alternative AAI Regulatory Option............................................................................................................................ 5 24 Exhibit 7 1: Property Distribution by Type .............................................................................. 7 1 Exhibit 7 2: Property Distribution by Size................................................................................ 7 2 Exhibit 7 3: ASTM E1527 2000 ( Base Case)  Estimated Level of Effort in Hours, by Activity and Property Size/ Type .................................................................................................... 7 3 Exhibit 7 4: Distribution of Labor Hours, by Labor Category ( under ASTM E1527 2000)....... 7 4 Exhibit 7 5: Transaction Screen ( Base Case)  Estimated Level of Effort in Hours, by Activity and Property Size/ Type .................................................................................................... 7 5 Exhibit 7 6: ASTM E1527 2000 ( Base Case)   Estimated Other Direct Costs.......................... 7 6 Exhibit 7 7: Incremental Labor Hour Burden under AAI Regulation  Properties Transitioning from ASTM E1527 2000 ................................................................................................. 7 6 Exhibit 7 8: Incremental Labor Hour Burden under AAI Regulation  Properties Transitioning from Transaction Screen................................................................................................... 7 8 Exhibit 7 9: Sampling Incremental Costs ................................................................................. 7 9 Exhibit 7 10: Unit Labor Cost, by Labor Category................................................................. 7 10 Exhibit 8 1: ASTM E1527 2000 ( Base Case)  Estimated Unit Cost ........................................ 8 2 Exhibit 8 2: Transaction Screen ( Base Case)  Estimated Unit Cost ......................................... 8 3 Exhibit 8 3: ASTM E1527 2000 ( Base Case)  Estimated Total Cost ....................................... 8 4 Exhibit 8 4: AAI Regulation  Estimated Unit Cost ( Upper Bound) ......................................... 8 6 Exhibit 8 5: AAI Regulation  Estimated Unit Cost ( Lower Bound) ......................................... 8 7 Exhibit 8 6: AAI Regulation  Estimated Total Cost ( Upper Bound) ........................................ 8 8 Exhibit 8 7: AAI Regulation  Estimated Total Cost ( Lower Bound)........................................ 8 9 Exhibit 8 8: Considered Option 1  Estimated Unit Cost ........................................................ 8 10 Exhibit 8 9: Considered Option 1  Estimated Total Cost ....................................................... 8 11 Exhibit 8 10: Considered Option 2  Estimated Unit Cost ...................................................... 8 12 Exhibit 8 11: Considered Option 2  Estimated Total Cost ..................................................... 8 13 Exhibit 8 12: Considered Option 3  Estimated Unit Cost ...................................................... 8 13 Exhibit 8 13: Considered Option 3  Estimated Total Cost ..................................................... 8 14 Exhibit 8 14: Option Using ASTM E1527 2000 Estimated Total Cost.................................. 8 16 Exhibit 8 15: Summary of Annual Cost Estimates ( in millions), Discounted at Three Percent8 16 Exhibit 8 16: Summary of Annual Cost Estimates ( in millions), Discounted at Seven Percent8 17 Exhibit 9 1: Annual Cost Estimates ( in millions)   Volume of Phase I ESAs in 2004............... 9 2 Exhibit 9 2: Annual Cost Estimates ( in millions)   Volume of Transaction Screens Transitioning to Phase I ESAs................................................................................................................ 9 3 Exhibit 9 3: Annual Cost Estimates ( in millions)   Lower and Upper Bound Estimates ........... 9 5 Exhibit 10 1: Small Business Administration's Size Standard for Small Businesses by NAICS ....................................................................................................................................... 10 1 Exhibit 10 2: Distribution of Firms by Size, in Year 2001...................................................... 10 3 Exhibit 10 3: Disribution of Establishments by Firm Size, in Year 2001 ................................ 10 3 Exhibit 10 4: Distribution of Governmental Jurisdictions, by Population Size Group ( 1996) .10 7 Exhibit 10 5: Distribution of Municipal and Township Annual Revenues .............................. 10 8 EIA for the AAI Regulation ES 1 EXECUTIVE SUMMARY Background of the Regulation On January 11, 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act ( the Brownfields Amendments). The Brownfields Amendments increased funding for assessing and cleaning up brownfields sites, clarified CERCLA liability protections for certain landowners, and enhanced State and Tribal response programs.

The Brownfields Amendments require EPA to develop regulations establishing standards and practices for how to conduct " all appropriate inquiries" and promulgate the standards within two years of its enactment. All appropriate inquiries provide for assessing the previous ownership, uses and environmental conditions of a property. The Brownfields Amendments require that any person purchasing commercial property who may want to claim liability protection for any release or threatened release as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser conduct all appropriate inquiries prior to acquiring the property. In addition, grantees conducting assessments with Federal brownfields grants must conduct the assessments in accordance with the all appropriate inquiries standards.

EPA determined that the regulatory negotiation process was the best way to develop the proposed Federal standards and practices for conducting all appropriate inquiries and established the Negotiated Rulemaking Committee for All Appropriate Inquiries. The Committee, composed of 25 members representing parties with an interest in the rulemaking, held six multiple day meetings over the course of seven months, beginning in April 2003. The Committee arrived at a consensus document representing its recommendation for a proposed regulation on November 14, 2003. It is this regulatory language that represents the preferred Agency option in the analysis presented in this document.

Methodology Our first step in assessing the regulatory impacts of the proposed regulation was establishing a baseline to represent the relevant aspects to the commercial real estate market in the absence of any changes in regulations. Because under existing conditions almost all transactions concerning commercial properties are accompanied by either an environmental site assessment ( ESA) conducted in accordance with a protocol established by the American Society of Testing and Materials, designated ASTM E1527 2000 or a transaction screen as specified in ASTM E1528, these practices were assumed to continue even in the absence of the all appropriate inquiries regulation. The numbers of each type of assessment were estimated on the basis of industry data for recent years, with recent growth rates in transactions assumed to continue for the 10 year period covered by the Economic Impact Analysis ( EIA). An adjustment in the relative numbers of the ESAs and transaction screens was made to account for the fact that, under the proposed regulation, an ESA will provide more certain protection from liability. This adjustment was made by comparing shifts between the two procedures that occurred when the Brownfields Amendments established the ASTM E1527 2000 standard as the interim standard for all EIA for the AAI Regulation ES 2 appropriate inquiries. We then considered the requirements included in the recommendation of the Negotiated Rulemaking Committee and those included in a few options that the committee considered but did not adopt and compared each alternative option to the requirements for assessments conducted under ASTM E1527 2000 and ASTM E1528. We also compared the cost of each of these alternatives to the costs associated with promulgating the current interim standard ( i. e., the current ASTM E1527 2000 standard). When compared to the baseline, the All Appropriate Inquiries ( AAI) regulation generally follows current practice, but is expected to result in less time spent on interviews for those cases where the subject property is abandoned; increased time spent documenting recorded environmental cleanup liens; increased time spent documenting cases in which the purchase price of the subject property is below the market price; and increased time for recording the degree of obviousness of contamination. The three options that were considered but not adopted would require: ( 1) all non clerical work to be performed by an environmental professional; ( 2) no interviews with owner/ occupants of neighboring properties; ( 3) limited soil or water sampling. We also compare the costs of these options to the to the costs associated with using the ASTM E1527 2000 standard.

To estimate the changes in costs resulting from the regulation or the regulatory options, we developed a costing model. This model estimates the total costs of conducting site assessments as the product of costs per assessment, numbers of assessments per year, and the number of years in the analysis.

The costs per assessment, in turn, are calculated by separating each assessment into individual labor activities, estimating the labor time associated with each labor activity, and assigning a perhour labor cost to each activity. Labor times and categories are assumed to depend on the size and type of property being assessed, with the nationwide distribution of properties based on data from industry on environmental site assessments and brownfields sites. The estimates and assignments of categories are made based on the experience of professionals who have been involved in large numbers of site assessments, and who are therefore skilled in cost estimation for the relevant activities. Other costs, such as reproduction and the purchase of data, are added to the labor costs to form the estimates of total costs per assessment.

These total costs per assessment, stratified by size and type of property, are then multiplied by estimated numbers of assessments of each size and type to generate our estimates of total annual costs. The model was tested by comparing its results to industry wide estimates of average costs of conducting assessments under baseline conditions, and found to agree quite well.

We used the model to estimate total costs per year under the proposed regulation, and each option. The differences between these estimated costs and the estimated costs in the baseline constituted our estimates of the incremental regulatory costs.

The types of benefits considered included improved information about environmental conditions as well as benefits from the cleanup of brownfields such as increased numbers of cleanups, reduced use of greenfields, and attendant commuting, congestion, and mobile source emissions. The benefits of the proposed regulation are considered only qualitatively, however, due to the difficulty of predicting how many additional transactions may occur in response to the increased certainty of liability protections provided by the proposed regulation, as well as the difficulty in EIA for the AAI Regulation ES 3 getting data on changes in behaviors and practices in response to the availability of the liability protections. Also, it is difficult to estimate what proportion of identified benefits may be the direct result of the liability protections and the proposed regulation and what proportion of the identified benefits may be the result of the overall brownfields program. EPA expects that the new liability protections afforded to prospective property owners, if they comply with the all appropriate inquiries provisions, will result in increased benefits. EPA is not able to quantify, with any significant level of confidence, the exact proportion of the benefits attributed only to the availability of the liability protections and the AAI regulation. For these reasons, the costs and benefits could not be directly compared.

Summary of the Regulatory Cost Estimates For a given property, the costs of compliance with the proposed regulation relative to the baseline depend on whether that property would have been assessed, in absence of the AAI regulation, with an ASTM E1527 2000 assessment process or with a simpler transaction screen ( ASTM E1528). The Exhibit ES 1 shows that the average incremental costs of the proposed regulation relative to conducting an ASTM E1527 2000 are estimated to be between $ 41 and $ 47. For the small percentage of cases for which a transaction screen would have been preferred to the ASTM E1527 2000 in the base case, but which now would require an assessment in compliance with the proposed regulation, the incremental costs are estimated to be between $ 1,448 and $ 1,454.

