Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Regulation for Real Estate Transfers
Regulatory Impacts Branch
Economics, Exposure, and Technology Division
Office of Pollution Prevention and Toxics
U.S. Environmental Protection Agency
401 M Street, S.W.
Washington, DC 20460
October 1995
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Table of Contents
Executive Summary 1
Introduction 7
Chapter 1: Background and Framework for Analysis 9
Effect Of The Disclosure Rule On Sales 9
Requirements of the Rule 9
Parties Affected by the Rule 10
Cost Effects on Affected Parties 10
Effect Of The Disclosure Rule On Rentals 14
Requirements of the Rule 14
Parties Affected by the Rule 15
Cost Effects on Affected Parties 15
Chapter 2: Profile of Sectors Affected 17
Real Estate Agents/Managers and Operators/Lessors 17
Mortgage Lenders (Banking and Financial Services) 18
Real Estate Attorneys (Legal Services) 19
Chapter 3: Estimated Costs to Private Parties and Government 21
Costs to Private Parties of Complying with the Disclosure Regulation for Real Estate Transfers 21
Structure of Cost Analysis 21
Sources of Data 23
Analysis of Costs by Affected Transaction 29
Total Annual Costs to Private Parties of Compliance Requirements of Disclosure Rule for Real Estate TransferS8
Sensitivity Analysis of Costs to Private Parties 38
Compliance Monitoring Costs to Private Parties 40
Costs to Government for Administering the Disclosure Regulation for Real Estate Transfers .. 41
Inspection and Case Management Costs 41
Performance Measurement and Management 42
Compliance Assistance 42
Total Costs to Government 42
Total Costs to Private Parties and Government of the Disclosure Regulation for Real Estate
Transfers 42
Chapter 4: Effect of the Lead Paint Hazard Disclosure Rule for Real Estate Transfers
on Small Businesses - Regulatory Flexibility Analysis 44
Background and Approach 44
Role of Small Businesses in Affected Industries 44
Assessment of Effects on Small Businesses 45
Organization Primarily Engaged in Residential Sales 46
Organization Primarily Engaged in Residential Rentals 48
Organization Engaged in Residential Sales and Rentals 48
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Hazard Disclosure Rule for Real Estate Transfers
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Chapter 5: Assessment of Benefits 50
Understanding the Market Imperfection 50
Exposure to Lead from Lead-Based Paint and Related Adverse Health Effects 50
Benefits of the Disclosure Rule 51
Methodological Options for Predicting Response to Information Products 53
Appendix A: Summary of Existing State Rules Regarding Lead Paint Hazards and
Disclosure 56
Massachusetts 57
Rhode Island 57
Maine 58
California 58
Appendix B: Data Sources 60
Text Citations 60
Personal Communications 62
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Hazard Disclosure Rule for Real Estate Transfers ii August 1995
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Exhibits
Exhibit 1: Cost Components and Frequency of Occurrence by Affected Transaction and Party. 12
Exhibit 2: Establishment, Employment and Payroll Data for Affected Business Groups 18
Exhibit 3: Summary Indicator Data for Real Estate Industry Performance 18
Exhibit 4: Summary Indicator Data for Commercial Banking and Savings Institution Sectors . 19
Exhibit 5: Summary of Data Items and Values for Affected Parties and Events Used in
Analysis of Lead-Paint Hazard Disclosure Rule for Real Estate Transfers 25
Exhibit 6: Summary of Time Requirements for Time-Related Cost Components in Analysis of
Lead-Paint Hazard Disclosure Rule 29
Exhibit 7: Number of Years for Annualization of Start-Up Costs 29
Exhibit 8: Cost Analysis For Sales Transactions (all dollar values at 1994) 31
Exhibit 9: Cost Analysis For Rental Transactions (all dollar values at 1994) 36
Exhibit 10: Estimated Annual Costs to Private Parties of Disclosure Rule for Real Estate
Transfers 38
Exhibit 11: Sensitivity Analysis of the Cost of the Disclosure Rule for Real Estate Transfers ... 39
Exhibit 12: Estimated Total Annual Costs of the Disclosure Rule for Real Estate Transfers .... 43
Exhibit 13: Small Business Participation in Affected Business Sectors, 1992 45
Exhibit 14: Illustration of Effects of Disclosure Rule for Transfers on Small Businesses 47
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Hazard Disclosure Rule for Real Estate Transfers
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Executive Summary
Pursuant to Section 1018 of the Residential Lead-Based Paint Hazard Reduction Act ("the Act") of 1992,
the Office of Pollution Prevention and Toxics (OPPT) of the U.S. Environmental Protection Agency (EPA),
in cooperation with the U.S. Department of Housing and Urban Development (HUD), is promulgating
regulations for the disclosure of information concerning lead upon transfer of residential property.
This Regulatory Impact Analysis (RIA) examines the potential costs, benefits, and impacts of regulations
for the disclosure of possible lead-based paint hazards in residential property upon the transfer of the
property for sale or rental. The analysis is presented in five sections: Background and Framework for
Analysis; Profile of Sectors Affected; Estimated Costs to Private Parties and Government; Effect ofthe Lead-
Based Paint Hazard Disclosure Rule for Real Estate Transfers on Small Businesses - Regulatory Flexibility
Analysis and; Assessment of Benefits. An Appendix is also included which provides a summary of existing
state rules regarding lead-based paint hazards and information disclosure.
Background and Framework for Analysis
The rule will apply generally to residential housing built before 1978, unless the housing has no bedrooms,
is housing for the elderly or disabled and may not be lived in by a child under the age of six ("target
housing"), or is rental housing certified as having no lead-based paint on any surface. These regulations will
therefore change current business practices in a great number of sale and rental transactions, imposing
compliance costs on certain involved parties.
Specifically, the disclosure rule establishes requirements governing the transfer of information from seller
to buyer and lessor to tenant. A seller of target housing is required to: provide a prospective purchaser an
EPA-approved lead hazard information pamphlet; notify a prospective purchaser of any known lead-based
paint or related hazard associated with the property; extend to a prospective purchaser the opportunity for
a 10-calendar day period to conduct a lead-based paint inspection and risk assessment before becoming
wholly obligated under contract and; include as a part of a contract for the sale of target housing a disclosure
and acknowledgment statement that includes a Lead Warning Statement with wording prescribed by
legislation. The disclosure and acknowledgment statement is executed by the seller, buyer, and, if party to
the transaction, the seller's agent, and documents compliance with the requirements of the disclosure rule.
The requirements of the disclosure rule with respect to rentals are similar but exclude the 10-day inspection
period.
Record keeping is required for both types of transactions, however, as each buyer/tenant must sign an
acknowledgment certifying their receipt of the information (pamphlet and information on known lead-based
paint or related hazards) which must be maintained by the seller/lessor, or agent/property manager acting in
behalf of the seller/lessor.
Those parties directly affected by the rule are the seller, lessor, agent, property manager, buyer, and tenant.
For cost estimation purposes, EPA grouped the required activities that create a regulatory burden on the
affected parties into four categories:
Start-up costs, which include learning the rule's requirements and establishing compliance procedures;
• Disclosure activities, which refer to the costs resulting from the actual transfer of information
and obtaining of needed signatures;
• Record keeping, which result from the requirement that signed acknowledgment statements
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Hazard Disclosure Rule for Real Estate Transfers
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must be retained by the provider of the information; and
• Materials, which is linked primarily to the disclosure requirement, as the lead hazard
information pamphlet must be purchased or photocopied (acknowledgment statements must also
be duplicated). Costs may also be incurred for filing where a high number of acknowledgment
statements are generated (e.g., agents), though this burden was estimated to be quite modest.
Profile of Sectors Affected
The requirements of Section 1018 of the Act fall primarily on the seller or lessor of "target housing," which
is defined to be any housing constructed prior to 1978, except housing for the elderly or persons with
disabilities (unless any child who is less than 6 years of age resides or is expected to reside in such housing)
or any zero-bedroom dwelling. However, if an agent or property manager acts on behalf of the seller or
lessor, which EPA estimated to be the case in the great majority of transfers, the responsibilities fall to such
agents or managers.
To analyze the impacts of the rule, EPA sought data on two industry sectors which, together, the Agency
believes constitute the regulated community in connection with this rulemaking. EPA also sought data
pertaining to the frequency of occurrence of regulated activities (sales and rental transactions in target
housing). The affected sectors include: Standard Industrial Classification (SIC) code 651, Real Estate
Operators and Lessors, with 92,000 establishments that maybe affected by the rule; and SIC code 653, Real
Estate Agents and Managers, also with 92,000 establishments that may be affected by the rule.
Employment data for these industries were obtained for occupations most likely to be involved in
transactions subject to the rule. On the basis of 1992 data, EPA estimates that 352,000 real estate agents and
243,000 property managers will be affected.
With regard to transaction volume, EPA estimates that 2.9 million sales transactions and 9.3 million rental
transactions occur annually in target housing.
Estimated Costs to Private Parties and Government
Exhibit ES. 1, Estimated Total Annual Costs of the Disclosure Rule for Real Estate Transfers, summarizes
the estimated total annua! compliance costs to private parties and government associated with the regulation.
Private parties incur costs as a result of compliance activities as summarized above. The costs to government
include the costs of rule administration.
Estimated Costs to Private Parties
EPA estimated total annua! costs to private parties of approximately $81 million in 1994 dollars (see Exhibit
ES.l). These costs were estimated in the four cost categories, as discussed below.
