Understanding PFAS Risk in Construction Lending
By Kathryn Peacock, Strategic Director of Environmental Services | Partner Engineering and Science, Inc.
Originally published in the 2026 CLRM Journal.
PFAS: A Rapidly Evolving Regulatory Landscape
PFAS and their impact on commercial real estate and construction are just starting to be understood. Recently regulated as a hazardous substance in 2024, PFAS are beginning to be recognized as a potential risk in construction projects, with implications for site feasibility, construction schedules, disposal options, cost certainty, and long-term liability. Additionally, liability frameworks continue to evolve as states adopt their own unique regulatory standards. By addressing PFAS early in the due diligence process, costly surprises can be proactively addressed through the construction lifecycle.
PFAS Basics
Per- and polyfluoroalkyl substances (PFAS) are a man-made class of chemicals that are resistant to heat, water, and oil. They were originally designed for applications like non-stick pans and stain-resistant carpets. Due to their beneficial properties, PFAS became widely used starting in about the 1940s and are now present in aqueous firefighting foam (AFFF), waxes, cosmetics, food packaging, paint and coatings, petroleum, plastics, polish, soaps, fabrics, and other textiles. In addition, biosolids used in agriculture derived from wastewater treatment plants or landfills, are known to have PFAS from industrial and domestic waste discharge.
While PFAS have been in use since the 1940s, their risks to human health and the environment were not widely recognized until much later. Research beginning in the 1970s identified PFAS in workers and animals, and by the 1990s, studies confirmed their widespread presence in the general population, highlighting concerns about persistence, bioaccumulation, and toxicity. Regulatory attention in the United States accelerated in the 2000s, with the EPA issuing health advisories for PFOA and PFOS in 2009 and establishing a lifetime drinking water health advisory in 2016—marking formal recognition of PFAS-related health risks. PFAS also persist for long periods in the environment and are highly mobile (i.e., they can travel long distances through air, surface water, and groundwater).
The Changing Regulatory Environment
The U.S. Environmental Protection Agency (EPA) classified PFAS as hazardous substances in 2024, designating two of the most prevalent PFAS compounds, PFOA and PFOS, as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as Superfund). In April 2024, the EPA finalized the National Primary Drinking Water Regulation (NPDWR) for six PFAS chemicals, establishing Maximum Contaminant Levels (MCLs) for safe drinking water. Additionally, the EPA established enforceable drinking water standards for both PFOA and PFOS at 4 parts per trillion (ppt)—levels so low they approach the limits of laboratory detection. While these standards are intended to be protective of human health, they pose practical difficulties for construction projects.
Additionally, because PFAS have numerous and widespread applications, they may be present at a variety of sites, including what the EPA refers to as “passive receivers”—sites that did not manufacture, use, dispose of, or intentionally release PFAS into the environment but nonetheless have come into contact with these substances through incidental or unavoidable means. This designation is significant because Superfund imposes strict, retroactive, and “joint and several” liability. In practical terms, parties can be held responsible for cleanup costs regardless of fault or intent, and liability can extend back to historical activities that predate current regulations.
The current regulatory framework creates uncertainty and potentially increased risk for lenders, owners, and contractors with respect to potential retroactive CERCLA liability. While there is no existing pathway to alleviate risk for passive receivers, in September 2025 the EPA announced that it would urge Congress to revise CERCLA’s strict liability framework, and on December 18th, 2025, the House Energy & Commerce Subcommittee on Environment received testimony from expert witnesses on the impacts of the EPA’s CERCLA designation of PFOA and PFOS on property owners and developers.
Why PFAS Matter in Construction Lending
Predevelopment Considerations
Prior to the development of a project, it is important to understand the potential level of risk associated with PFAS. Potential change orders and schedule delays that can directly affect project cash flow, erode contingencies, increase reliance on additional capital, or impair a borrower’s ability to meet debt service obligations can be identified proactively during predevelopment.
Documentation Review
With the designation of PFOA and PFOS as hazardous substances in 2024, Phase I ESAs are now required to address PFAS. Other assessments, such as geotechnical assessments, Phase II Environmental Site Assessments, regulatory closure letters, groundwater or soil monitoring reports, environmental database reports, or other types of environmental assessments, may also be provided as part of due diligence and should be reviewed thoroughly, with an emphasis on identifying PFAS-related risk that may be lying dormant in these documents.
While PFAS are required to be addressed as part of a Phase I ESA, they may not always be discussed in the executive summary, particularly if they are not identified as a Recognized Environmental Condition (REC) or Business Environmental Risk (BER). As a result, it’s imperative to read the entire report. Even where PFAS are identified as a REC or BER, this doesn’t necessarily mean the report will recommend further actions if there isn’t a threat to human health or the environment identified. Because the main path of exposure for PFAS is drinking water, and the forms of regulated PFAS are not known to be volatile (indicating a lack of vapor intrusion concern), sampling is often not recommended when PFAS concerns are identified.