The three regulatory options considered by the Negotiated Rulemaking Committee, but not recommended, would result in higher incremental costs from the base case. Option 1, which would require more of the tasks in the all appropriate inquiries to be performed by an environmental professional, would add an average of $ 539 per assessment ( or approximatly $ 1,946 per property, assuming a transition from a transaction screen). Option 2, which would have the same interview requirement as under the base case, would add an average of $ 54 per assessment ( or $ 1,460 per property, assuming a transition from a transaction screen), which reflects costs associated with complying with other provisions of the proposed rule. Option 3, which would require the all appropriate inquiries to include limited sampling and analysis, would result in average incremental costs of either $ 1,439 or $ 2,845, depending on whether, under base case conditions, an ASTM E1527 2000 process or a transaction screen ( ASTM E1528) would have been used. The alternative of using the ASTM E1527 2000 standard as the federal regulation would result in lower costs. We note, however, that for reasons explained in the preamble to the proposed rule, EPA has found that the ASTM E1527 2000 standard does not address all ten statutory criteria and is inconsistent with the statutory requirements for all appropriate inquiries. The incremental per assessment costs are summarized in Exhibit ES 1. EIA for the AAI Regulation ES 4 ES 1: Summary of Incremental Per Assessment Cost Estimates Average Incremental Cost Relative to Phase I ESA under ASTM E1527 2000 ( 97% of transactions) Average Incremental Cost for Transition from Transaction Screen ( under ASTM E1528) ( 3% of transactions) Proposed AAI Regulation $ 41  $ 47 $ 1,448  $ 1,454 AAI Option 1   Environmental Professional Only $ 539 $ 1,946 AAI Option 2   Unchanged Interview Requirement $ 54 $ 1,460 AAI Option 3   Limited Sampling $ 1,439 $ 2,845 ASTM E1527 2000 $ 0 $ 1,407 Source: ICF Analysis.

The total annualized costs of the proposed regulation and the four additional options considered, in total and relative to the base case, are shown in Exhibits ES 2 and ES 3. The total costs were calculated over a period of ten years from the start of 2004 and then annualized at a three and seven percent discount rate. When a discount rate of three percent is used, the estimated total annual costs for the options considered by the Negotiated Rulemaking Committee range from just under $ 700 million to over $ 1 billion per year, compared to the baseline costs of $ 663.8 million and the costs associated with using the ASTM E1527 2000 of over $ 677 million. The proposed regulation adds between $ 26 and $ 28 million per year ( the range occurs because we modeled the distribution of abandoned and non abandoned properties as a range, see Chapter 5), while the incremental costs associated with the options range from $ 30 million to almost $ 460 million per year. The incremental cost of using the ASTM E1527 2000 standard is over $ 13 million. When a discount rate of seven percent is used, the estimated total annual costs for the options considered by the Negotiated Rulemaking Committee range from $ 710 million to over $ 1 billion per year, compared to the baseline costs of $ 683.5 million and the costs associated with using the current ASTM standard of over $ 697 million. The proposed regulation adds between $ 27 and $ 29 million per year, while the incremental costs association with the options range from $ 31 million to over $ 470 million per year. The incremental cost for the alternative of using the ASTM standard is close to $ 14 million. EIA for the AAI Regulation ES 5 ES 2: Summary of Annual Cost Estimates ( in millions), Discounted at Three Percent Base Case Proposed AAI1 AAI Option 1 AAI Option 2 AAI Option 3 ASTM E1527 2000 Total Annual Cost $ 663.8 $ 690.1  $ 691.9 $ 844.0 $ 693.9 $ 1,122.0 $ 677.3 Incremental Total Annual Cost Relative to the Base Case $ 0 $ 26.3  $ 28 $ 180.2 $ 30.0 $ 458.1 $ 13.5 ES 3: Summary of Annual Cost Estimates ( in millions), Discounted at Seven Percent Base Case Proposed AAI AAI Option 1 AAI Option 2 AAI Option 3 ASTM E1527 2000 Total Annual Cost $ 683.5 $ 710.5  $ 712.3 $ 868.9 $ 714.4 $ 1,155.0 $ 697.3 Incremental Total Annual Cost Relative to the Base Case $ 0 $ 27  $ 28.8 $ 185.4 $ 30.8 $ 471.5 $ 13.8 Source: ICF Analysis.

As shown in Exhibit ES 3, the estimated total annual cost of the proposed AAI regulation, calculated using a discount rate of seven percent, would be between $ 710.5 and $ 712.3 million and the estimated total annual incremental cost would be between $ 27 and $ 29 million. Thus, we estimated that the proposed regulation would have an incremental annual effect on the economy of less than $ 100 million per year.

Small Entity Analysis Since all non residential property transactions could be affected by the proposed AAI regulation, large numbers of small entities could be affected to some degree. Our analysis shows that the effects, on the whole, would be insignificant for small entities. For the majority of small entities the cost of conducting an environmental site assessment would increase, on average, between $ 41 and $ 47 under the proposed regulation. For the small percentage of cases for which a transaction screen would have been preferred to the ASTM E1527 2000 in the baseline, but which now would require an assessment in compliance with the proposed regulation, the cost of conducting an environmental site assessment would increase, on average, between $ 1,448 and 1,454. When we annualized the incremental cost of $ 47 per property transaction over ten years at a seven percent discount rate, we estimated that for the majority of small entities the average 1 Throughout this document the costs for the proposed AAI rule are shown as a range. This is because we modeled the distribution of abandoned and non abandoned properties as a range. As explained in Chapter 5, the percentage of property transactions involving abandoned properties is an important variable to our cost estimates. Given that data on abandoned properties are scarce, we modeled the distribution of abandoned and non abandoned properties as a range, using two independent sources of information. EIA for the AAI Regulation ES 6 annual cost increase per establishment per property transaction would be approximatly $ 7. For the small percentage of entities transitioning from transaction screens to Phase I ESAs, the average annual cost increase per establishment per property transaction would be approximatly $ 207. Thus, the cost impacts to small entities are estimated to be insignificant. EIA for the AAI Regulation 1 1 CHAPTER 1: Introduction 1.1 Liability Under the Comprehensive Environmental Response Compensation and Liability Act ( CERCLA)

1.1.1 CERCLA, Prior to January 2002 An essential step in real property transactions is evaluating a property for potential environmental contamination and assessing potential liability for any contamination present at the property. The process for assessing properties for the presence of environmental contamination often is referred to as " environmental due diligence," or " environmental site assessment." Under the Comprehensive Environmental Response Compensation and Liability Act ( CERCLA) or Superfund, this process is referred to as " all appropriate inquiries."

Under CERCLA, private parties and public entities can be held strictly liable for cleaning up contamination at properties that they either own or operate. In addition, parties may be assigned liability under CERCLA when they are found to have caused or contributed to the contamination of a property. Any person or party owning a property on which hazardous substances came to be located could be found potentially liable for any releases of such hazardous substances under Section 107( a)( 1) of CERCLA, even where the owner had no participation in the handling of the hazardous substances and took no action to exacerbate the release. Strict liability under CERCLA means liability for environmental contamination can be assigned based solely on property ownership.

In 1986, Congress amended CERCLA with the Superfund Amendments and Revitalization Act ( SARA). In particular, SARA amended the liability provisions of CERCLA by allowing for an " innocent landowner" defense. The new Section 101( 35)( B) of CERCLA provided some landowners with a defense from the strict liability provisions of CERCLA for those persons who could establish that they did not know and " had no reason to know" that any hazardous substance that is the subject of a release or threatened release was disposed of on, in, or at the property. Such persons, to demonstrate they did not know and had " no reason to know" must have undertaken, at the time of acquisition of the property, " all appropriate inquiries" into the previous ownership and uses of the property consistent with good commercial or customary practice. As a result, the conduct of all appropriate inquiries became part of many commercial property transactions.

1.1.2 Small Business Liability Relief and Brownfields Revitalization Act On January 11, 2002, President Bush signed into law the Small Business Liability Relief and Brownfields Revitalization Act ( the Brownfields Amendments). The Law amended CERCLA by providing EPA with the authority to provide funding to eligible entities for the assessment and cleanup of brownfields sites, clarifying CERCLA liability provisions for certain landowners, and providing funding authority to enhance State and Tribal voluntary clean up and response programs. Subtitle B of Title II of the Brownfields Amendments revised the liability provisions EIA for the AAI Regulation 1 2 of CERCLA Section 101( 35) by clarifying the requirements necessary to establish the innocent landowner defense under CERCLA. In addition, the Brownfields Amendments amended CERCLA by providing additional liability protections on Superfund liability for purchasers of properties who could qualify as bona fide prospective purchasers and contiguous property owners. For the first time since the enactment of CERCLA in 1980, a person could buy property with the knowledge of contamination on the property, without being held potentially liable for the cleanup of the contamination, provided the person complies with each of the provisions governing the liability defense in the law. Among the requirements added to CERCLA, as part of the liability protection for bona fide prospective purchasers and contiguous landowners, is the requirement that such persons undertake " all appropriate inquiries" into prior ownership and use of a property at the time at which a party acquires the property.

The Brownfields Amendments require EPA to develop regulations establishing standards and practices for how to conduct all appropriate inquiries and promulgate the standards within two years of its enactment. Congress included in the Brownfields Amendments a list of criteria that the Agency must address in the regulations establishing standards and practices for conducting all appropriate inquiries ( § 101( 35)( 2)( B)( ii) of CERCLA). The Brownfields Amendments also require parties receiving funding under the Federal brownfields program for the conduct of site characterizations and assessments to conduct the site characterizations and assessments in accordance with the standards and practices for all appropriate inquiries established under the same provision of CERCLA.

1.1.3 Role of " All Appropriate Inquiries"

" All appropriate inquiries," or environmental site assessment standards provide a framework or process for assessing commercial property for the presence or potential presence of a release or threatened release of a hazardous substance at, on, or to a property for which a party could be found potentially liable under CERCLA. Congress has established that it is essential for any person purchasing commercial property who may want to claim liability protection for any release or threatened release as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser to conduct all appropriate inquiries prior to acquiring the property. All appropriate inquiries must be conducted for the purposes of either establishing that the purchaser did not know and " had no reason to know" of contamination at the property, or in the case of the bona fide prospective purchaser, the purchaser bought the property with knowledge of the contamination and is not responsible for the contamination. Failure to perform all appropriate inquiries defeats each of the landowner liability protections.

In addition to conducting all appropriate inquiries prior to acquiring a property, the statute requires that a person claiming to qualify as a bona fide prospective purchaser or contiguous property owner must prove that he or she is not potentially liable or affiliated with any other person who is potentially liable for response costs. The statute, as amended by the Brownfields Amendments, also imposes other continuing obligations that landowners must meet to claim the CERCLA liability protections. These continuing obligations include complying with land use restrictions and institutional controls; taking reasonable steps with respect to hazardous substance releases; providing full cooperation, and providing assistance and access to persons that are authorized to conduct response actions or natural resource restoration; complying with EIA for the AAI Regulation 1 3 CERCLA information requests and administrative subpoenas; and complying with legally required notices.

1.2 Need for the Proposed Action Prior to the enactment of the Small Business Liability Relief and Brownfields Revitalization Act ( the " Brownfields Amendments"), anyone purchasing a contaminated property, regardless of whether the purchaser caused or contributed to the contamination, could be held responsible under CERCLA for the contamination and associated damages. Therefore, many otherwise attractively located properties remained abandoned and potentially contaminated, while other uncontaminated properties or " greenfields" were purchased for development. The development of " greenfields" often translates into additional infrastructure and municipal services costs for already financially strapped cities and towns. Additionally, the continued existence of abandoned properties within municipal limits contributes to blight.