The first category, start-up costs, amounts to about $27 million for both sales and rental transactions, and
represents about one-third of the overall estimated annua! costs to private parties. Factors affecting the
magnitude of these costs include the number of employees having to familiarize themselves with the
regulations, both initially (employees in the existing work force) and over time (new entrants to the affected
sectors); the time required to learn the activities which must be undertaken in order to comply; and the hourly
compensation of affected employees.
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Hazard Disclosure Rule for Real Estate Transfers
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Exhibit ES.l: Estimated Total Annual Costs of the Disclosure Rule for Real
Estate Transfers
Transaction and Cost Category Estimated Cost
(SI 994)
Costs to Private Parties
Sale Transactions
Start-Up Costs*
Disclosure Event Costs
Record-Keeping Costs
Materials Costs
$25.8 million
$20.2 million
$0.6 million
$2.8 million
Total for Sale Transactions:
$49.4 million
Rental Transactions
Start-Up Costs*
Disclosure Event Costs
Record-Keeping Costs
Materials Costs
$1.1 million
$25.6 million
$1.9 million
$3.4 million
Total for Rental Transactions:
$31.9 million
Total Estimated Annual Costs to Private Parties:
$81.3 million
Costs to Government
Low Estimate
High Estimate
$2.4 million
$4.3 million
Total Estimated Annual Costs:
Based on Low Estimate of Government Costs
Based on High Estimate of Government Costs
$83.7 million
$85.6 million
* First-year costs annualized at 3 percent.
Source: U.S. Environmental Protection Agency
As shown in the exhibit, start-up cost estimates differ markedly with respect to transaction type (sale versus
rental). The reason for this difference is because rental property owners, who were assumed to be potentially
affected by the rule as both sellers and lessors, would only have to familiarize themselves with the
regulations once. Costs for these owners were allocated to the "sales" portion of the analysis.
EPA estimated that disclosure event costs would amount to approximately $46 million annually for both sales
and rental transactions, and would constitute the greatest portion of overall costs. Factors affecting the
magnitude of these costs include the frequencies of regulated events; the time involved in performing
required activities, such as providing the prospective purchaser/tenant with the required information and
obtaining the required signatures; and the hourly compensation of all involved parties. EPA also took into
account the fact that several states have similar requirements pertaining to information transfer regarding
potential lead hazards in the sale of residential property. Thus, an allowance was made in the burden
estimates for transactions occurring in such states to reflect a certain level of current compliance.
Record-keeping and materials costs are estimated to amount to about $9 million annually and comprise a
more modest share of overall annua! costs. Factors affecting the magnitude of these cost items include the
number of affected parties per transaction; the frequency of transactions, the costs of acquiring/duplicating
documents, which include the lead hazard information pamphlet and signed acknowledgment statements; and
costs to store documents.
As specified in the regulation, rental units that have been found by a certified inspector to be free of lead-
based paint on all surfaces will be exempt from the disclosure requirement. As part of this analysis, EPA
considered the effect on costs to private parties of rental units being removed from regulatory coverage as
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Hazard Disclosure Rule for Real Estate Transfers
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the result of the "finding and certification" process. U sing the reduced number of rental transactions expected
to be subject to regulation after finding and certifying additional lead-free units over a ten-year period, the
estimated costs to private parties fall slightly from to $81.3 million to $81.2 million ($1994). This analysis
of the removal of leadpaint-free units from regulatory coverage considered only the effect of finding existing
lead paint-free units and does not consider the effect of abatement activity in creating additional lead paint-
free units.
Beyond the direct costs of the regulation to private parties, EPA identified several additional ways in which
transaction participants may incur costs in responding to the regulation. However, for each of these
mechanisms, EPA judged that the incurrence of costs was not a requirement of the regulation and therefore
did not include the costs associated with these mechanisms in the regulatory cost analysis. These additional
cost mechanisms include: possible outlays for attorneys to review transactions and document compliance on
behalf of participants; possible additional cost burdens for seller or owner parties with multiple persons;
possible outlays resulting from additional transaction requirements imposed by lenders; possible outlays
resulting from additional transaction requirements imposedby lenders; andpossible outlays for professional
liability insurance by real estate agents.
Additional costs resulting from actions taken by consumers in response to information, such as possible lost
sales, delays in completion of sales, reductions in sales prices, or possible outlays for lead hazard inspections,
were not quantified. Currently, data and methods limitations do not permit measurement of how the rules
may affect behavior.
Estimated Costs to Government
To administer the final regulation, resources will be required to conduct a number of activities, including:
• Inspections;
• Violation case management;
• Establishment and maintenance of cooperative agreements, if applicable;
• Compliance assistance;
• Development of performance measurement criteria; and
• Management.
EPA estimated the total annua! cost of these activities would range from $2.4 million to $4.3 million,
depending on the estimated number of compliance inspections performed annually.
Total Costs to Private Parties and Government
The estimated costs to private parties and the federal government were summed to yield a comprehensive
estimate of the total annual costs of the lead-based paint hazard disclosure regulation for real estate transfers.
As shown in Exhibit ES.l, EPA estimated that the total annual costs would range from approximately $84
million to $86 million ($1994).
Effect of the Lead Paint Hazard Disclosure Rule for Real Estate Transfers on Small
Businesses - Regulatory Flexibility Analysis
EPA investigated the potential impacts of the rule on small businesses, and prepared a Regulatory Flexibility
Analysis (RFA). While a large number of small establishments will be potentially affected by the rule, cost
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Hazard Disclosure Rule for Real Estate Transfers
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impacts were not found to be of sufficient magnitude to cause undue harm to such establishments.
Consequently, EPA did not further modify the regulation based on small business impacts.
In assessing small business impacts, EPA first developed an establishment profile for each major sector (SIC
651 and SIC 653). This profile indicated that approximately 75 percent of all establishments in SIC 651 (Real
Estate Operators and Lessors) and approximately 73 percent of all establishments in SIC 653 (Real Estate
Agents and Managers) fell within the 1 -4 employee size class. These proportions increased to 90 percent and
87 percent, respectively, when employee size class 1-9 was examined.
To measure the cost impacts of the rule on these small establishments, representative, or model,
establishments were designed. These model establishments correspond to typical establishments with respect
to number of employees and annua! transaction volume, in each affected sector. Since transaction activity
was reported to vary widely, a range of transaction volume was estimated for each establishment type.
For each model establishment, annual regulatory costs were then calculated and compared to annual labor
and overhead costs. Ratios were computed for both high and low estimates of the range of transaction
activity. In the case of a real estate sales organization, regulatory costs were found to represent from 0.20 to
0.42 percent of labor and overhead costs. In the case of a rental establishment, impacts were slightly higher,
ranging from 0.21 to 0.47 percent. An establishment engaged in both activities was projected to sustain
impacts of 0.28 to 0.63 percent. In all instances, the estimated cost burden was less than one percent of the
total estimated costs of business operation before regulation.
Assessment of Benefits
The market imperfection that the rule is intended to correct is the lack of information available to prospective
home buyers and renters. The failure of the marketplace to provide this information means that prospective
buyers and renters might purchase or lease a property, or make pricing or rental payment decisions regarding
properties, without understanding possible health risks or risk management costs accompanying the
transaction.
It is expected that the information provided as a result of this rulemaking will lead buyers and renters to
modify their behavior in a way that will reduce health risks from lead exposure. For example, purchasers
could undertake abatement activities subsequent to taking ownership of a dwelling. The rule may also prompt
property owners, due to reluctance on the part of prospective buyers/tenants to select housing with lead-based
paint hazards, to act to reduce lead-related hazards in their residential dwellings.
EPA notes that the regulation does not require actions to be taken to reduce lead-based paint hazards in
residential housing; thus, the extent to which benefits accrue depends upon how transaction participants
respond to the additional information. Currently, data are not available to permit estimation of how the rule
may affect behavior. It was not possible, therefore, to quantify the expected benefits.
Additionally, actions taken in response to new information will involve costs. To assess the net benefits to
society from these actions, such costs would have to be estimated and subtracted from the expected benefits
associated with the actions. However, because a number of possible outcomes with respect to risk
management are possible (as discussed above), the magnitude and distribution of these cost impacts depend
highly on how transaction participants interact in the market. That is, for any particular home offered for
sale, the cost to manage any risk posed by lead-based paint hazards will vary due to buyer and market
characteristics. Often, this cost may be borne by the seller (through, for instance, price concessions),
although market situations may exist (for example, where a home is in particular demand) where costs could
be borne by the buyer or shared between buyer and seller.
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Hazard Disclosure Rule for Real Estate Transfers
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Introduction
Under Section 1018 of the Residential Lead-Based Paint Hazard Reduction Act of 1992, the Environmental
Protection Agency (EPA), Office of Pollution Prevention and Toxics (OPPT) is preparing regulations
requiring the disclosure at the time of property transfers ofpossible lead-paint hazards in residential property.
These regulations will require owners of most residential property built before 1978 to notify prospective
buyers or renters of the property that the property may contain lead-based paint and may present a health
hazard. Property owners or their agents are required to:
• Provide prospective buyers and tenants an EPA-approved Lead Hazard Information Pamphlet
and all known information on the presence of lead-based paint, lead-based paint related hazards,
abatement activity, or prior occurrence of lead poisoning at the property. EPA has prepared an
acceptable lead hazard information pamphlet titled "Protect Your Family From Lead in Your
Home"; however, other pamphlets may be used provided that they have been approved by EPA.
• Include a Disclosure and Acknowledgment Statement in sales contracts and rental contracts.