Even where PFAS are not determined to pose a direct threat to human health or the environment, their presence in soil or groundwater can still disrupt construction budgets and schedules in unpredictable ways. Routine activities such as excavation, demolition, and groundwater dewatering may trigger additional testing, treatment, or disposal requirements. In these situations, PFAS may still affect material handling, disposal options, and construction costs, leaving owners and lenders exposed to unanticipated delays and overruns.
Offsite Considerations
PFAS are mobile, meaning that if present in soil or groundwater, they have the ability to move offsite and impact adjacent properties, including residential areas or drinking water wells. In such cases, lenders and owners may face heightened exposure to third-party claims, regulatory enforcement actions, or cost recovery demands—potentially at a scale far exceeding the original project footprint.
State Regulatory Programs
A project may be enrolled in a state remediation program for non-PFAS contaminants and underwritten with the expectation of timely regulatory closure. In several states, regulators are now requiring PFAS sampling and evaluation as part of site closure or no-further-action determinations, even where PFAS were not included in the original remediation scope. Late-stage PFAS analysis can delay regulatory closure, extend monitoring obligations, and postpone stabilization, refinancing, or disposition—undermining cost certainty and defined exit timelines relied upon by lenders.
Additionally, disposal and management options may be limited, costly, and subject to evolving landfill acceptance criteria. Materials otherwise suitable for reuse or recycling may require specialized treatment or long-distance disposal, increasing costs, extending schedules, and complicating construction sequencing.
Post-Construction and Post-Closing Considerations
PFAS-related risk doesn’t end once construction is complete or a loan has closed. Post-development site conditions, operational practices, and evolving regulations—particularly those at the state level—warrant continued attention from owners and lenders. For example, the use of onsite groundwater for irrigation, cooling towers, or other non-potable purposes may trigger additional regulatory scrutiny if PFAS are later identified. In certain jurisdictions, reuse of groundwater (even for non-drinking applications) can prompt sampling requirements, restrictions on use, or reporting obligations that were not anticipated during underwriting.
Long-term monitoring is another potential post-closing risk. Some state programs may require ongoing PFAS sampling of groundwater, surface water, or discharge points following development, particularly where dewatering occurred during construction or where offsite migration is a concern. These monitoring programs can persist for years and represent a recurring operational cost that should be understood upfront. Annual monitoring expenses can vary widely by state and site conditions, but they could be significant over the life of an asset and should be evaluated with an environmental consultant during underwriting.
Projects or loans initiated prior to the 2024 regulatory changes may present additional challenges. Assets that were underwritten, constructed, or stabilized before PFAS became a required consideration in environmental due diligence may now face retroactive exposure. In response, some large lenders are beginning to conduct portfolio-wide PFAS reviews, reassessing legacy assets to better understand groundwater use, historical land use, and proximity to potential PFAS sources. These reviews may result in new operational controls, restrictions on groundwater use, or requirements for updated environmental assessments.
Lenders should pay close attention to assets that have remained in loan pipelines or portfolios for extended periods. Many borrowers are likely not actively reevaluating those assets, particularly if no redevelopment is planned. It’s important to recognize that assumptions made during original Phase I ESA reviews may no longer be sufficient. In other words, a “clean” Phase I ESA conducted prior to April 2024 may now have a PFAS issue that needs to be addressed. For example, understanding the source of drinking water post-development, whether municipal or private, remains critical as PFAS risk may emerge even where no recognized environmental condition was previously identified.
Insurance Considerations
PFAS-related liabilities may be partially or entirely uninsured. Most commercial general liability policies exclude pollution-related claims, and some insurers have implemented explicit PFAS exclusions. Contractor pollution liability coverage may also exclude PFAS. Given these limitations, lenders cannot rely solely on insurance to mitigate PFAS exposure. As a result, lender policies play a critical role in risk protection by requiring enhanced environmental due diligence, conservative underwriting assumptions, and clear contractual allocation of environmental responsibilities. Common policy tools may include heightened environmental review for higher-risk projects, PFAS-specific representations and covenants, reserve requirements to address potential cost overruns, and ongoing reporting obligations where PFAS conditions are identified. Together, these measures help lenders manage uninsured PFAS risk, preserve collateral value, and protect loan recovery in an evolving regulatory landscape.
Looking Ahead
As PFAS continue to reshape the construction risk landscape, lenders that proactively integrate PFAS considerations into underwriting, due diligence, and loan structuring are better positioned to manage uncertainty and protect collateral value. For many construction lenders and project owners, it may make sense to engage a qualified consultant with both environmental and construction expertise to stay abreast of developing regulations and ensure that PFAS considerations are integrated into due diligence, contracting, and risk management. Taking steps now to understand and plan for potential PFAS impacts can help protect investments and reduce the risk of costly disruptions.