To address this problem, Congress included in the Brownfields Amendments to CERCLA, provisions providing for liability protection for Bona Fide Prospective Purchasers. To encourage the purchase and redevelopment of contaminated and potentially contaminated properties ( e. g., brownfields sites), Congress for the first time provided liability protection for purchasers who buy properties with the knowledge that the property is contaminated. Congress included within this provision several criteria for ensuring that a purchaser buys a contaminated property with adequate knowledge of potential contamination and ensuring that the property owner does not exacerbate the environmental conditions at the property after the purchase. One criterion established by Congress for obtaining the CERCLA liability protections is that prospective purchasers must conduct all appropriate inquiries into the previous owners and uses of a property to identify potential contamination prior to purchasing the property. Congress also mandated that EPA develop regulations setting federal standards for the conduct of all appropriate inquiries.

The all appropriate inquiries proposed rule presented and analyzed in this economic impacts analysis responds to the Congressional mandate. EPA was granted discretion in defining all appropriate inquiries, but this discretion was limited by a mandate to address a set of ten criteria, specified in the statute. In addition, it contributes to addressing the problem of brownfields and other contaminated properties remaining idle, abandoned, and potentially contaminated because of the disincentives attached to these properties due to the strict, joint, and several liability provisions of CERCLA.

EPA notes that the problem to be addressed by the AAI rule represents a market failure due to asymmetric information which impedes the functioning of private market based solutions and makes government interventions more appropriate. Asymmetric information is a feature of real estate transactions for properties that may be contaminated; because buyers have much less information than sellers about potential clean up liabilities, and because it is both costly to collect information and difficult for buyers to be sure how much information is necessary to determine their liabilities, properties will tend to be less valuable to potential buyers than to their current owners. EIA for the AAI Regulation 1 4 The reason a federal response is most appropriate in this case is that the risk of liability under a federal statute ( CERCLA) is an important component of the increased risk as perceived by prospective purchasers. Because only the federal government can define the actions that qualify for exemption from CERCLA, interventions at other levels of government would be ineffective at addressing the problem.

1.3 Regulatory Negotiation as a Rule Making Process 1.3.1 Overview Negotiated rulemaking is a process in which a proposed rule is developed by a committee, established under the provisions of the Federal Advisory Committee Act ( FACA) and the Negotiated Rulemaking Act ( NRA), and composed of representatives of interests that may be significantly affected by the rule. Decisions are made by consensus, which generally require concurrence among all interests represented on the committee. The process is started by the Agency's careful identification of the interests potentially affected by the rulemaking under consideration. To help in this identification process, the Agency publishes a notice in the Federal Register, which identifies a preliminary list of interests and requests public comment on that list. Following receipt of the comments, the Agency establishes a Federal advisory committee representing these various interests to negotiate a consensus on the terms of a proposed rule. The Agency is a member of the committee representing the Federal government's own set of interests. The negotiated rulemaking advisory committee is facilitated by a trained mediator, who facilitates the negotiation process. The role of this mediator, or facilitator, is to apply proven consensus building techniques to the advisory committee setting. Using a trained mediator to facilitate the process assists all potential parties, including EPA, to identify their interests in the rule and be able to reevaluate previously stated positions on issues involved in the rulemaking effort.

Negotiation allows interested and affected parties to discuss possible approaches to various issues rather than only asking them to respond to details on an Agency proposal. The negotiation process involves a mutual education of the parties by each other on the practical concerns about the impact of such approaches. Each committee member participates in resolving the interests and concerns of other members, rather than leaving it up to EPA to bridge different points of view.

A key principle of negotiated rulemaking is that agreement is by consensus of all the interests. Thus, no one interest or group of interests is able to control the process. The Negotiated Rulemaking Act defines consensus as the unanimous concurrence among interests represented on a negotiated rulemaking committee, unless the committee itself unanimously agrees to use a different definition.

Once a regulatory negotiation advisory committee reaches consensus on the provisions of a proposed rule, the Agency, consistent with its legal obligations, uses such consensus as the basis of its proposed rule, to be published in the Federal Register. This provides the required public notice and allows for a public comment period. Other interested parties not represented on the EIA for the AAI Regulation 1 5 committee retain their rights to comment, participate in an informal hearing ( if requested) and judicial review.

1.3.2 The Negotiated Rulemaking for Establishing All Appropriate Inquiries Standards EPA determined that the regulatory negotiation process was the best way to develop the proposed Federal standards and practices for conducting all appropriate inquiries after initiating a convening process to identify appropriate stakeholder groups and solicit advice and input from experienced public and private sector users of all appropriate inquiries standards. We retained an experienced facilitator to contact stakeholders that could potentially be affected by the all appropriate inquiries regulation to determine whether or not stakeholders were interested in participating in a negotiated rulemaking process and determine the potential for stakeholder issues to be successfully addressed through a regulatory negotiation. Following an evaluation of stakeholder interest and input during the convening process, EPA determined that there was sufficient enthusiasm among stakeholders for a negotiated rulemaking process and almost all stakeholders interviewed expressed a belief that potential issues and differences between interested parties could be successfully addressed and negotiated through the regulatory negotiation process.

The negotiated rulemaking process allowed EPA to obtain a diverse array of input from both private sector stakeholders and state and tribal program officials familiar with and experienced in implementing currently available processes for conducting all appropriate inquiries. By building upon currently available private sector standards for undertaking all appropriate inquiries as well as building on the experience of state and Federal government site assessment programs the Agency could efficiently develop Federal regulatory standards that both meet the criteria provided in the Brownfields Amendments and ensure minimal disruption to the private market and state and Federal site assessment programs.

The Negotiated Rulemaking Committee for All Appropriate Inquiries was formed and operated in full compliance with the requirements of the Federal Advisory Committee ( FACA) and in a manner consistent with the requirements of the Negotiated Rulemaking Act ( NRA). The Agency conducted the negotiated rulemaking proceedings with particular attention to ensuring full and adequate representation of those interests that may be significantly affected by the regulations that will set standards for conducting all appropriate inquiries. Section 562 of the NRA defines the term " interest" as " with respect to an issue or matter multiple parties which have a similar point of view or which are likely to be affected in a similar manner."

The Negotiated Rulemaking Committee for All Appropriate Inquiries was composed of 25 members representing parties with an interest in the rulemaking. EPA monitored committee membership carefully throughout the process to ensure that there was a balanced representation from affected and interested stakeholder groups. The committee included representatives from the following types of interest groups:

  Environmental Interest Groups   Environment Justice Community   Federal Government EIA for the AAI Regulation 1 6   Tribal Government   State Government   Local Government   Real Estate Developers   Bankers and Lenders   Environmental Professionals.

Membership on the committee consisted of individuals representing the following organizations:

  Trust for Public Land   National Groundwater Association   American Society of Civil Engineers   International Council of Shopping Centers   International Municipal Lawyers Association   Mortgage Bankers of America   National Brownfields Association   Association of State and Territorial Solid Waste Management Officials   Environmental Defense   Partnership for Sustainable Brownfields Redevelopment   Gila River Indian Community   Cherokee Nation   Wasatch Environmental, Inc.   ASFE   EPA   West Harlem Environmental Action   National Association of Home Builders   National Association of Development Organizations   The Real Estate Roundtable   Center for Public Environmental Oversight   US Conference of Mayors   Environmental Bankers Association   National Association of Industrial and Office Properties   National Association of Local Government Environmental Professionals   US Public Interest Research Group. 2 The Negotiated Rulemaking Committee on All Appropriate Inquiries held six multiple day meetings over the course of seven months, beginning in April 2003. The Committee arrived at a consensus document representing its recommendation for a proposed regulation on November 14, 2003. All 25 members of the Committee participated in the development of the document and came to consensus without dissent. Appendix I to this document contains the Committee's 2 EPA notes that after all members of the Negotiated Rulemaking Committee reached consensus on November 14, 2003 and such consensus was confirmed by all Committee members through approval of the final meeting summary, US PIRG submitted a letter, dated December 19, 2003, notifying EPA that it wished to withdraw from the Committee. EIA for the AAI Regulation 1 7 recommended regulatory language. It is this regulatory language that represents the preferred Agency option in the analysis presented in this document.

EPA notes that in responding to the statutory mandate included in the Brownfields Amendments, the Agency determined that the existing ASTM E1527 97 and ASTM E1527 2000 standards do not address all of the ten required criteria outlined in the Brownfields Amendments. As a result, use of the ASTM standards would be inconsistent with applicable law and would not adequately serve EPA's needs in promulgating the all appropriate inquiries regulation. In the preamble for this proposed rule, EPA has requested public comment on this determination.

EPA's proposed all appropriate inquiry regulation adopts the consensus language agreed to by the Negotiated Rulemaking Committee, which translated the ten criteria required by the Brownfields Amendments into a performance based regulatory standard. This EIA compares the costs and other practical differences between the current site assessment practices, which predominantly employ the interim ASTM standard, and the projected site assessment practices once AAI is promulgated.

1.4 The Interim Standard for All Appropriate Inquiries In the Brownfields Amendments, Congress established, as the Federal interim standard for conducting all appropriate inquiries, the procedures of the American Society for Testing and Materials ( ASTM) including Standard E1527 97 ( entitled " Standard Practice for Environmental Site Assessment: Phase 1 Environmental Site Assessment Process"). This interim standard applies to properties purchased on or after May 31, 1997 until EPA promulgates Federal regulations establishing standards and practices for conducting all appropriate inquiries.

On May 9, 2003, EPA promulgated a final rule clarifying the interim standard for all appropriate inquiries and establishing that, in the case of property purchased on or after May 31, 1997, the requirements for conducting " all appropriate inquiries," including the conduct of such activities to qualify as a bona fide prospective purchaser and to establish an innocent landowner defense under CERCLA, can be satisfied through the use of ASTM Standard E1527 2000 ( as well as the E1527 97 standard), entitled " Standard Practice for Environmental Site Assessment: Phase 1 Environmental Site Assessment Process." In addition, the rule clarified that recipients of brownfields site assessment grants will be in compliance with the all appropriate inquiries requirements if they comply with either the ASTM Standard E1527 97, or the ASTM E1527 2000 Standard.

1.5 Analytical Requirements Executive Order 12866 ( EO 12866) " Regulatory Planning and Review," issued on September 30, 1993 by President Clinton, requires a cost/ benefit analysis for all regulatory actions determined to be " significant." The proposed rules can be considered significant on the basis of their likely impact on the US economy, which may impose, under some regulatory options, annual economic impacts in excess of the $ 100 million threshold set for significant regulatory actions. The executive order requires a statement of the need for the proposed action, consideration of alternatives, and analyses of costs in comparison to benefits. Separately, the Regulatory EIA for the AAI Regulation 1 8 Flexibility Act ( RFA), ( Pub. L. No. 96 354, 94 Stat. 1164 ( codified at 5 U. S. C. § 601)) enacted in September 1980, and amended by the Small Business Regulatory Enforcement Fairness Act ( SBREFA), Pub. L. No. 104 121, 110 Stat. 857 ( codified at 5 U. S. C. § 601 et seq.) enacted in March 1996, requires agencies to consider the impact of their regulatory proposals on small entities, consider ways to cut impacts on small entity impacts through effective alternatives, and provide for public comment on the analyses. 3 These acts require the preparation of an Initial Regulatory Flexibility Analysis ( IRFA) for proposed rules that might have significant economic impacts on a substantial number of small entities.