The disclosure and acknowledgment statement shall contain a Lead Warning Statement that
describes the hazards of exposure to lead-based paint and, for sales, recommends assessment
of the possible risks of lead-based paint in the subject property prior to its purchase. The
Department of Housing andUrban Development (HUD) andEPAhave prepared disclosure and
acknowledgment statements that may be used under the Section 1018 regulations; however,
sellers, lessors, and agents may use an alternate document if it contains the same warning
language and disclosure and certification information. The disclosure and acknowledgment
statement must be completed, signed, and dated by the parties participating in the sale or rental.
• Sign and date a certification in the disclosure and acknowledgment statement certifying
compliance with the disclosure requirements of the Lead-Based Paint Hazard Reduction Act
and identifying information relative to lead-based paint given to prospective buyers and tenants
of affected properties;
• Obtain signed and dated acknowledgment from buyers and tenants (on the disclosure and
acknowledgment statement) that they have been informed of the possibility of lead-based paint
hazard at the property and their associated rights under the Lead-Based Paint Hazard Reduction
Act;
• Retain the signed disclosure and acknowledgment statement for completed sales and rental
transactions for three years from the date of purchase or commencement of the leasing period;
and
• Give prospective buyers a 10-calendar day period to conduct a lead-based paint inspection and
hazard evaluation, and the provision of withdrawing without penalty from a purchase contract
based on the outcome of the inspection.
These regulations will impose various costs on the parties involved in sale and rental transactions and, as
well, the federal government. This document presents an analysis of the estimated costs to private parties
from compliance with the lead-based paint hazard disclosure regulation for real estate transfers, including
an assessment of the rule's likely effects on small businesses. The document also presents an estimate of the
costs to government from administering the regulation and qualitatively assesses the rule's likely benefits.
The document includes five chapters and two appendixes. The first chapter outlines a framework for
understanding the costs of the regulation while the second briefly reviews key economic data regarding the
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Hazard Disclosure Rule for Real Estate Transfers
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business sectors likely to incur costs as a result of the regulation. The third chapter presents the analysis of
the estimated costs of the regulation to private parties and the federal government and the fourth chapter
analyzes the costs to private parties in relation to example small businesses in the affected business sectors.
The final chapter discusses the hazards of exposure to lead from lead-based paint and assesses the
mechanisms by which the disclosure rule is likely to yield benefits. The first appendix summarizes existing
state programs that include a lead hazard disclosure component while the second lists data sources used in
this analysis.
Another part of the Residential Lead-Based Paint Hazard Reduction Act of 1992, Section 1021, establishes
disclosure requirements for renovation work performed at residential property that may contain lead-based
paint. The analysis of the costs of compliance with the disclosure rule for renovation is presented in a
separate document, Analysis of Lead-Based Paint Hazard Disclosure Rule for Renovations. Much of the
methodology and data sources for that analysis is the same as that for the disclosure rule for transfers. In
some cases, the analyses overlap in the assumptions regarding estimation and allocation of costs because
some parties are affected by both rules.
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Hazard Disclosure Rule for Real Estate Transfers
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Chapter 1
Background and framework for Analysis
Section 1018 of the Residential Lead-Based Paint Hazard Reduction Act of 1992 requires promulgation of
regulations for disclosure of possible lead-based paint hazards in residential property upon the transfer of
the property by sale or rental. These regulations will apply generally to residential housing built before 1978
unless the housing contains no bedrooms, or is housing for the elderly or disabled and may not be lived in
by a child under the age of six ("target housing"). The regulations will change current business practices in
sale and rental transactions and impose costs on involved parties. The costs of the lead hazard disclosure
regulations ("disclosure rule") to private parties will manifest foremost as time requirements: time invested
in learning the rule and implementing compliance procedures, time required for disclosure activities, and
time for meeting the rule's record-keeping requirements. In addition, the rule will impose modest materials
expenses for documents and storage of transaction records. T o provide a basis for analyzing these costs, this
chapter reviews the requirements of the law and implementing regulations for the affected transactions,
identifies the affected parties in those transactions, and summarizes the ways in which those parties may be
expected to incur costs as a result of the disclosure rule.
Effect Of The Disclosure Rule On Sales
Requirements of the Rule
The disclosure rule establishes specific requirements for transfer of information from the seller to the buyer
in the sale of target housing. These requirements apply to the seller of target housing or the agent acting on
behalf of the seller, if an agent is a party to the prospective sale. The requirements include:
• The seller, or agent acting on behalf of the seller, shall provide a prospective purchaser of the
subject property an EPA-approved Lead Hazard Information Pamphlet as specified under
Section 406 of the Toxic Substances Control Act. EPA has prepared a lead hazard information
pamphlet titled "Protect Your Family From Lead in Your Home" that may be used for this
purpose. However, sellers and agents may use other information pamphlets provided that they
have been approved by EPA for use in the state in which the property is located.
• The seller or agent shall include a Disclosure and Acknowledgment Statement in any contract
for the sale of target housing, whether for the entirety or for a partial interest. The disclosure
and acknowledgment statement shall contain a Lead Warning Statement that summarizes the
risks of exposure to lead-based paint and recommends assessment of the possible risks of lead-
based paint in the subject property prior to its purchase. The Department of Housing and Urban
Development (HUD) and EPA have prepared a disclosure and acknowledgment statement that
may be used with sales subj ect to the Section 1018 regulation. However, sellers and agents may
use an alternate document if it contains the same warning language and disclosure and
certification information. The disclosure and acknowledgment statement must be completed,
signed, and dated by the parties participating in the sale.
• The seller or agent shall notify a prospective purchaser of any known lead-based paint or related
hazard in the property, and make available to the purchaser any lead hazard evaluation reports
that are available to the seller. These reports would include any evaluation or inspection reports
prepared on behalf of previous prospective buyers, and any information on past lead paint
abatement activity or lead poisoning at the property. In multi-unit housing, such information
would include any available information on the presence of lead-based paint or abatement
activity in common areas, and any records indicating whether other units (than the subject unit
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or units) "contain or have contained lead-based paint or lead-based paint hazards."
• The seller shall sign and date a Seller's Certification in the disclosure and acknowledgment
statement that he/she has disclosed the required information, if available, to a prospective
purchaser and shall describe the information, if any, disclosed to the prospective purchaser. If
an agent is a party to the transaction on behalf of the seller, the agent must also sign an Agent's
Certification on the disclosure and acknowledgment statement.
• The prospective purchaser must sign and date a Purchaser's Acknowledgment, also part of the
disclosure and acknowledgment statement, stating that the purchaser is aware of his/her rights
under the disclosure rule including the opportunity for a 10 calendar day inspection period, has
read the Lead Warning Statement, and has received the lead hazard information pamphlet and
the information identified in the Seller's Certification as having been disclosed regarding the
subject property. The seller, and the seller's agent, if involved, must retain copies of the
disclosure and acknowledgment statement signed as part of a consummated sale for three years
from completion of the sale.
• The seller shall extend to a prospective purchaser the opportunity for a 10 calendar day period
to conduct an inspection and risk assessment for lead-based paint hazards, and the provision of
withdrawing without penalty from a purchase contract based on the outcome of the inspection.
The regulations stipulate that the buyer may waive this right; in this case, however, the buyer
must indicate in the sales contract that the inspection opportunity was waived. The regulation
includes language for a contingency clause for the 10 calendar day inspection opportunity that
may be included in a sales contract. This particular contingency clause does not have to be used
by the seller and purchaser; however, use ofthe suggested language will satisfy the regulation's
requirement for providing the inspection opportunity.
Responsibility for compliance with these requirements falls first on the seller of the target housing but is
shared with an agent if the seller has entered a contract with an agent for the sale of the property. The
legislation and regulation prescribe penalties for failure to comply with the disclosure rule requirements.
Parties Affected by the Rule
These requirements explicitly affect the three parties who are most directly involved in a real estate sale
transaction: Seller, Agent, and Prospective Purchasers. Each of these parties is required to perform some
responsibility or invest time in meeting the disclosure rule's requirements. In addition, two other parties are
likely to be affected by the rule in a less direct way: Mortgage Lenders and Real Estate Attorneys. Because
lenders accept mortgages on subject properties as security for the purchase loans, lenders have a significant
financial stake in understanding the requirements of the disclosure rule and, perhaps, in ensuring compliance
with the disclosure rule to prevent a future liability from damaging their security interests in subject
properties. Similarly, attorneys virtually always represent or advise parties in real estate sale transactions,
including the seller, buyer, and/or lender. To protect the interests of their clients in sales transactions
involving target housing, attorneys will need to understand the rule.
Cost Effects on Affected Parties
Five general ways were identified in which the disclosure rule is expected to impose costs on the affected
parties. In general, the costs of the disclosure rule will be the aggregation of individual cost effects over the
number of parties and transactions that are affected by the rule, or the frequency of cost occurrence. Below,
each of the five cost components is discussed in terms of how the cost component will affect the parties to
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a sale transaction and the frequency of its occurrence:
1. Start-up costs. These costs include the time required to learn the disclosure rule' s requirements
and set up compliance procedures. All of the affected parties in sale transactions except
prospective buyers — that is, sellers, agents, mortgage lenders, and real estate attorneys — are
expected to incur these costs. However, costs incurred by attorneys and lenders are qualitatively
different from the start-up costs incurred by other affected parties as attorneys and lenders do
not explicitly bear a compliance responsibility under the rule. With respect to real estate agents,
real estate lenders, and real estate attorneys, these costs are expected to be incurred once for the
current stock of individuals performing these capacities. Thereafter, these costs would be
incurred by the new entrants to these professions. With respect to the sellers of target housing,
a distinction was drawn between sellers of owner-occupied property and sellers of rental
property. Start-up costs to sellers of owner-occupied property are expected to be incurred once
for each sale of owner-occupied target housing. Sellers of rental property would also be
expected to incur start-up costs in bringing a target rental property to market. However, sellers
of rental property may be expected to encounterthe disclosure rule and its requirements in more
than one venue. In particular, a seller of rental property will have encountered the rule as it
applies to rental activities and may also encounter the rule more than once in a sales context if
the rental property seller owns more than one rental target housing property. Thus, to prevent
possible multiple counting of the start-up costs applicable to a seller of rental target housing,
the frequency of start-up cost occurrence is judged to be once for each party owning rental
target housing and to be counted only once for both sales transaction and rental transactions.