1.6 Organization of This Document The remaining of this EIA is organized as follows:   Chapter 2   Market Effects of the Proposed Rule   Chapter 3   Affected Sectors of the Economy   Chapter 4   All Appropriate Inquiries Regulation   Chapter 5   Analytical Approach to Estimating Costs   Chapter 6   Analytical Approach to Estimating Benefits   Chapter 7   Data Collection   Chapter 8   Total and Incremental Cost Estimates   Chapter 9   Sensitivity Analyses   Chapter 10   Small Entity Impacts Analysis   Appendix I   All Appropriate Inquiries Proposed Regulation   Appendix II   Summary of the Main Differences between the All Appropriate Inquiries Standard and the ASTM E1527 2000   Appendix III   Unit Cost Estimates for the Regulatory Option 3   Appendix IV   EDR's Methodology for Estimating the Volume of ESAs   Appendix V   Volatility in Property Transactions.

3 " The Regulatory Flexibility Act: An Implementation Guide for Federal Agencies," The Office of Advocacy, US Small Business Administration, p. 1, November 2002. EIA for the AAI Regulation 2 1 CHAPTER 2: Market Effects of the Proposed Rule; Net Social Costs and Benefits The most straightforward assessment of social costs of a rule can be made by measuring the actual changes in the regulated community's costs of engaging in the same activities as in the base case ( except insofar as the AAI rule requires changes). Ideally, however, we should also measure the other effects of the rule. In particular, the number of commercial property transactions per year could change, and the number of commercial property transactions that include the conduct of an ESA could change. In this section, we lay out what we see as the underlying economics determining commercial real estate transaction volume, and how this could be affected by changes in the costs and benefits of conducting ESAs caused by the AAI rule. We also sketch out what might be an ideal analysis, incorporating the induced changes in the commercial real estate market and the effects on social costs and benefits. We show, however, that this ideal analysis is unlikely to contribute substantially to the estimate of the social costs. In addition, we discuss the data constraints that render this ideal analysis to be impractical. Due to the impracticality of undertaking an ideal analysis, we estimated the total cost impacts of the proposed rule using an engineering cost analysis.

The commercial real estate market can be described as a market consisting of a large number of heterogeneous properties. Within this heterogeneous market, brownfields, which are abandoned, idle, or underutilized properties compete for commercial development dollars with other previously undeveloped properties, often referred to as " greenfields." In fact, in a report published by the Council for Urban Economic Development ( CUED), " Brownfields Redevelopment: Performance Evaluation," the authors point out that economic development practitioners attending a 1998 CUED organized workshop stated that brownfields should be treated as a real estate deal: the process is driven by location and market demand. ... contamination merely adds complexity to the process   it does not change the process... ." 4 One of the many costs, or attributes, that contribute to a buyer's preference for one piece of real estate over another is the potential cost of any real or perceived environmental liabilities associated with a property. Liability concerns are greater for brownfields than for greenfields. Other property attributes that may influence a buyer's preferences for a particular piece of real estate are location, and the availability of infrastructure. Brownfields may offer better locations than greenfields and may offer the benefit of existing infrastructure, where greenfields properties may be in less desirable locations and have no existing infrastructure.

To address the problem of environmental liability, Congress included in the Brownfields Amendments to CERCLA, provisions providing for liability protection for Bona Fide Prospective Purchasers. To encourage the purchase and redevelopment of contaminated and potentially contaminated properties ( e. g., brownfields), Congress for the first time provided liability protection for purchasers who buy properties with the knowledge that the property is contaminated, if they conduct all appropriate inquires prior to purchasing a property. Given a relatively constant total demand for commercial real estate properties, reducing liability concerns regarding commercial properties will have a greater effect on the demand for brownfields. This 4 Error! Main Document Only." Brownfields Redevelopment: Performance Evaluation," Council for Urban Economic Development, 1999, P. 10. EIA for the AAI Regulation 2 2 effect would have the impact of shifting consumer preference within the commercial real estate market toward brownfields and away from greenfields. A primary impact of increasing the redevelopment of brownfields is the reduction in urban blight. In fact, the results of a 232 city survey published in a February 2000 report by the U. S. Conference of Mayors, " Recycling America's Land: A National Report on Brownfields Redevelopment," documents that two of the major benefits of brownfields redevelopment are neighborhood revitalization and increased environmental protection.

Based on industry data for the commercial real estate market on the number of Phase I environmental site assessments and transaction screens, and consensus that significant purchases are unlikely to take place without the assurance of an assessment, we have estimated the annual number of affected transactions. The AAI rule changes the net costs of those transactions  increasing average costs by a small amount, and providing increased information and greater certainty of liability protection. These changes in the costs of commercial real estate transactions might change the incentives for buying real estate, resulting in a different number of transactions per year as well as causing changes in consumer preferences for the type of real estate purchased. Changing the rate of transactions, in turn, will cause changes in social welfare through various mechanisms. This concept is illustrated in Exhibit 1 ( below) which shows the rate of commercial property transactions on the horizontal axis, and the costs and benefits of properties on the vertical axis.

The upward sloping line indicates the supply of all commercial properties offered per year as a function of price; at higher prices, more owners will find it in their interests to sell in a given year. The two downward sloping lines show the annual demand for properties, with and without transaction costs. Both the supplies and demands shown here include commercial properties of all kinds, whether previously undeveloped properties (" greenfields") or existing properties that may be contaminated (" brownfields"). Though these two types of properties differ in their characteristics, with brownfields having the advantages of existing infrastructure and often more convenient locations, along with the disadvantage of greater risks of clean up liabilities, they compete within the same market. The solid downward sloping line indicates the demand in the absence of transaction costs, while the lower, dashed line shows how the demand is shifted downward and to the left by transaction costs. Essentially, the transaction costs drive a wedge between buyer and seller   they are costs to the buyer that are not realized by the sellers. The transaction costs can be seen to reduce the total net social value of property transactions, which can be measured as the sum of producer and consumer surplus   the area between the supply and demand curves to the left of their intersection point. The total net social surplus in the absence of transaction costs is shown in the exhibit as the sum of all three shaded areas, from the vertical axis out to the equilibrium point at Q*, above the supply curve and below the demand curve in the absence of transaction costs. Once transaction costs are acknowledged, the demand curve can be seen to shift downward by the magnitude of the transaction costs, and the net social surplus drops to the area shown by the diagonal shading. The transaction rate drops from Q* to Qo ( because there are now fewer transactions that have net benefits exceeding their costs), and the net surplus drops by the checked area ( the transaction costs for the remaining transactions) and the vertically shaded area ( the " deadweight loss" from transactions that are no longer made). EIA for the AAI Regulation 2 3 Cost of Properties Supply of Properties per Year Demand with No Transaction Costs Demand for Properties per Year Qo Q*

Supply of Properties per Year Demand with No Transaction Costs Exhibit 1 Exhibit 2 The effects of changing transaction costs due to the AAI rule can, in theory, be shown as a shift in the dashed line indicating the demand for commercial properties. To the extent the AAI rule increases the costs of ESAs, or induces individuals to choose to conduct a Phase I ESA in place of a less costly transaction screen, we would expect the transaction costs to increase, increasing the difference between the two demand curves shown in the exhibit, and reducing the net social surplus. This shift is shown in Exhibit 2 ( above). With somewhat higher transaction costs, the demand for properties shifts down as shown by the downward sloping line with the alternating long and short dashes. The rate of transactions drops from Qo to Q1 as fewer property sales are worth concluding. As a result, the net social surplus drops by the area consisting of the narrow dotted parallelogram, plus the small black triangle. The dotted parallelogram is equivalent to the EIA for the AAI Regulation 2 4 increase in per transaction costs for conducting ESAs, while the small black triangle represents the dead weight loss resulting from the drop in transactions.

The very small size of the black triangle in this case indicates something important: if the shift in transaction costs is very small compared to the total value of each transaction, then neglecting the deadweight loss resulting from changes in transactions will not have an important effect on the estimate of the net total social costs of the AAI rule. Rather, making an estimate of the rule's costs based on transactions multiplied by the change in the cost per transaction ( i. e., the area of the dotted parallelogram) will be a reasonably accurate measure of the change in social costs. 5 As will be shown, the AAI rule's effects on costs are less than $ 100 per property transaction, on average. By contrast, though it is difficult to measure the average size of a non residential real estate transaction, a rough analysis presented below suggests that it is close to $ 1 million, which is thousands of times greater than $ 100. Thus, if the concern is that the AAI rule may increase the costs of transactions and thereby affect the volume of transactions, it would appear that the drop in transactions is very unlikely to affect the results of the analysis of total social costs significantly.

The costs associated with complying with the AAI rule are not the only manner in which the rule may affect commercial property transactions, however. By improving information about the environmental conditions of a property, and ( especially) by increasing the certainty of CERCLA liability protection, the AAI rule is expected to provide benefits to property purchasers that exceed the increase in costs. The excess of benefits over costs to property purchases is particularly likely in those cases in which full ESAs are conducted in place of transaction screens, because this substitution is voluntary. An additional affect of improved information and the liability protections afforded by the AAI rule may be to change people's preferences for the type of commercial property bought. Although the total number of transactions may not be affected, a greater number of transactions may include brownfields sites, due to the liability protections afforded to buyers who comply with the AAI requirements, rather than the competing " greenfields." A secondary source of net benefits is likely to flow from the improved information provided by the site assessments: to the extent that contamination is detected and cleaned up, there will be reductions in risks and increases in welfare. Of course, there will also be increased costs due to the expenses of cleaning up the affected sites, but because the costs of correcting environmental problems are generally reduced by early detection and the Brownfields Amendments promotes cost effective cleanups, the benefits of the cleanups should exceed their costs. Still more benefits will often result from the increased transactions and cleanups as economic development takes place in previously depressed neighborhoods. These benefits can be " external" to both the buyers and the sellers, accruing to the surrounding communities and the local government, though they can be offset to some degree by external costs imposed by the resulting changes to living conditions in the immediate area. The categories of benefits resulting from the AAI rule and possible increases or shifts in transactions are covered more completely in Chapter 6.

5 If the cost estimate is made by multiplying the change in per transaction cost by current transactions, the estimate will be slightly greater in magnitude than the dotted parallelogram shown in the second exhibit, because the latter is based on a smaller number of transactions. See Exhibit 3 below. EIA for the AAI Regulation 2 5 The shift in demand is illustrated in Exhibit 3, below. The downward shift in demand caused by the AAI rule's effects on transaction costs, which was introduced in Exhibit 2, is shown in Exhibit 3. In addition, though, the exhibit shows an upward shift in demand caused by the liability reduction benefits of the AAI rule, leading to a very small net increase in transactions, from Q0 to Q2. Benefits ( excluding the net external benefits discussed above) are approximately equal to the trapezoid bounded by the lowest and highest demand curves in Exhibit 3, between the origin and Q2, and benefits net of costs are shown as the checked trapezoid lying between the two highest demand curves. The shaded parallelogram between the lower two demand curves represents the costs of the AAI rule as measured for this EIA: it is the per transaction increase in the cost of ESAs times the existing rate of transactions, without trying to account for the effects on transactions of either the costs or the benefits of the rule. It will differ from the " correct" measurement of costs in the absence of benefits by only a small amount   the dotted triangle shown below the supply curve, which will be very small for the reasons outlined above.

Taking benefits into account, and their positive effects on transactions, the true costs of the AAI rule can be shown to be slightly larger than the cost estimate made in this EIA, again because of the differences in transactions. Because the change in transactions is expected to be quite small, though, the differences between the measured costs and the true costs will be insignificant. The only situations in which using existing transaction rates would be an inadequate measure of the change in the social surplus would be if the benefits provided by the AAI rule were substantially greater than their costs   e. g., if AAI's benefits were a substantial fraction of the typical cost of an affected property   or if the rate of commercial real estate transactions were highly elastic, and hence extremely sensitive to small changes in transaction costs. We do not consider either situation to be very likely, but   as discussed in the section below   the data required to confirm this view would be quite difficult to collect. The effects of benefits6 on the theoretically correct measurement of social surpluses can be seen as well in Exhibit 3: the net increase in social welfare can be seen as the increase in the sum of consumer and producer surplus. This increase is shown as the checked area, which is the net increase of benefits over costs. This quantity differs from the quantitative estimate of the effects of the AAI rule prepared for this EIA ( which, again, is represented by the dotted parallelogram) because neither the benefits nor the change in transactions could be quantified. The EIA, therefore, is limited to an engineering estimate of the change in costs per transaction multiplied by baseline transactions.

6 Again, the benefits shown in the diagram exclude the net social benefits that are external to the transactions; those benefits do not affect the demand curve for properties because they accrue to society at large rather than to the purchasers. In theory   and in practice, to the extent allowed by data limitations   they too should be included in the measurement of net social benefits. EIA for the AAI Regulation 2 6 To calculate the directions and magnitudes of the demand shifts and social welfare changes introduced above, we need to understand the determinants of the annual rate of transactions, and how they are affected by the costs of the transactions. We see the rate of transactions of existing properties as determined by the economically efficient time between changes of ownership. At the time a firm purchases a property, it chooses the most preferable property. Over time, changes in the property, and especially the firm's operations ( such as its size or customer base) lead to other properties becoming superior overall. The firm will not necessarily move every time this happens, though, because there are costs for moving. The moving costs are particularly high for properties that must be sold, because of the transaction costs, which can be several percent of the total value of a property. ( Note that, for much the same reason, rental properties turn over much more often than owner occupied houses.) A move will be made only when the value of the current property has declined enough to push the relative advantages of the most attractive other property above the transaction costs. With high transaction costs, the value of the current property must decline substantially, which is likely to take a relatively long time, other things equal. Property Transactions per Year Cost of Properties Supply of Properties per Year Baseline Demand Q1QoQ2 Exhibit 3 Demand Including Costs of AAI Rule: Higher per transaction Cost Demand Including both Costs of AAI Rule and Benefits, Showing Possible Net Increase in Demand Theoretical Increase in Social Surplus Measured Increase in Costs EIA for the AAI Regulation 2 7 With lower transaction costs, the breakeven point will come sooner ( shown by the arrow in Exhibit 4 above), and the expected time before moving will fall. In turn, the turnover rate for existing properties will increase, manifesting itself as an increase in transactions.

Actually collecting data on transaction frequencies, transaction costs, and the elasticity of transaction frequencies with respect to costs, however, is very difficult. A search for data and literature on these issues turned up limited data, accompanied by comments expressing this difficulty. For example, Anderson, McLemore, Conner, and Liang note that " The predictability of [ apartment] demand is due in part to the numerous private, government and governmentrelated sources that collect and report ( or rely) on residential market information. Examples include the United States Census Bureau, [ Department of Housing and Urban Development], [ Federal National Mortgage Association], [ National Multi Housing Council], [ Government National Mortgage Association], [ Federal Home Loan Mortgage Corporation], and the Federal Reserve, just to name a few. With data readily available, household growth can be forecast down to the Metropolitan Statistical Area and even county level. This is in contrast to most other property types, like retail, where the analysis is much more complicated and the quality and availability of data can be limited." 7 One reference was available with a comprehensive estimate of non single family transactions, stating ". . . among core assets such as major office, industrial, retail and multifamily properties, there was an 18% increase in sales volume over 2001 figures to $ 93.5 billion. By including non core assets ( hotels, land, etc.) the total amount of commercial real estate sales volume rose to an estimated $ 200 billion for 2002.8" This reference was not, however, documented as to its source. A few attempts have been made to estimate the total value of all non single family real estate, which can be used along with estimates of total sales to 7 Randy Anderson, Richard McLemore, Philip Conner, and Youguo Liang, " Portfolio Implications of Apartment Investing," Journal of Real Estate Research, vol. 25 ( 2), 2003, pp. 113  131, available at http:// cbeweb 1. fullerton. edu/ finance/ journal/ papers/ pdf/ past/ vol25n02/ 02.113_ 132. pdf. 8 Colliers International Market Report, available at http:// www. colliers. com/ Content/ Repositories/ Base/ Markets / Honolulu/ English/ Market_ Report/ PdFs/ InvestmentReport2002to2003WEB1. pdf Exhibit 4 $ Net advantage of current property over next best alternative ( with low and high transaction costs)

Time before sale of property ( inverse of transaction frequency) EIA for the AAI Regulation 2 8 calculate average transaction frequencies. Hartzell, Pittman, and Downs9 estimated total commercial real estate in 44 MSAs to be worth 1.338 trillion dollars, based on 1989 data, and extrapolated this estimate to 2.429 trillion dollars for the country as a whole. Combining the estimate of total commercial real estate sales volumes from Collier at $ 93.5 to $ 200 billion per year with Hartzell et al.' s estimate of $ 2.429 trillion would imply that four to eight percent of properties turn over per year.

This is only a rough estimate, though, given the differences in the time periods studied and the questions about the definitions of the property types that were included. Furthermore, Hartzell et al. state, in contrast to the ease of determining the value of stocks and bonds, due in part to the public nature of data reported, " For real estate, however, the problem of determining the " market" is exceedingly difficult. Real estate trades in a multitude of local markets, generally with little public information available. Trades are often made by individuals or closely held institutions who have little to gain by making the details of the trades public, beyond the reporting that exists when deeds and mortgages are reported within local jurisdictions. . . . It is difficult to have a great deal of confidence in measures of investment performance for much of the real estate market, it is difficult to gauge the frequency of transactions, and it is difficult to determine the value of this very significant portion of total wealth in the United States."

Perhaps the best available estimate of transaction frequencies was recently published in Real Estate Economics. In " An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property," 10 Fisher et al. note that " relatively little attention has been given to examining transaction frequencies," ( p. 239) and that " We know surprisingly little about the private market " transaction cycles" of investment grade commercial property, despite its importance to the institutional investment communities. Even less is known about the factors underlying these sales cycles . . ." The authors base their analysis of transactions on properties in the National Council of Real Estate Investment Fiduciaries ( NCREIF) database, which have a total value of about $ 100 billion. They found that the fraction of properties sold per year varies over time, along with periods of rising or falling prices, averaging 8.4 percent per year over the period 1984   2001. Thus, their estimate is broadly consistent with the estimate derived from the Colliers' and Hartzell et al. analyses mentioned above, though it covered only a fraction of the total real estate market. Fisher et al. did not include transaction costs in their analysis of the primary factors that " explain" intertemporal variation in transaction frequency, which leaves open the question of whether transactions are at all sensitive to those costs.

Combining Fisher et al.' s estimate of 8.4 percent per year with Hartzell et al.' s estimate of $ 2.429 trillion, we can make a rough estimate of the total transaction volume of commercial real estate of just over $ 200 billion per year. With transactions running at approximately 250,000 per year, the average value of each transaction is, by this calculation, about $ 850,000. However, it is clear that the information that would be needed simply to refine these rough estimates, let alone to make estimates of the sensitivity of transaction frequencies to transaction cost changes on the 9 David J. Hartzell, Robert H. Pittman, David H. Downs, " An Updated Look at the Size of the U. S. Real Estate Market Porfolio," Journal of Real Estate Research, vol. 9 ( 2), Spring 1994, pp. 197   212. 10 Jeffrey Fisher, Dean Gatzlaff, David Geltner, and Donald Haurin, " An Analysis of the Determinants of Transaction Frequency of Institutional Commercial Real Estate Investment Property," Real Estate Economics, vol. 32 ( 2), Summer 2004, pp. 239 264. EIA for the AAI Regulation 2 9 order of the small changes at issue in the context of the AAI rule, would be very difficult to locate or develop.

The only situations in which transactions would be expected to be very sensitive to the changes in transaction costs caused by the AAI rule are those where properties have market values that are small relative to the uncertainties surrounding the magnitude of the liabilities that new owners might face after the purchase. These cases, although relatively uncommon, are precisely the ones in which the AAI rule is most likely to make the difference between a sale and redevelopment, and continued underutilization or vacancy. Thus, the fact that the increase in numbers of transactions is not expected to be large does not mean that there will not be important benefits flowing from increased purchases or uses of brownfields. In fact, one benefit of the new liability protections provided by the Small Business Liability Relief and Brownfields Revitalization Act and the AAI rule may be to increase the relative value of brownfields compared to undeveloped properties, or " greenfields." Such an effect would result not in an increase in total transactions, but an increase in the percentage of transactions that include brownfields.