Whether this cost component is recognized as a part of sales or rental transactions is largely
immaterial. Exhibit 1, Cost Components and Frequency of Occurrence by Affected Transaction
and Party summarizes these cost effects as they apply to affected parties.
2. Disclosure event costs. These costs refer to the time to perform the disclosure activity itself and
include the time to explain the rule, transfer the pamphlet and any additional information
between selling and prospective buyer parties, and gain needed signatures on the disclosure and
acknowledgment statement. These events are expected to occur at the time a prospective buyer
makes an offer on target housing. Thus, the frequency of disclosure event costs will be once for
each offer made on target housing. The parties expected to incur these costs are those parties
that participate directly in the sale of target housing, namely: sellers, prospective buyers, and
selling agents, if involved. In addition to the disclosure event costs that occur in conjunction
with presentations to prospective buyers, real estate agents are also expected to incur a
disclosure event cost in explaining the disclosure rule and its requirements to the seller of target
housing. This aspect of the disclosure event would be expected to occur only once in each sale
of target housing (see Exhibit 1).
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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August 1995
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Exhibit 1: Cost Components and Frequency of Occurrence by Affected Transaction and Party
Transaction
Cost Component
Affected Partv
Frequency of Cost Occurrence
Sales
Start-Up Costs
Real Estate Agents
Once for current stock of agents; annually for new agents
Sellers of Owner-
Occupied Property
Once for each sale of owner-occupied target housing
Sellers of Rental
Property
Once for each party owning rental target housing (see below
under rental transactions)
Real Estate Lenders
Once for current stock of lenders; annually for new lenders
Real Estate Attorneys
Once for current stock of real estate attorneys; annually for
new attorneys
Disclosure Event
Costs
Property Sellers
Once for each offer in each sale of target housing
Real Estate Agents
Once to explain the rule and its requirements to the seller in
each sale of target housing, if agent is involved.
Once for each offer in each sale of target housing, if agent is
involved.
Offerors
Once for each offer in each sale of target housing
Record-Keeping
(retaining signed
disclosure and
acknowledgment
statements)
Property Seller
Once for each sale of target housing
Real Estate Agents
Once for each sale of target housing, if agent is involved
Materials
- Pamphlets
- Disclosure and
acknowledgment
statement
- Lead-based paint
hazard inspection
clause
- Storage
Property Sellers and
Agents, if involved
Pamphlets: Once for each offer in each sale of target
housing
Disclosure and acknowledgment statement: Copied in
duplicate or triplicate for each offer in each sale of target
housing.
Lead-based paint hazard inspection clause: Inspection
contingency clause is added to sales contracts and copied in
duplicate or triplicate for each offer in a sale of target
housing.
Storage: Agents assumed to require storage for signed
Disclosure and Acknowledgment Statement once for each
sale of target housing
Rentals
Start-Up Costs
Property Managers
(real estate agents
covered under sales)
Once for current stock of managers of rental target housing;
thereafter, annually for new management entities
Owners/Lessors
Once for each party owning rental target housing (but
covered under sales)
Disclosure Event
Costs
Real Estate Agents,
Property Managers
Once for each rental transaction in target housing involving
an agent
Owners/Lessors
Once for each rental transaction in target housing
Tenants/Lessees
Once for each rental transaction in target housing
Record-Keeping
(retaining signed
disclosure and
acknowledgment
statements)
Owners/Lessors or
Property Managers
Once for each rental transaction in target housing
Materials
- Pamphlet
- Disclosure and
acknowledgment
statements
- Storage
Owner/Lessor and
Rental Agent, if
involved
Once for each rental transaction in target housing. The
signed disclosure and acknowledgment statements are
assumed to be copied and distributed to the involved parties:
owner, tenant, and rental agent, if involved.
3. Record-keeping costs. The rule imposes specific record-keeping requirements on the involved
parties. Both the seller and the selling agent, if involved, are required to retain for at least three
years the disclosure and acknowledgment statements signed in conjunction with the sale of
target housing. Although the costs are likely to be very minor per transaction, the record-
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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August 1995
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keeping requirement will cause the seller and the selling agent to spend time in filing the
specified documents. These requirements will occur once for each sale of target housing (see
Exhibit 1).
4. Materials. For sales transactions, the materials costs of the disclosure rule include:
• The cost of the lead hazard information pamphlet. One copy of the lead hazard
information pamphlet is assumed to be required for each offer on target housing.
• The cost of the disclosure and acknowledgment statement (which includes the Lead
Warning Statement). The signed disclosure and acknowledgment statement is assumed
to be printed on one side of a single sheet of paper that is copied for distribution to the
seller, offeror, and real estate agent, if involved.
• The cost of including a lead-based paint inspection contingency clause in sales
contracts. The contingency clause included in the regulation is assumed to be included
as a single page addition to the sales contract and assumed to be copied for distribution
to the seller, offeror, and real estate agent, if involved (if the clause is added to sales
contracts without requiring an additional page, this assumption will overstate
regulatory costs).
• Any materials requirements for storing the signed documents as specified by the rule's
record-keeping requirements. Storage costs for the signed disclosure and
acknowledgment statement (i.e., filing space) are assumed to be required ofreal estate
agents. Any storage requirement for other affected parties is assumed to be incidental
and thus not to impose a cost in terms of filing space (see Exhibit 1).
5. Compliance Monitoring. The disclosure rule may also generate costs in conjunction with
compliance monitoring activities undertaken by the responsible agencies. At present, EPA
expects to perform compliance monitoring activities in response to complaints regarding failure
of responsible parties (i.e., sellers, lessors, and sales or rental agents) to comply with disclosure
rule requirements and, therefore, most likely on a relatively infrequent basis. Compliance
monitoring will likely involve EPA performing an on-site compliance audit and will require
parties such as real estate agents to incur costs for the time required to retrieve and copy
compliance documents and for photocopying.
Several additional effects of the disclosure rule were identified but are not considered to generate costs that
are directly attributable to the rule for the purpose of this analysis. These additional effects include:
• Possible outlays for attorneys to review transactions and document compliance on behalf of
participants. It is possible that attorneys may be engaged to review a transaction document to
ensure compliance with the disclosure rule on behalf on the transaction principals. Although
such actions would create a cost, they are not required by the rule.
• Possible additional cost burdens for seller or owner parties with multiple persons. Particularly
in the case of sales of rental housing, the buying and/or selling parties may be multiple person
entities (e.g., a real estate investment trust). If all persons in a selling or buying entity are
required to participate individually in meeting the rule' s requirements (e.g., each member of the
buying or selling entity is required to sign the Warning Statement), then the compliance burdens
might be magnified for some transactions. For this analysis, it is assumed that one person may
be assigned responsibility for representing a multiple person entity in meeting disclosure and
signature requirements. A similar issue may arise in regard to the sale of investment units in
trusts that own rental target housing. F or example, the ownership of some real investment trusts
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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August 1995
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that may own target housing is traded on public securities exchanges. As a result, the ownership
interests in these trusts change hands quickly, on a daily basis, and without the traditional
inspections of the properties in which ownership interest is being purchased. Because these
trades involve the sale of ownership interests between investors who, in general, would not
intend to live in the involved properties, these sales are substantially different from sales to
prospective owner-occupants. Forthis analysis, it was assumed that the disclosure andsignature
requirements would not apply to the sales of publicly traded shares in these real estate trusts.
If such requirements were applied to these transactions, then these transactions would become
more costly and a large volume of transactions would be additionally affected.
• Possible outlays resulting from additional transaction requirements imposed by lenders.
Mortgage lenders may impose additional costs in a transaction as the result of the disclosure
rule. For example, to protect their security interests, lenders may require verification and
documentation of compliance, or preparation and signing of indemnification agreements against
loss from failure of a buyer or seller to comply properly with the disclosure rule. Such actions
might impose a cost on the parties to a sale transaction; however, the rule does not require these
additional protections.
• Possible outlays for professional liability insurance bvreal estate agents. Real estate agents are
charged with the responsibility of overseeing compliance when they participate in the sale of
target housing and may be held responsible for the failure of a transaction to meet rule
requirements. To protect against possible liabilities, agents may purchase additional insurance.
Again, such outlays are not required by the rule and therefore not considered a cost for this
analysis.
Additional costs resulting from actions taken by consumers in response to information were not quantified
(currently, data and methods limitations do not permit measurement of how the rules may affect behavior):
• Possible lost sales, delays in completion of sales, or reductions in sales prices. In many cases,
improved information may be advantageous to the buyer but disadvantageous to the seller. For
example, the disclosure rule may increase the probability that a buyer will withdraw an offer to
purchase target housing or to seek price concessions from the seller based on the outcome of an
inspection. However, such effects would result from the improved information in the transaction
and are indicative of rectifying the market imperfection that is the focus of the disclosure rule.
That is, absent information regarding the possible presence of lead-based paint and related
hazards in a sale, a buyer might purchase a property or make pricing decisions regarding the
property without understanding possible health risks or cleanup costs that may accompany the
purchase. The disclosure rule attempts to remedy this imperfection by increasing the amount of
information available to prospective buyers.