In summary, the analysis presented in this chapter suggests strongly that ( as stated on page 2 3) the effects of the rule on total transactions will be small, and therefore very little error will be introduced into the estimate of social costs if transactions are assumed to be fixed. Given the difficultly of collecting accurate data on the changes in transactions, and the small effect this additional analysis would be expected to have on estimated social costs, we can conclude that an engineering cost estimate is the most appropriate approach to assessing the social costs of the AAI rule. EIA for the AAI Regulation 3 1 CHAPTER 3: Affected Sectors of the Economy 3.1 Affected Entities The proposed All Appropriate Inquiries regulation ( AAI) will potentially apply to all commercial property transactions. The AAI requirements will be applicable to any public or private party, who may potentially claim protection from CERCLA liability as an innocent landowner, a bona fide prospective purchaser, or a contiguous property owner. However, the conduct of all appropriate inquiries, or environmental due diligence, is not new to the commercial property market. Prior to the Brownfields Amendments to CERCLA, commercial property transactions often included an assessment of the environmental conditions at prospective properties prior to the closing of any real estate transaction for the purposes of confirming the conditions at the property and/ or to establish an innocent landowner defense should environmental contamination be discovered after the property was purchased. The process most prevalently used for conducting all appropriate inquiries is the process developed by the American Society for Testing and Materials ( ASTM) and entitled E1527, Phase I Environmental Site Assessment Process.

3.2 Profile of Firms Providing Phase I Environmental Site Assessments Although environmental site assessments ( ESAs) are common practice in the commercial real estate industry, there are very few sources of data describing the environmental site assessment industry. This may be because the conduct of ESAs is not a primary business activity for many firms. ESAs, particularly Phase I site assessments, often are conducted by environmental services firms or environmental consulting firms offering an array of environmental and/ or engineering services. As of the writing of this EIA, Environmental Data Resources, Inc. ( EDR), is likely the only firm collecting data characterizing the Phase I ESA industry on a continuing and systematic basis at the national level.

Phase I ESAs are performed by engineering, geology, hydrogeology, and environmental sciences consulting firms. EDR estimates that there are approximately 7,500 firms currently performing Phase I ESAs. 11 The large number of firms performing Phase I assessments strongly suggests that it is a competitive industry. Many firms operate regionally, so large numbers of firms must compete directly.

11 Consultations with Dianne Crocker of EDR, November 2003. EIA for the AAI Regulation 3 2 3.2.1 Size and Geographic Distribution The most recent publicly available source of information on the Phase I ESA industry is the Benchmarking Survey of Environmental Professionals: Nuts and Bolts of the Phase I Process conducted by EDR in 2002. EDR surveyed over 280 firms across the nation on a variety of issues including firm characteristics ( such as size and location) and the scope of Phase I ESA activities performed. Although the information on the EDR sampling strategy is not disclosed, EDR asserts that the survey is a reasonably good representation of the Phase I ESA industry. 12 EDR survey results indicate that the size distribution of firms conducting Phase I ESAs ranges from less than $ 1 million in annual revenues to over $ 50 million. Approximately 19 percent of the firms surveyed earn less than $ 1 million in annual revenues. More than half of the firms ( 57 percent) surveyed earn between $ 1 and $ 10 million dollars in annual revenues. The rest of the firms ( 24 percent) have annual revenues of $ 10 million or more, with approximately 7 percent earning over $ 50 million.

According to EDR estimates, in 2002 the average price for a Phase I ESA was $ 2,050.13 Thus, a firm that specializes in performing Phase I ESAs would have conducted approximately 500 assessments in 2002 to generate $ 1 million in annual revenues. However, the EDR survey results show that only 10 percent of the firms performed 250 to 500 Phase I ESAs, and only 11 percent of the firms performed 500 or more Phase I ESAs in 2002. Although we do not know the size distribution of these firms, the EDR survey results indicate that conducting Phase I ESAs is not the primary activity for most of the firms surveyed.

The majority of the firms surveyed ( 68 percent) have indicated that their work is confined to one of the seven US regions: Northeast, Mid Atlantic, Southeast, South, Central, Midwest, or West. Close to one third of the firms ( 28 percent) performs Phase I ESAs in more than one US region. The rest of the firms, less than five percent, operate in a single locality.

12 Consultations with Dianne Crocker of EDR, November 2003. 13 Source: EDR ESA Report, Vol. 8 ( 3). EIA for the AAI Regulation 3 3 3.2.2 Current Practices According to data provided by EDR, there were approximately 241,000 Phase I ESAs conducted in 2002.14 As shown in Exhibit 3 1, the annual number of Phase I ESAs conducted from 1997 to 2002 ranged between 210,000 and 260,000. During that period, the national average price for a Phase I ESA was in the range of $ 1,800 to $ 2,100. A discussion of the methodology used by EDR to estimate the annual volume of Phase I ESAs is provided in Appendix IV. The shortcomings associated with using the EDR data in the economic analyses include the fact that EDR has been collecting and compiling data on the number of ESAs performed for only a few years. In addition, we could not identify any other sources for this data and therefore we cannot compare EDR's estimates to other sources. Because the results of our analyses rely significantly on the accuracy of this data, we conducted sensitivity analyses on the assumed number of total ESAs performed. Our sensitivity analyses are presented in Chapter 9.

Exhibit 3 1: Number of Phase I ESAs Conducted Annually and the Average Pricing Nationally, 1997 2002 Source: EDR.

A recent survey conducted by EDR shows that Phase I ESAs are not exclusively driven by a need for the property owner to qualify for protection from CERCLA liability. It is estimated that close to 45 percent of ESAs is driven by a desire for property owners to assess business environmental risk concerns. As a result, ESAs conducted prior to the 2002 Brownfields Amendments to CERCLA often were broader in scope than ESAs conducted for the purposes of establishing a CERCLA liability defense and often included such components as evaluations of potential asbestos and lead based paint contamination.

Although the most common all appropriate inquiries process conducted as part of typical commercial real estate transactions is the ASTM E1527 2000 Phase I Environmental Site Assessment Standard, this standard is not used for assessing all commercial properties. For properties that are believed to be free of the presence or potential presence of a hazardous 14 Ibid. 0 50,000 100,000 150,000 200,000 250,000 300,000 1997 1998 1999 2000 2001 2002 Number of Phase I ESAs Performed Annualy $ 1,700 $ 1,750 $ 1,800 $ 1,850 $ 1,900 $ 1,950 $ 2,000 $ 2,050 $ 2,100 $ 2,150 Average Price of Phase I ESA Total Number of Phase I ESAs Average Price of Phase I ESA EIA for the AAI Regulation 3 4 substance, pollutant, or contaminant, a less stringent and less costly assessment may be conducted that involves only a site visit and a search for and review of property specific documents and some government records. This less stringent process often is called a " transaction screen" and may be deemed sufficient for undeveloped properties or properties where a prospective buyer has reason to believe that no adverse environmental conditions exist at the site. The process most prevalently used to conduct transaction screens for commercial properties is the ASTM E1528 standard. Transaction screens are less comprehensive in scope than Phase I ESAs, and cost about half as much to conduct. The number of transaction screens performed annually has decreased steadily over the past 5 years from 50,000 in 1998 to 32,000 in 2002. The annual rate of decline is approximately 10 percent ( 4,500 screens). EDR reports that there is a trend in the banking sector in which small cap loans and loans with perceived low risk are being subjected to Phase I ESAs instead of a transaction screen. Of the 241,000 Phase I ESAs conducted in 2002, EDR estimates that 4 to 6 percent ( or 10,000 to 15,000 Phase I ESAs) is the result of this trend. According to EDR, the trend is largely driven by the users who are following the consultants' advice to select more rigorous ESAs.

At an even less rigorous level of environmental screening is the environmental questionnaire. Although there are no data on the annual volume of environmental questionnaires, industry data indicate that a substantial number of lenders required a questionnaire and site visit for small cap loans in 1999.15 The environmental questionnaires are used on the properties with a very low risk of presence or likely presence of contamination. It is expected that the AAI regulation will not affect such properties. Given a low probability that their site is contaminated, the users will find that the CERCLA liability protection is not worth the cost of an AAI Phase I ESA.

The environmental due diligence practices are not limited to the standards discussed above. The users of properties with a high risk of presence or likely presence of contamination ( e. g., a dry cleaning site) may select a more rigorous type of environmental due diligence commonly referred to as a Phase II ESA. Given that a Phase II environmental site assessment often goes well beyond a Phase I environmental site assessment, we do not expect the proposed AAI standards to result in any incremental burden in these cases.

15 EDR ESA Report, October, 1999. EIA for the AAI Regulation 4 1 CHAPTER 4: All Appropriate Inquiries Regulation This chapter describes the AAI regulation requirements. In addition, the chapter presents some of the standards and practices that were considered by the Regulatory Negotiating Committee, but were not adopted.

4.1 The AAI Regulation In January 2002, the President signed the Small Business Liability Relief Brownfields Revitalization Act (" the Brownfields Amendments"). The Brownfields Amendments revised the CERCLA liability provisions by providing some limitations on CERCLA liability for bona fide prospective purchasers, contiguous property owners, and property owners claiming to be innocent landowners. The Brownfields Law established that such property owners must conduct " all appropriate inquiries" into prior ownership and use of a property to identify potential for environmental contamination prior to acquiring the property. In addition, Congress directed EPA to include, within the standards for all appropriate inquiries, the following set of criteria:

1. Results of inquiries by an environmental professional 2. Interviews with past and present owners, operators, and occupants 3. Reviews of historical sources of information 4. Searches for recorded environmental cleanup liens 5. Reviews of Federal, State, Tribal, and local government records 6. Visual inspections of the facility and of adjoining properties 7. Specialized knowledge or experience on the part of the defendant 8. The relationship of the purchase price to the value of the property, if the property was not contaminated 9. Commonly known or reasonably ascertainable information about the property 10. The degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate investigation.

The Regulatory Negotiating Committee followed these criteria in developing the content of the AAI standard. The AAI requirements under each of the ten statutory criteria are discussed below.

Criterion 1: Results of inquiries by an environmental professional The Brownfields Amendments direct EPA to promulgate a standard for all appropriate inquiries that includes the results of an inquiry by an environmental professional. As explained in Chapter 1, EPA established a Negotiated Rulemaking Committee to develop a proposed regulation setting the Federal standard for all appropriate inquiries. The Committee's recommended definition of " environmental professional" is included in § 312.10 of the proposed regulation. Because the all appropriate inquiries process is essential to a property owner's ability to qualify for liability protection under CERCLA, the proposed definition specifies certain levels of certification, education, and experience for environmental professionals to ensure that EIA for the AAI Regulation 4 2 individuals responsible for supervising, reviewing, and signing the report of the all appropriate inquiries are qualified individuals who meet a rigorous standard and are capable of ensuring the performance of quality environmental investigations. However, the Committee also realized that environmental investigations have been performed for years by individuals with varying academic and professional backgrounds. To avoid disrupting this market of environmental professionals, the Committee recommended and EPA is proposing a definition of an environmental professional whereby even those persons who do not meet the certification and educational requirements proposed in the regulation may continue to contribute to environmental investigations. These individuals may assist in the conduct of all appropriate inquiries if they do so under the supervision or responsible charge of a person who meets the proposed requirements for an environmental professional.

Under the current ASTM E1527 standard, environmental site assessments generally are supervised by a professional engineer or other senior environmental professional who is in a supervisory position. Therefore, the FACA Committee members and EPA are confident that the minimum requirements for qualifying as an environmental professional included in the proposed rule will allow for those individuals currently supervising environmental site assessments to qualify as environmental professionals and continue to supervise the all appropriate inquiries activities. The proposed definition of environmental professional should not impose any additional burden given that the proposed rule requires that only the person supervising the all appropriate inquiries activities and signing the final report meet the proposed qualifications for the environmental professional. FACA Committee members have advised EPA that most individuals currently supervising environmental site assessments meet or exceed the proposed qualifications for the environmental professional.

The proposed regulation also should not result in any increase in the amount of work performed by those individuals who meet the environmental professional definition, as they will continue to perform the same supervisory activities as they conduct under the interim standard ( i. e., the ASTM E1527 2000 standard). These activities include:

  Monitoring the conduct of all tasks,   Reviewing the results of the inquiries,   Inserting an opinion with regard to the environmental conditions at a property in the report, and   Signing the inquiries report.

Criterion 2: Interviews with past and present owners, operators, and occupants The Brownfields Amendments require that the AAI standard include interviews with past and present owners, operators, and occupants of the facility for the purpose of gathering information regarding the potential for contamination at the facility. The Negotiated Rulemaking Committee recommended and EPA is proposing requirements for these interviews in § 312.23 of the proposed regulation. Under the proposed rule, the all appropriate inquiries must include at least one interview with the current owner or occupant of the subject property. Current owners and occupants will have information about current property uses, and may have information about past ownerships and uses for the property as well. The proposed rule does not require that EIA for the AAI Regulation 4 3 interviews be conducted with any other specific individual or type of individual. The proposed rule is based upon a performance standard that allows the environmental professional to obtain necessary information on current and past uses and ownerships of a property from multiple sources of information. The proposed rule states that interviews with past owners and occupants, current and past facility managers, and employees of current and past occupants of the subject property should be conducted to the extent necessary to learn the full history of the subject property. However, this information also could be obtained from other sources of information ( e. g., title searches, previously conducted environmental assessments, aerial photographs, property tax files, zoning/ land use records, etc.) This requirement is the same as current practice. The ASTM E1527 2000 standard requires that a " person with good knowledge of the uses and physical characteristics of the property" be interviewed as part of the site assessment to obtain information indicating recognized environmental conditions in connection with the property. The ASTM standard recommends that additional owners and occupants be interviewed as necessary to obtain information regarding past or historical uses and ownership of the property and information regarding the environmental conditions of the property.

Interviews of past owners and occupants also may be useful for obtaining information about historical uses of the property. The ASTM E1527 2000 standard lists property owners and occupants as potential sources of such information. Neither the ASTM standard nor the proposed rule specifically require that past owners and occupants be interviewed as part of the all appropriate inquiries. Many of the FACA Committee members pointed out that past owner and occupants of a property can be valuable sources of information on historical uses of a property, when such individuals can be found. 16 Committee members with extensive experience in conducting site assessments using the ASTM E1527 2000 standard point out that current practice is to make an effort to identify and interview past owners and occupants to obtain historical information about a site, and specific activities previously conducted at a property. However, in some cases, particularly when the current owner has been present at the property for a relatively long period of time, it is difficult to locate past owners or occupants of a property, and in many cases they may no longer be alive. Some Committee members pointed out that it often may be easier to locate, and more valuable to interview, employees who are familiar with past uses and ownership of a property.

In the case of properties where a current owner can be identified, the proposed rule is not expected to change the hour burden beyond the current industry practices. Both the interim standard and the proposed rule require that at least one current owner or occupant of a property be interviewed. In addition, both also require that additional sources of information be consulted to obtain necessary information on historical uses of the property and environmental conditions at the property. The cost analysis presented later in this document assumes that in both the base case and the requirements of the proposed rule, between 2 and 6 hours will be spent during the all appropriate inquiries in conducting interviews to obtain information on current and past uses and ownerships of the subject property, depending on the size and type of property. This is sufficient time for at least two, and in many cases more than two, interviews to be conducted at each property with various types of individuals. In addition, time allotted for other AAI 16 Personal communications with FACA Committee members including Julie Kilgore, Wasatch Environmental Inc., David Lourie, ASFE, Eric Block, National Ground Water Association, Tom Crause, Illinois EPA, Karl Kalbacher, Maryland DEP. EIA for the AAI Regulation 4 4 activities such as reviews of historical sources of information and accounting for " commonly known or reasonably ascertainable information" may be dedicated to additional interview activities to collect information about a property, as necessary to satisfy the performance factors and objections of the proposed rule.

The Committee and EPA recognized that some commercial properties and brownfields sites are abandoned and it may be difficult or impossible to find or contact past owners, operators, and occupants of the property. In these cases, the Committee recommended and EPA is proposing that the environmental professional interview owners and occupants of neighboring properties where such owners and occupants may have observed uses of or releases at the abandoned property. Environmental assessment standards currently in use, including the ASTM E1527 2000 standard, do not impose specific requirements or give guidance with respect to who should be interviewed when the subject property is abandoned. Although, FACA Committee members point out that common practice is that neighboring property owners are often interviewed when they are easily located or in cases where current owners and occupants are not sufficient sources of necessary information. The proposed rule explicitly requires that at least one owner or occupant of a neighboring property be interviewed to obtain information regarding past uses and ownership of a property, when that property is determined to be abandoned.

The cost analysis presented in Chapters 6 through 8 of this document includes an assessment of the costs associated with finding and interviewing at least one owner or occupant of a neighboring property to obtain information on past uses and ownerships of an abandoned property. Since, in the case of abandoned properties, there is no current owner or occupant of a property, the cost analysis also eliminates the hour burden and costs associated with finding and interviewing current and, potentially, past owners and occupants of the subject property ( which are attributed to properties with known owners and occupants in the baseline scenario). An additional assumption in calculating the costs associated with identifying and interviewing neighbors of abandoned properties is that locating owners and occupants of neighboring properties should be, in most cases, less time consuming than locating past owners, operators, and occupants of the subject property. Therefore, in the cases where the subject property is abandoned, the proposed rule is expected to reduce the total hour burden for conducting interviews.

Criterion 3: Reviews of historical sources of information In both the base case and the case of the proposed rule, all appropriate inquiries must include reviews of historical sources of information. The purpose of this activity or inquiry is to ensure that a record of current and past uses of the property is assembled to create a comprehensive review of the potential for releases of hazardous substances at the property. The proposed standards for reviewing historical sources of information are included in § 312.24 of the proposed regulation. The proposed rule, as does the interim standard, requires that historical documents be reviewed as far back in time as the site held structures or the property was used for agricultural, residential, commercial, industrial, or governmental purposes. The proposed regulation allows the environmental professional to use professional judgment to determine how far back in time it is necessary to review historical records. Current environmental assessment practices suggest consulting historical records as far back as 1940 or back to the property's obvious first developed EIA for the AAI Regulation 4 5 use, whichever is first. The proposed regulation will not impose any additional burden hours above the current environmental assessment practices.

Criterion 4: Searches for recorded environmental cleanup liens The Brownfields Amendments require that the AAI standards include searches for recorded environmental cleanup liens against the facility that are filed under Federal, state, or local laws. The objective of this criterion is to ensure identification of recorded past releases and cleanups of hazardous substances on or near the subject property. To ensure discovery of environmental liens, the environmental professional may need to search a variety of sources, including land records and court records. Current environmental assessment standards, including the ASTM E1527 2000 standard, do not contain any requirements significantly different from this criterion, but the ASTM standard does designate the purchaser as the party responsible for the lien searches. At § 312.25, the proposed regulation leaves this search responsibility open to the purchaser or the environmental professional, but requires that all information collected regarding environmental cleanup liens be provided to the environmental professional and documented in the all appropriate inquiries report. Therefore, in the cost analysis conducted in developing this EIA, it was assumed that the proposed regulation will result in an increase in the hour burden for preparing the all appropriate inquiries report, specifically for including the documentation of information on environmental cleanup liens.

Criterion 5: Reviews of Federal, State, Tribal, and local government records To ensure a complete picture of possible contamination at a property site, the Brownfields Amendments include a criterion for reviews of Federal, State, and local government records, such as waste disposal records, underground storage tank records, and hazardous waste handling, generation, treatment, disposal, and spill records, for information concerning potential contamination at or near the property. This criterion is addressed at § 312.26 of the proposed regulation. The proposed requirements for reviews of Federal, State, Tribal, and local government records are essentially the same as the base case standards currently in use for Phase I ESAs conducted using the ASTM E1527 2000 standard. However, the proposed rule does include a few additional requirements regarding searching for governmental records concerning adjacent properties. For instance, the current standard recommends a search of Emergency Response Notification System ( ERNS) records for the property only, while the proposed regulation requires ERNS records searches for the subject property and adjoining properties. The proposed regulation, however, is not likely to impose any additional burden hours above the current environmental assessment practices due to the relative ease in assessing government records and given that the base case includes costs associated with searching government records for information on adjacent properties.

Criterion 6: Visual inspections of the facility and of adjoining properties The Brownfields Amendments include a criterion for conducting a visual inspection of the facility and adjoining properties, which are addressed at § 312.27 of the proposed regulation. The objective of this criterion is to seek visual evidence of past or potential releases of hazardous substances. The requirements in the proposed regulation do not differ from practices currently in EIA for the AAI Regulation 4 6 use for site reconnaissance associated with Phase I ESAs conducted using the ASTM E1527 2000 standard. Under certain unique circumstances where a visual on site inspection cannot be conducted, the proposed regulation requires that the environmental professional do the following:

document efforts taken to gain access,

document the use of other sources of information to determine the existence of potential environmental contamination, and

express an opinion about the impact of the inability to conduct a visual inspection on the completeness of the inquiries.

The proposed regulation is not likely to impose any additional burden hours above the current environmental assessment practices given that the current interim standard includes requirements for significant documentation of the results of the on site visual inspection.

Criterion 7: Specialized knowledge or experience on the part of the defendant The Brownfields Amendments require that all appropriate inquiries include the purchaser's specialized knowledge of the site and any specialized knowledge of current and past activities conducted at the property. The objective of this criterion is to hold the landowner responsible for providing to the environmental professional known information regarding potential environmental conditions on or near the property. In other words, the defendant or owner cannot hide information that is not uncovered by the environmental professional during the inquiries. This criterion is addressed in proposed § 312.28, which states that the defendant must disclose specialized knowledge of the subject property and the surrounding area to the environmental professional. This proposed requirement does not go beyond the current standard established for the CERCLA innocent landowner defense in CERCLA Section 101( 35). This requirement also is one of the designated user responsibilities in the ASTM E1527 2000 standard. Therefore, the proposed regulation will not impose any additional burden hours above the current environmental assessment practices.