• Possible outlays for lead hazard inspections, risk screens and risk assessments. An effect of the
rule may be to increase the number of lead hazard inspections, risk screens, and risk
assessments that are performed. However, the rule does not require these inspections.
Effect Of The Disclosure Rule On Rentals
Requirements of the Rule
The requirements of the disclosure rule with respect to rentals are similar to, but somewhat less in scope than,
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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August 1995
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those specified for a sale transaction. Comparable requirements to those in a sale include the requirement
that the owner/lessor of target housing, or the rental agent representing the owner/lessor:
• Provide a prospective tenant/lessee of the subject property a copy of an EPA-approved lead
hazard information pamphlet.
• Notify a prospective tenant/lessee of any known lead-based paint or related hazard in the
subject unit, and provide any lead hazard evaluation reports and related information that are
available to the owner/lessor. These reports would include any evaluation or inspection reports
prepared on behalf of previous prospective buyers, and any information on past lead paint
abatement activity or lead poisoning at the property. In multi-unit housing, such information
would include any available information on the presence of lead-based paint or abatement
activity in common areas, and any records indicating whether other units (than the subject unit
or units) "contain or have contained lead-based paint or lead-based paint hazards."
• Include in any rental agreement, a disclosure and acknowledgment statement, which contains
the Lead Warning Statement applicable to rental property. EPA and HUD have also prepared
a disclosure and acknowledgment statement that may be used with rental transactions subject
to the Section 1018 regulation. However, lessors and rental agents may use an alternate
statement if it contains the same warning language and disclosure and certification information.
• Sign and date a Lessor's Certification in the disclosure and acknowledgment statement that
he/she has disclosed the required information, if available, to a prospective tenant/lessee and
shall describe the information, if any, disclosed to the prospective tenant/lessee. If an agent is
a party to the transaction on behalf of the owner/lessor, the agent must also sign an Agent's
Certification on the disclosure and acknowledgment statement.
• Before entering a binding rental agreement, obtain signed and dated acknowledgment from the
tenant/lessee on the disclosure and acknowledgment statement that the tenant/lessee is aware
of his/her rights regarding receipt of information on lead-related hazards at the property and has
received a copy of an approved lead hazard information pamphlet.
• Retain the signed disclosure and acknowledgment statement for three years from the beginning
of the tenancy.
The only significant difference in the requirements for a rental transaction from those of a sale transaction
is that the rental transaction requirements include no provision for the 10-day inspection period and
associated contract withdrawal option.
Responsibility for compliance with these requirements again falls first on the owner/lessor of the target
housing but is shared with an agent if an agent participates in the rental transaction.
Parties Affected by the Rule
The parties likely to be affected by rental transaction requirements of the disclosure rule are: the Property
Owners/Lessors, Real Estate Agents or Property Managers who may act as rental agents on behalf of
Owners/Lessors, and Prospective Tenants. Each of these parties is required to perform some responsibility
or invest time in meeting the disclosure rule's requirements.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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Cost Effects on Affected Parties
The general ways in which the disclosure rule is expected to affect rental transactions are the same as those
outlined above for sales transactions. Each of these five cost components is discussed with respect to the
affected parties in rental transactions:
1. Start-up costs. Parties expected to incur start-up costs in relation to rental transactions include:
property owners/lessors and property managers or real estate agents retained to rent the target
properties. Again the start-up costs include the time required to learn the disclosure rule's
requirements and set up compliance procedures. In terms of the frequency of cost events, start-
up costs are assumed to be incurred once for the existing stock of managers of rental housing
and annually thereafter for new entrants to this business. Rental property owners/lessors and
real estate agents are also expected to incur start-up costs but these costs are already
encompassed as part of the count of affected events in the sale of target housing (see discussion
above at start-up costs for sale transactions and Exhibit 1).
2. Disclosure event costs. Parties incurring disclosure event costs include owners/lessors,
tenants/lessees, and rental agents, if involved. The time requirements again include the time to
explain the rule, transfer the pamphlet and any additional information between owners/lessors
and prospective tenants/lessees, and gain the needed signatures to the disclosure and
acknowledgment statements. These events are expected to occur at the time the tenant enters
a rental agreement/lease for target housing and therefore would be expected to occur once for
each rental transaction in target housing. Rental agents would incur this cost only when the
rental transaction is assisted by an agent (see Exhibit 1).
3. Record-keeping costs. Record-keeping requirements are expected to fall on the owners/lessors
and/or rental agent. The frequency of the record-keeping requirement is expected be once for
each rental transaction in target housing (see Exhibit 1).
4. Materials. Materials costs again include the costs of a lead hazard information pamphlet, the
disclosure and acknowledgment statements (which includes the Lead Warning Statement), and
any materials requirements for storing the signed document as specified by the rule's record-
keeping requirements. Specific materials requirements per rental transaction in target housing
include one pamphlet; a copy of the signed disclosure and acknowledgment statement (assumed
to be printed on one side of a single sheet of paper) for distribution to the tenant/lessee,
owner/lessor, and rental agent, if involved; and the capability of storing the signed document
(see Exhibit 1).
5. Compliance Monitoring. As discussed with regard to sales transactions, the disclosure rule may
be expected to generate costs for compliance monitoring activities. These costs would be
incurred by the rental property owners, real estate agents, and rental property managers who are
responsible for complying with the disclosure rule. Compliance monitoring will likely involve
EPA performing an on-site compliance audit and will require these parties to incur costs for the
time required to retrieve and copy compliance documents and for photocopying.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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Chapter 2
Profile of Sectors Affected
Two business groups are expected to bear the principal effects of the lead hazard disclosure rule for real
estate transfers: (1) Real Estate Agents and Managers; and (2) Real Estate Operators and Lessors. It is these
parties whose business practices are directly affected by the rule and thus may be expected to incur the
greatest costs. In addition, two other business groups — Mortgage Lenders and Real Estate Attorneys —
were identified in the preceding chapter as being less directly affected but also possibly incurring costs as
a result of the disclosure rule. This chapter summarizes economic data and provides a brief review of the
current outlook for these business groups.
Because the economic performance for the two primarily affected groups — Real Estate Agents and
Managers, and Real Estate Owners and Lessors — is so closely linked and economic information on these
groups is often combined, the following discussion considers these two groups together. Each of the latter
two groups is a member of a much broader business sector in the U.S. economy: Mortgage Lenders are
members of the Banking and Financial Services Sector; and Real Estate Attorneys are part of the Legal
Services Sector. The data and discussion for these latter groups are based on these broader business sector
definitions.
Real Estate Agents/Managers and Operators/Lessors
Real estate agents/managers and operators/lessors are part of SIC code 65, Real Estate: Real Estate Operators
and Lessors, SIC code 651 and Real Estate Agents and Managers, SIC code 653. Real estate operators and
lessors includes those businesses that are engaged in the ownership and operation of residential and non-
residential rental properties. Real estate agents and managers includes businesses who act on behalf on others
in the renting, buying, selling, managing, and appraising of real estate properties. On the basis of Census
Bureau data, in 1992, these two SIC codes had a total of 184,000 establishments, employed 1,112,000
persons, and had a total payroll of $23,278 million (see Exhibit 2, Establishment, Employment and Payroll
Data for Affected Business Groups, next page). The gross employment as reported in Census data is likely
to exceed substantially the number of persons that would actually be affected by the disclosure rule. In
particular, the Census Bureau data do not permit identification of those businesses whose primary focus is
on non-residential property. In addition, the number of persons in these businesses who will have to learn
the disclosure rule and be responsible for compliance will be less than the total employment. A better
measure of the number of real estate agents and brokers that may affected by the rule may be gained from
Bureau of Labor Statistics (BLS) data as reported in Occupational Projections and Training Data. According
to BLS data, in 1992, the total employment in the Real Estate Agents and Brokers occupation was 352,000.
This value would exclude those persons in the business who are not responsible for selling property but
would still include persons involved primarily in non-residential property.
During the late 1980s and early 1990s, the real estate development, management and transfer businesses
experienced substantial economic weakness as the result of general weakness in the economy, a spate of
overbuilding in commercial real estate generally and residential real estate in some regions, and tightened
lending standards for real estate development and purchases. Real property values and transaction volumes
generally declined, leading to lower revenues and weaker financial performance in this industry. From about
1991-92 onward, these businesses have recovered as interest rates declined substantially and the economy
strengthened in general. Most recently, economic performance in these industries has turned somewhat
sluggish as interest rates crept upwards over 1994 and the economy shows signs of weaker growth. Key
indicators of real estate industry performance include total housing permits, total sales of existing housing
units, and total nonresidential
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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Exhibit 2: Establishment, Employment and Payrol
Data for Affected Business Groups
Total
Annual
Number of
Number of
Payroll (S000,
Business Sector
SIC Code(s)
Establishments
Employees
1992)
Real Estate Agents/Managers and Operators/Lessors
Operators and Lessors
651
92,000
475,000
8,324,133
Agents and Managers
653
92,000
637,000
14,973,843
Banking and Financial Services Sector
Commercial Banks
602
65,000
1,576,000
42,518,231
Savings Institutions
603
21,000
355,000
8,758,760
Credit Unions
606
13,000
123,000
2,516,436
Mortgage Bankers
616
15,000
181,000
7,100,076
Legal Services Sector
81
154,000
952,000
39,857,204
Source: U.S. Department of Commerce, Bureau of the Census, County Business Patterns, 1992, 1995
permit value.1 These data show that activity in the industry generally peaked between 1986 and 1988,
declined until 1991 or 1992, and began to show recovery in 1993 and 1994 (see Exhibit 3, Summary
Indicator Data for Real Estate Industry Performance, below). Continued strength in the real estate
businesses will largely depend on the strength of growth in the overall economy and the persistence of
relatively low interest rates.2
Exhibit 3: Summary Indi
cator Data for Real Estate Industry Performance
Y ear
1987 1988 1989
1990
1991
1992
1993
1994
Housing Permits (000)
1,534 1,455 1,338
1,104
945
1,105
1,214
1,363
Sales, Existing Housing
3,807 3,901 3,752
3,594
3,575
3,811
4,203
4,404
(000)
Nonresidential Permit
51,551 54,773 51,536
45,775
34,107
32,825
36,464
40,136
Value ($000,000,
current)
Source: National Association of Home Builders, 1995.
Mortgage Lenders (Banking and Financial Services)
Several parts of the banking and financial services sector participate in mortgage lending, including
depository institutions such as commercial banks (SIC 602), savings and loan institutions (SIC 603), and
credit unions (SIC 606); and non-depository organizations such as mortgage bankers/companies (SIC 616).
On the basis of 1992 census data, these four industry groups had a total of 114,000 establishments with
2,235,000 employees, and made total payroll of $60,894 million. The segment of the industry and its
employees that will be affected by the lead hazard disclosure rule is much smaller than the total of the
industry sectors. For example, the Bureau of Labor Statistics (BLS) estimates the total number of Credit
Clerk and Authorizer positions to be about 218,000 as of 1994 (Occupational Outlook Quarterly, Spring
1994). Credit clerks and authorizers would include those persons in lending organizations who are
1 Permit value is the estimated cost of construction and improvements activity specified at the time a
construction permit is obtained for performing new construction or improvements to an existing property.
2 See the summary financial outlook for the homebuilding and real estate investment industries in Value Line
Investment Survey, April 21, 1995, page 873 and, May 5, 1995, page 1171.
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Hazard Disclosure Rule for Real Estate Transfers
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August 1995
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responsible for managing and approving credit. Because credit management involves other types of loans
in addition to real estate loans, the number of positions identified by BLS would be expected to exceed the
number of persons involved in mortgage lending.
These industry groups experienced a steady, but modest, upward trend in recent years following a period of
economic/financial difficulties in the later years ofthe 1980s. This growth in financial performance resulted
from stronger loan demand in the recovering economy coupled with lower interest rates. In turn, interest
spreads on loans (the difference between the interest charged for loans and paid for deposits) have increased,
leading to higher bank profitability, and the volume of non-performing or classified loans has declined
considerably. The savings and loan industry, particularly affected by the deterioration in the real estate
industry several years ago, also appears to be recovering. Exhibit 4, Summary Indicator Data for Commercial
Banking and Savings Institution Sectors, presents data on performance in the commercial banking and
savings segments of the industry. For the commercial banking sector, these data show modest growth over
the past few years in terms of assets, total value of real estate loans, and equity capitalization. Because of
higher scrutiny of the capitalization standards applied to banks over the past several years, the capitalization
ratio (equity-to-total assets) rose from 1987 to 1993. The data for savings institutions tell a different story.
From 1988 to 1992, total assets in federally insured institutions declined by a substantial 40 percent but had
begun to stabilize and recover by 1992. The equity capitalization ratio recovered to 6.1 percent in 1992 after
a record low 1.9 percent in 1989. Department of Commerce analysts view both the commercial banking and
savings institutions industries as likely to remain in an upturn over the next few years. However, the
robustness of performance in both industries depends in large part on the maintenance of relatively low
interest rates and avoidance of recession in the aggregate economy and the real estate industries in particular.
Exhibit 4: Summary Indicator Data for Commercial Bank
ng and Savings Institution Sectors
I Cell
1987
1988
1989
1990
1991
1992
1993
1994
Commercial Banks
Total Assets
($000,000,000)
3,000
3,131
3,299
3,389
3,431
3,506
3,706
3,763
Total Real Estate Loans
($000,000,000)
600
675
762
830
851
868
923
NA
Total Equity Capital
($000,000,000)
181
197
205
219
232
263
297
NA
Equity Capital to Assets
(percent)
6.03
6.29
6.21
6.46
6.76
7.50
8.01
NA
Savings Institutions. Federally Insured Institutions onlv
Total Assets
($000,000,000)
1,251
1,351
1,234
1,085
920
832
970
927
Total Real Estate Loans
($000,000,000)
679
727
709
616
682
619
NA
NA
Total Equity Capital
($000,000,000)
46
55
24
31
49
51
NA
NA
Equity Capital to Assets
(percent)
3.71
4.09
1.91
2.86
5.28
6.09
NA
NA
Source: U.S., Department of Commerce,
Bureau of the Census and International Trade Administration.
Real Estate Attorneys (Legal Services)
The Legal Services Industry (SIC group 81) comprises a large number of specialties of which real estate-
related activities is only one. Bureau of Census data for 1992 indicate that in SIC group 81, 154,000 total
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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August 1995
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establishments employed 952,000 persons with a total payroll of $39,857 million. The Bureau of Labor
Statistics estimates the total number of Lawyers at about 626,000 (Occupational Outlook Handbook, May
1994). Within this total, the number of attorneys who indicate that real estate practice is their primary
business is much smaller. Specifically, data from the "Martindale, Hubbell Law Directory" (Reed Publishing,
1993) indicate that approximately 35,200 attorneys primarily engage in real estate practice.
The legal services industry has shown strong growth over the past few years. Between 1989 and 1994, the
estimated receipts of taxable firms grew from $80.9 billion to $97.0 billion (Bureau of the Census). Growth
was steady over the entire period with no year showing a decline from the previous year. Department of
Commerce analysts cite increasing competition in the legal services industry as possibly reducing the growth
in fees and total receipts in future years. However, the overall economic/financial outlook for the industry
remains favorable.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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Chapter 3
Estimated Costs to Private Parties and Government
The costs of the lead-based paint hazard disclosure rule for real estate transfers include costs to the private
parties that are affected by the rule, as outlined in Chapter 1, and the costs to the federal government for
administering the regulation. This chapter assesses both cost categories and is organized in three major
sections. The first, and longest, section of the chapter addresses the costs to private parties while the second
section reviews the expected costs to the federal government for administering the regulation. The final
section summarizes the aggregate findings for the costs to both private parties and the federal government.
Costs to Private Parties of Complying with the Disclosure Regulation for Real Estate
Transfers
The costs of the lead-based paint hazard disclosure rule to private parties were analyzed in accordance with
the framework outlined in Chapter 1. Before presenting the cost estimates, the following sections first review
general considerations in analyzingthe costs, andthe methods and sources forgathering data for the analysis.
Following these discussions, the next section presents the estimated compliance costs for sale and rental
transactions, including a summary of the calculations leading to the cost values. Following this discussion
are a sensitivity analysis in which the values for important, but uncertain, factors in the analysis are varied
to understand their effect on the expected cost of the disclosure rule; and an assessment of the likely costs
of compliance monitoring activities to private parties.
Structure of Cost Analysis
The aggregate costs of compliance were estimated for the two transactions affected by the rule — Sales and
Rentals — and for four components of cost: Start-Up, Disclosure Event, Record-Keeping, and Materials.
Within this framework, costs were estimated in terms of the incremental time and materials required for
compliance with the disclosure rule aggregated over the estimated number of transaction events and/or
persons affected by the rule. The incremental time requirements were valued on the basis of the loaded labor
cost of the affected individuals if the time required for compliance is part of the person's occupation. If the
time required for compliance is not part of the person's occupation, the time was valued on the basis of an
estimated after-tax income to the person in the assumption that the personal time spent in compliance
displaces the opportunity to work and earn additional income. Materials costs were estimated as the out-of-
pocket costs for the material required — for example, the cost of the lead hazard information pamphlet or
the copies of the signed disclosure and acknowledgment statements.
In summary, the elements in the calculation of the aggregate cost for a time-related cost component include
the time spent per person or event, the number of affected people or events, and the value of time. The
general formula for the cost of a time-related event is as follows:
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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August 1995
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Cost of Time - Related Event
time cost
X
event time
x number of events
Similarly, the elements of a materials cost are the number of materials required per event, the number of
events, and the cost of the material. For example,
Costs were aggregated to yield an estimated annual cost of compliance. In this aggregation, the cost of time-
related events was treated differently depending on whether the cost is a recurring event based on the volume
of affected transactions or is a one-time start-up cost for affected parties. For cases where costs are incurred
in the course of a transaction — for example, the disclosure event associated with a sale or rental
transaction — the estimated cost per transaction event is simply multiplied times the number of events per
year to yield the estimated annual cost. Alternatively, in those cases in whichparties incur a one-time start-up
cost as part of their business (e.g. agents, property managers), the cost is annualized over the expected tenure
of those persons in their occupation.3 It was assumed that the start-up time spent in learning the requirements
of the disclosure rule and developing compliance procedures is a displacement from time that would
otherwise be spent in generating additional income for the affected person or business entity. To illustrate,
it is assumed that a real estate agent would otherwise spend time attempting to complete property sales or
rental activities instead of spending the time to learn the disclosure rule. On the basis of this assumption, the
discount rate used for annualizing the cost of start-up activities is a displacement-of-consumption rate of
three percent. In addition, the analysis also presents cost values calculated on the basis of a higher
displacement-of-investment rate of seven percent. Because non-recurring outlays are a relatively small
component of the total costs imposed by the disclosure rule, the increase in cost from using the higher seven
percent rate is small and amounts to only a few percent of the total estimated costs for the rule.