Criterion 8: The relationship of the purchase price to the value of the property, if the property was not contaminated A purchase price that is lower than the expected fair market value of the property may indicate the presence of contamination at the property that was not revealed during other steps in the inquiries. The requirement to consider the relationship of purchase price to the value of property is addressed at § 312.29. The requirement was previously included in the CERCLA requirements for the innocent landowner defense and is addressed in the current ASTM E1527 2000 standard.

In cases where it is determined that the purchase price does not reflect the fair market value of a property, persons to whom the proposed regulation will apply must consider whether the differential is due to the fact that the property contains releases or threatened releases of hazardous substances. The Negotiated Rulemaking Committee realized that not all environmental professionals have expertise in assessing property values. Therefore, this EIA for the AAI Regulation 4 7 requirement can be fulfilled by the purchaser, instead of the environmental professional. Although the current interim standard requires this type of comparison and explanation of any differential in the purchase price and market value, the requirements under the proposed regulation are more explicit regarding what type of information must be documented in the all appropriate inquiries report. The proposed regulation is, therefore, expected to increase the hour burden for preparing the report for the fraction of property transactions where there is a significant differential in the purchase price and fair market value of the property. For the purposes of the cost analysis presented in Chapters 6 through 8 of the document, it is assumed that 15 percent of all commercial property transactions include properties where there is a significant difference between the purchase price and the fair market value of the property.

Criterion 9: Commonly known or reasonably ascertainable information about the property Environmental professionals are required to supplement the searches and reviews discussed above with commonly known or reasonably ascertainable information about the property. This requirement was included in the previous provisions for the CERCLA innocent landowner defense and is not an incremental burden imposed by the proposed rule. This provision is included as § 312.29 of the proposed rule. Commonly known or reasonably ascertainable information may be obtained from a variety of sources, including newspapers, local government officials, community organizations, and websites, among others. This information must be pursued to the extent necessary to achieve the objectives and performance factors of § 312.20( c) and ( d). The proposed regulation is not expected to impose any additional burden hours above the current environmental assessment practices to fulfill this requirement.

Criterion 10: The degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate investigation There may be cases where environmental investigation does not reveal any contamination at the property, yet some circumstances lead the environmental professional to believe that the site may be contaminated. In other circumstances, the condition of the site may indicate obvious contamination. Either situation might lead the environmental professional to recommend additional investigation. In these and other cases, the environmental professional and persons to whom the proposed regulation applies must consider the degree of obviousness of a release or threatened release on the property. The report of the all appropriate inquiries should include an opinion from the environmental professional on whether additional investigation is warranted. The proposed requirements, set forth at § 312.31, are expected to increase the hour burden for preparing the all appropriate inquiries report because the documentation requirements regarding the need for additional investigations in the proposed rule are slightly more stringent than the ASTM requirement that the Phase I ESA report include an opinion of the environmental professional regarding environmental conditions at the property. EIA for the AAI Regulation 4 8 Exhibit 4 1: Summary of the Statutory Requirements Statutory Requirements Expected to change hour burden for conducting a Phase I ESA ( relative to ASTM E1527 2000) Criterion 1: Results of inquiries by an environmental professional No Criterion 2: Interviews with past and present owners, operators, and occupants Yes Criterion 3: Reviews of historical sources of information No Criterion 4: Searches for recorded environmental cleanup liens Yes Criterion 5: Reviews of Federal, State, Tribal and local government records No Criterion 6: Visual inspections of the facility and of adjoining properties No Criterion 7: Specialized knowledge or experience on the part of the defendant No Criterion 8: The relationship of the purchase price to the value of the property, if the property were not contaminated Yes Criterion 9: Commonly known or reasonably ascertainable information about the property No Criterion 10: The degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate investigation Yes 4.2 Considered Options During the regulatory negotiating process, several standards and practices, some of which went beyond the scope of the statutory requirements, were considered by the Negotiated Rulemaking Committee. This section presents three standards and practices that were considered by the Committee, but were not adopted in the proposed AAI regulation.

4.2.1 Option 1: Environmental Professional Under this regulatory option, all major activities would be performed by a person who meets the definition of an environmental professional included in the proposed regulation under § 312.10.

The Regulatory Negotiating Committee did not adopt this option. It was believed that such a requirement would disrupt current market practices by displacing a large number of persons with relevant experience in conducting site assessments but who do not meet the certification and educational requirements proposed in the regulation. In addition, the quality of Phase I ESAs could be ensured by requiring the environmental professional to oversee and review the work performed by such persons. EIA for the AAI Regulation 4 9 4.2.2 Option 2: Interview Requirement Under this regulatory option, there would be no explicit interview requirement for abandoned properties. Therefore, the interview requirements for all properties would be the same as under the current ASTM standard.

The Regulatory Negotiating Committee did not adopt this option. It was believed that, in case of abandoned properties, interviews with owners and occupants of neighboring and nearby properties, where those owners and occupants may have observed uses of or releases at the subject property, may provide valuable additional information about uses and potential conditions at the property that may not be gained from other sources.

4.2.3 Option 3: Sampling Under this option, limited sampling would be required for properties where information collected during the all appropriate inquiries results in a perceived risk of potential contamination at the property. Environmental sampling and testing of various media ( e. g., soil, groundwater, surface water, air, sediment, building materials, etc.) at a property could provide a user with additional information to further characterize the impact that a recognized environmental condition may have on a property.

The Regulatory Negotiating Committee did not adopt this option due to the potentially high burdens that such a requirement could place upon a prospective purchaser of a property who may choose, based upon the results of the assessment, not to purchase the subject property. However, the properties that this option likely would affect, or that most likely would require sampling to ascertain the likely presence of a release, are those with a high probability of contamination. These are the properties on which, without this regulatory option, a Phase II ESA would most likely be performed in addition to the AAI investigation. The result would be that the AAI regulation would make a Phase I ESA more expensive and a Phase II ESA less expensive for such properties because the sampling and analysis normally undertaken as part of the Phase II ESA would be required to be conducted during the AAI investigation ( or in many cases, preacquisition rather than after the property is purchased.

4.2.4 Use of the ASTM E1527 2000 The Office of Management and Budget's ( OMB) " Circular A 4" document defines " best practices" for developing regulatory analyses. Section C of this document provides guidance to regulatory agencies on identifying and considering alternative regulatory options. Section E. 3 of Circular A 4, " Evaluation of Alternatives," states that where there is a continuum of alternatives for a standard ( such as level of stringency), agencies " generally should analyze at least three options: the preferred option; a more stringent option that achieves additional benefits ( and presumably costs more) beyond those realized by the preferred option; and a less stringent option that costs less ( and presumably generates fewer benefits) than the preferred option.

All of the regulatory alternatives considered by the Negotiated Rulemaking Committee are more stringent than the Committee's consensus standard, or EPA's preferred regulatory option. In addition, the preferred option is estimated to impose a relatively low incremental cost, less than EIA for the AAI Regulation 4 10 $ 50 per transaction. Therefore, complying with the OMB Circular A 4 guidance to consider a less stringent or less costly regulatory alternative is challenging. EPA considered the alternative of using the current ASTM E1527 2000 standard as a regulatory option.

As discussed in the preamble to the proposed rule, EPA determined that the existing ASTM E1527 2000 standard does not address all of the ten required criteria outlined in the Brownfields Amendments. As a result, use of the ASTM standard would be inconsistent with applicable law and would not adequately serve EPA's needs in promulgating the all appropriate inquiries regulation. In the preamble for this proposed rule, EPA has requested public comment on this determination.

Given that OMB guidance requires EPA to evaluate a less stringent, or less costly, regulatory alternative, this EIA compares the costs of the Agency's preferred alternative, three more stringent options considered by the Negotiated Rulemaking Committee, and the alternative of using the ASTM E1527 2000 standard. EIA for the AAI Regulation 5 1 CHAPTER 5: Analytical Approach to Estimating Costs and Benefits The general approach used in this analysis to estimate the impact of the AAI proposed regulation is to identify the incremental cost burdens associated with the changes in the ESA activities imposed by the proposed rule relative to Phase I site assessment practices using the ASTM E1527 2000 standard, add up the costs of costs associated with those changes, and then assess the impacts of those costs.

To implement this approach, we first reviewed the activities and practices associated with conducting a Phase I ESA using the ASTM E1527 2000 standard, the current interim standard and the baseline standard for this analysis. To simplify the analysis, we grouped the Phase I ESA activities into a few key activities, and then estimated the cost of each activity based on estimates of labor hours to conduct these activities and labor categories. As Phase I ESAs are more laborious at more complex sites, labor hours were estimated as a function of property type. The labor hours also were adjusted to account for property size. Summing up costs over Phase I ESA activities, we derived an average cost per Phase I ESA. The total costs were then calculated by multiplying the average cost per Phase I ESA by the number of Phase I ESAs projected over the modeling period.

The next step in the analysis was to identify the changes in Phase I ESA activities that will result from the incremental burdens imposed by the proposed AAI regulation. By comparing the current Phase I ESA activities to the requirements of the proposed regulation, we identified the necessary changes in current procedures for conducting a Phase I ESA that will be required for a property owner to comply with the provisions of the proposed rule. Once we determined that the changes from the current practices would be manifested in terms of additional Phase I ESA activities, we estimated the cost of each additional activity based on the labor hours and labor categories required to perform them. We then followed the same procedure as explained above to derive the average cost per Phase I ESA and the total cost of compliance with the proposed regulation.

To estimate the total cost to all affected parties imposed by the proposed AAI regulations, we estimated the number of transaction screens likely to shift to Phase I ESAs as a result of the Brownfields Amendments. We first estimated the average incremental cost per transaction screen, and then multiplied that cost by the estimated number of transaction screens that would transition to Phase I ESAs. The total cost of the proposed regulation includes the incremental cost for property transactions where the assessment was previously conducted using the ASTM standard and the total incremental cost associated with transactions transitioning from a transaction screen to the proposed AAI requirements.

The benefits of the AAI regulation are assessed qualitatively. We first identify the nature of the different categories of benefits, and explain that the net private benefits are the reduction in the resource costs of qualifying for protection from CERCLA liability. We also discuss the social benefits of increasing the number of transactions involving brownfields and contaminated or EIA for the AAI Regulation 5 2 potentially contaminated properties, reducing the number of abandoned properties, and increasing cleanups, but without estimating these benefits quantitatively.

The following sections describe in detail the methodology for estimating the costs and benefits of the proposed AAI regulation.

5.1 Base Case for the EIA The publicly available literature on the Phase I ESA industry indicates that the most commonly used standard is the current ASTM standard entitled E1527, Phase I Environmental Site Assessment Process. During the regulatory negotiating process, the FACA committee members confirmed this finding. In addition to being the most commonly used standard, the ASTM E1527 2000 is the Federal interim standard for conducting all appropriate inquiries. Therefore, we established the ASTM E1527 2000 standard as the base case for this analysis. It is assumed that absent the AAI regulation, the Phase I ESA industry would continue to use the ASTM E1527 2000 standard for conducting all appropriate inquiries.