An additional element of the analysis of start-up costs involves the recognition that the start-up costs to
members of the affected occupations occur at one-level in the first year of compliance with the rule and at
another level thereafter. Specifically, the existing stock of persons in the various occupations affected by the
rule — for example, real estate agents and rental property managers — is assumed to learn the rule and
establish compliance procedures in the first year of the rule and these costs occur one time only and are
annualized in the manner described above. However, additional start-up costs would be incurred by the new
entrants to these business groups: new real estate agents, and property managers (and lenders and attorneys,
when their costs are considered) will have to learn the disclosure rule. Although the new entrants to these
businesses will typically be a small percentage of the existing stock, some costs will still be incurred in each
year for this start-up activity. This element of start-up cost was analyzed in the following manner:
3 Start-up costs for mortgage lenders and real estate lawyers would be treated in the same way. Although lenders
and lawyers may incur costs in learning about the disclosure rule as described in Chapter 1, they are not explicitly
charged with compliance-related responsibilities under the rule. Because their incurrence of costs is not strictly required
by the disclosure rule, start-up costs for lenders and lawyers are not considered in the base cost analysis presented in this
chapter. However, costs for lenders and lawyers are considered as part of the sensitivity analysis presented later in the
chapter. Costs for lenders and lawyers are assumed to occuronly as start-up costs and the analytic treatment of these costs
is the same as that discussed for the other occupations expected to incur start-up costs.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers 23 August 1995
Cost of Copies
copies cost
event copy
x number of events
-------
1. An estimated number of entrants to the affected occupational categories was obtained from the
Bureau of Labor Statistics (BLS). The measure provided by BLS takes into account both the
growth in total positions in an occupation and the movement of persons out of the occupation
creating a need for new entrants. The value obtained from BLS is the average annua! number
of new entrants in each affected occupation over the period 1992-2005.
2. The annual start-up cost for new entrants to the affected professions was calculated as follows:
Annual Start-Up Costs for Entrants = entrants * hours x cost
start-up hour
These costs were assumed to occur in the first year of the regulation and each year thereafter.
Another element of the analysis concerns the estimation of incremental costs of compliance in states that
have some form of a lead paint hazard disclosure requirement pertaining to real estate transactions. As
described in Appendix A, several states were identified as having a disclosure rule for real estate sales that
encompasses some of the features of the federal rule. In these states, real estate agents may have to spend
less incremental time per transaction to meet the federal rule requirements because some of the explanation
and disclosure activity would occur independent of the requirements of the federal disclosure rule. However,
only for three of these states — Massachusetts, Rhode Island, and Maine — was the state rule deemed likely
to offset the incremental time that would otherwise be required for compliance with the federal rule (See
Appendix A). This determination was based on the degree to which these states' rules focus on lead-based
paint as an environmental hazard and the nature of a requirement for explanation and/or obtaining of
signatures of acknowledgment as part of the disclosure activity. For sales transactions in these states, the
incremental time for disclosure activities was reduced to reflect the likely reduction in the time required for
compliance with the federal rule.
Sources of Data
The data used in this study were obtained from literature searches and personal communication with
representatives of the affectedparties. Important sources of data for the analysis include federal publications
by the Bureau of Labor Statistics, Bureau of the Census, and International Trade Administration. In addition,
data were obtained from publications of various industry associations and trade groups. Much of the data
concerning the estimated time requirements for compliance and frequency of events was obtained through
personal communication with independent sales andrental agents, property managers, mortgage lenders, and
real estate lawyers. A complete list of the literature sources and the sources of personal communication is
presented in Appendix B.
Almost all of the data acquired from independent businesses — real estate agents, rental property managers,
renovation contractors, lenders, and attorneys — came frompersons and companies based in Massachusetts.
Since 1988, Massachusetts has had a lead-based paint disclosure rule for residential real estate sales that is
similar to the federal rule. Because real estate agents and other affected parties in Massachusetts have worked
with this rule for several years, their insights into how the new federal rule would likely affect transactions
and impose costs were believed to provide a sound basis for estimating the costs of the federal rule.
Many data items were required for the cost analysis and much of the data is used in more than one
calculation. The data that was used to calculate the costs for the three affected transactions, along with the
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
24
August 1995
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sources for each value is summarized in three exhibits on the following pages. Exhibit 5, Summary of Data
Items and Values for Affected Parties and Events Used in Analysis of Lead-Paint Hazard Disclosure Rule,
summarizes data in four categories:
1. Data Items Concerning the Number of Affected Parties or Persons. These data pertain to the
number of parties and persons that will incur start-up costs under the rule. The starting source
for most of these values was the Bureau of Labor Statistics publication, Occupational
Projections and TrainingData, and associated BLS publications. An effort was made to use an
occupational definition that coincides as closely as possible with the occupationthat is expected
to incur costs as the result of the rule. However, because data are not available on the number
of persons within an occupation who are specifically involved with residential real estate sales,
management, lending or legal practice, these numbers necessarily have a degree of uncertainty
and, in general, may overstate the number of persons who will be affected by the rule.
2. Data Items Concernins the Number ofTransactions and Events that Impose a Cost. These data
are the estimates of the number of times a particular compliance-related activity must occur in
each year or in each affected transaction. The number of housing sales is based on 1992 data
compiled by the National Association of Realtors and applies to all sales of existing residential
property, including both single-family and multi-unit properties. Two adjustments were made
to the sales data to yield an estimate of the number of sales transactions that would be affected
by the disclosure rule. First, from year-of-construction data from the 1991 American Housing
Survey, EPA used the estimated fraction of existing owner-occupied residential units built
before 1979 to calculate the number of sales of pre-1979 housing units. This procedure assumes
that the fraction of sales of pre-1979 housing units will be the same as the fraction of existing
units that were built before 1979. A second adjustment was made to remove the estimated
number of sales of zero-bedroom units with no children occupants. This estimated value is
again taken from American Housing Survey data for 1991. EPA used the resulting value,
2,949,000, as the estimated annua! number of sales of target housing for this analysis. On the
basis of information from the National Association of Realtors, EPA assumed that 85 percent
of these sales would involve an agent, who would thus become responsible for ensuring
compliance with the disclosure rule. As discussed above, a review of state rules regarding
hazard disclosure in real estate transactions indicated that three states have requirements that
may offset some of the federal rule requirements. About 60,000 sales of target housing are
estimated to occur annually in these states.
Other values summarized in the sales part of the exhibit include the number of offers per sale
and the number of lead paint hazard inspections. No solid data were able to be found on the
number of offers per sale of residential property. Discussions with real estate agents indicated
that the number of offers would typically fall between 1 and 5 and that 2 or 3 might be a
reasonable value for this analysis. The primary analysis uses the value of 2 offers per sale.
Because this value is a significant element in calculating the number of disclosure events, the
higher value of 3 offers per sale was used in the sensitivity analysis presented at the end of this
chapter.
With regard to rental-related values, the American Housing Survey for 1990 was again the
source of the number of rental units built before 1979 and the adjustment for zero-bedroom
units without children. The American Housing Survey also contains data on tenure in various
types of property. From these data, it was estimated that approximately 36 percent of rental
units were moved into in any given year (i.e., not simply re-leased to the same renting party) and
the number of rental transactions in target housing was calculated by multiplying the 36 percent
by the estimated number of rental target housing units. On this basis, approximately 9,279,000
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
25
August 1995
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rental transactions in target housing would be subject to the regulation. This estimate of annua!
rental events would include rentals that involve written agreements and less formal rentals that
do not involve a lease or other
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
26
August 1995
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Exh ibit 5: Summary of Data Items and Values for Affected Parties and Events Used in Analysis of Lead-Paint
Hazard Disclosure Rule for Real Estate Transfers
Data Item
Value for Cost Analvsis
Basis for Value/Source
Data Items Concerning Number of Affected Parties or Persons
Number of Real Estate
Agents
Current: 352,000
Estimated number of Real Estate Agents, 1992
from Occupational Projections and Training Data
(OPTD), Bureau of Labor Statistics, May 1994
Number of Real Estate
Agents Involved in
Residential Real Estate
Transactions
Current: 324,000
Entrants: 8,000
Based on information from Commercial
Investment Real Estate Institute, Chicago, that
about 8 percent of agents deal exclusively with
non-residential transactions. Annual new entrants
from OPTD, 1994.
Number of Entities Owning
Rental Target Housing
Current: 92,000
Entrants: 4,000
Number of establishments in SIC code 651, Real
Estate Operators and Lessors, 1992, County
Business Patterns (CBP), Bureau of the Census,
1994. Entrants based on OPTD, 1994.
Number of Real Estate
Lenders
Current: 218,000
Entrants: 7,000
Estimated number of Credit Clerks and
Authorizers, 1992, and entrants from OPTD, 1994.
Number of Real Estate
Attorneys
Current: 35,000
Entrants: 1,000
Estimated number of attorneys primarily practicing
real estate law, from "Martindale, Hubbell Law
Directory," Reed Publishing, 1993. Entrants from
OPTD, 1994.
Number of Property
Managers
Current: 243,000
Entrants: 10,000
Estimated number of Property and Real Estate
Managers, 1992, from OPTD, 1994
Data Items Concerning Number of Transactions and Events that Impose a Cost
Sales-Related Values
Annual Number of Sales,
Existing Housing
3,811,000
3 states with
lead hazard disclosure
requirement: 77,400
Estimated total sales of existing homes,
apartments, condominiums, and co-ops, 1992,
National Association of Realtors, 1993.
Percentage of Existing
Housing Units Built Before
1979
77.7%
Estimated fraction of total housing units built
before 1979, based on 1991 American Housing
Survey data, provided by HUD.
Sales of Pre-1979 Zero-
Bedroom Units With No
Children Occupants
12,000
Estimated from 1991 American Housing Survey
data, provided by HUD.
Annual Number of Sales,
Target Housing
2,949,000
3 states with lead
hazard disclosure
requirement: 60,000
Estimate based on total housing sales, pre-1979
housing percentage, and number of sales of zero-
bedroom units outside scope of rule.
Annual Number of Sales,
Target Housing Involving an
Agent
2,507,000
Estimate based on 85 percent participation of
agents in sales of existing housing, National
Association of Realtors, 1993.
Annual Number of Sales,
Target Housing Without
Assistance of an Agent
442,000
Estimate based on 85 percent participation of
agents in sales of existing housing, National
Association of Realtors, 1993.
Number of Offers per Sale of
Housing
Estimated typical
value is 2 to 3 offers
per sale
Estimates from real estate agents
Rental-Related Values
Number of Rental Housing
Units Built Before 1979
26,837,000
From 1991 American Housing Survey data,
provided by HUD.
Number of Pre-1979 Zero-
1,061,000
Estimated from 1991 American Housing Survey
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
27
August 1995
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Exhibit 5: Summary of Data Items and Values for Affected Parties and Events Used in Analysis of Lead-
Paint Hazard Disclosure Rule for Real Estate Transfers (continued)
Data Item Value for Cost Analysis Basis for Value/Source
Data Items Concerning Number of Transactions and Events that Impose a Cost (continued)
Number of Target Rental
Housing Units
25,776,000
Estimate based on total rental units, pre-1979
percentage, and number of zero-bedroom rental
units outside scope of rule.
Annual Number of Rental
Transactions in Target
Housing
9,279,000
About 36 percent of rental units are occupied by
tenants that moved into them within the preceding
12-month period. Estimated from 1991 American
Housing Survey, provided by HUD.
Estimated Annual Reduction
in Number of Rental
Transactions Subject to
Regulation
4,200 units annually
Estimate based on annual number of lead-based
paint inspections in rental properties and rate at
which units are found and certified as lead-free.
Data Items Concerning Cost of Time for Compliance-Related Activities
Real Estate Agents
$12.02, plus fringe and
overhead at 64 percent,
yields unit hourly cost of
$19.71
Average hourly earnings, December 1994,
Finance, Insurance and Real Estate category, from
Employment and Earnings (EE), Bureau of Labor
Statistics, January 1995. Fringe and overhead rate
taken from CAIR burden analysis (EPA).
Real Estate Lessors and
Property Managers
$12.02, plus fringe and
overhead at 64 percent,
yields unit hourly cost of
$19.71
Same as preceding.
Real Estate Lenders
$9.40, plus fringe and
overhead at 64 percent,
yields unit hourly cost of
$15.42
Median weekly earnings for 1994, Financial
Records Processing, from EE, January 1995.
Weekly value divided by assumed 40-hour
workweek.
Real Estate Attorneys
$27.90, plus fringe and
overhead at 64 percent,
yields unit hourly cost of
$45.76
Median weekly earnings for 1994, Lawyers, from
EE, January 1995. Weekly value divided by
assumed 40-hour workweek.
Personal Time (time spent by
property owners or buyers
apart from their normal
compensated occupation)
$11.28, less 27.65 percent
for income tax and FICA
withholding, yields unit
hourly value of $8.16
Average hourly earnings for December 1994, total
private employment, less allowance for income tax
and FICA withholding, EE, January 1995.
Data Items Concerning Cost of Materials for Compliance-Related Activities
Lead Hazard Pamphlet
$0.24 per pamphlet.
16 pages, printed front and back, folded sheet
format (i.e., four 8.5 x 11 sheets per document)
(discount office supply bulk copying price, May
1995).
Cost of Disclosure And
Acknowledgment Statements
and Inspection Contingency
Clauses
$0.04 each for Disclosure
And Acknowledgment
Statements and Inspection
Contingency Clause.
Disclosure and Acknowledgment Statements are
required as part of the transactions. Contingency
Clauses are assumed to add one page to sales
contract. Copying costs are calculated at $0.04 per
page (discount office supply price, May 1995).
Filing Materials
$0,004 per sheet of paper.
A 4-drawer, 26-inch deep filing cabinet is
estimated to hold about 25,000 sheets of paper and
to cost $100 (discount office supply price, May
1995), yielding a filing cost per sheet of $0,004.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
28
August 1995
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written agreement.
In addition, as specified in the regulation, rental units that have been found by a certified
inspector to be free of lead-based paint on all surfaces will be exempt from the disclosure
requirement. Using data developed for the analysis of regulations to be issued under Section
402 of the Toxic Substances Control Act, EPA estimated that about 56,000 lead-paint
inspections would be undertaken annually in rental property that would otherwise be subject
to the disclosure rule. Approximately 21 percent of these units are expected to be certified lead-
free and thus will reduce the stock of units that are subject to the disclosure rule.4 Thus, in each
year following the disclosure rule's effectiveness date, the stock of units subject to the
disclosure requirement will be reduced by about 11,700 units merely as a result of finding units
that are free of lead-based paint and certifying them as such. In turn, using the estimate that 3 6
percent of rental units will be newly rented each year, EPA estimates that the number of rental
transactions otherwise subject to the disclosure rule will decline by about 4,200 units annually
as the result of the finding and certification process. To illustrate the potential consequence of
this reduction in the number of rental units subject to regulation, EPA also analyzed the cost
of the disclosure rule after the assumed passage of ten years and with the consequent
accumulated reduction of about 42,000 transactions in the number of rental transactions
annually subject to the regulation.
A number of other mechanisms would also lead to fewer rental transactions being subject to the
disclosure rule over time, including: creation of additional lead-free units through abatement
activity and loss of units with lead-based paint through demolition or other destruction.
However, these mechanisms will likely have much less effect than the "finding and
certification" mechanism and have not been reflected in the analysis.
3. Data Items Concerning the Cost of Time for Compliance-Related Activities. As noted above,
the cost of time for compliance-related activities was calculated on the basis of the loaded labor
cost of the affected individuals if the time required for compliance is part of the person's
occupation. Hourly income data for the affected occupations for 1994 were obtained from the
Employment and Earnings report published by the Bureau of Labor Statistics (BLS). The
estimated time values for persons affected by the rule as part of their occupation include an
allowance for fringe and overhead costs. The total fringe and overhead markup used in these
analyses is 64 percent: 40 percent for fringe benefits and 17 percent for overhead (1.40 x 1.17
= 1.64).5 Time that is not part of the person's occupation was valued on the basis of the hourly
income for all private employment as reported by BLS: $11.28 at December 1994. This value
was reduced by 27.65 percent to account for income tax and FICA payments.
4. Data Items Concerning the Cost of Materials for Compliance-Related Activities. Materials costs
were estimated as the out-of-pocket costs for purchasing the materials required for compliance and
include four items: (1) the cost of the Lead Hazard Information Pamphlets; (2) the cost of the
Disclosure and Acknowledgment Statements; (3) the cost of including the inspection contingency
4 Estimate of percentage of rental units constructed 1979 or earlier and not containing lead-based paint taken
from Comprehensive and Workable Plan for the Abatement of Lead-Based Paint in Privately Owned Housing: Report
to Congress, U.S. Department of Housing and Urban Development, 1990. See Table 3-2 on page 3-7.
5 The fringe and overhead cost multiples are based on previous analyses of information burden analyses
undertaken by the Regulatory Impacts Branch, Office of Pollution Prevention and Toxics.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
29
August 1995
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clause for lead-based paint hazards in sales contracts; and (4) the cost of document storage. EPA
did not include in this analysis any cost for developing Lead Hazard Information Pamphlets,
Disclosure and Acknowledgment Statements, or inspection contingency clauses because EPA
and/or HUD have prepared acceptable materials for each of these items. Although the regulation
does not require that transaction participants use the EPA/HUD materials, these materials are
available to transaction participants. Accordingly, transaction participants will not need to incur
costs to develop these materials.
• Lead Hazard Information Pamphlet: EPA has prepared a Lead Hazard Information Pamphlet,
Protect Your Family From Lead in Your Home, that may be used to meet the information
pamphlet requirement. The U.S. Government Printing Office (GPO) estimates that this 16-
page document, printed front and back in three colors, in a half-standard page size format, will
be available to the public at a price of $0.52 per copy. As noted in Chapter 1, the regulation
permits use of other lead hazard information materials if EPA has approved their use. In
addition, transaction participants may copy or print the EPA-approved document as needed.
Thus, transaction participants may be able to obtain or reproduce the document at lower cost
than from GPO. For this analysis, EPA assumed a document cost of $0.24 per copy.
• Disclosure and Acknowledgment Statement: EPA and HUD have prepared two disclosure and
acknowledgment statements that may be used to meet the disclosure and acknowledgment
documentationrequirement. Both statements are printed on one side of a single sheet of paper.
For this analysis, EPA assumed that transaction participants would incur a document copying
cost of $0.04 per statement.
• Inspection Contingency Clause for Lead-Based Paint Hazard: The regulation includes
approved language for an inspection contingency clause to be added to sales contracts for
target housing. If used, this clause would require approximately one-half of a page in standard
text format. For this analysis, EPA assumed that including an inspection contingency clause
in a sales contract would require one additional page to be copied at the copying cost of $0.04
per page. If a contingency clause is able to be included in a sales contract without adding to
its page length, the assumption of one additional page will overstate the cost for this item.
• Document Storage: In all instances, the costs of document storage are assumed to be part of
an existing filing system. As a result, the only materials costs for filing compliance-related
documents are the cost of the filing cabinet. A 4-drawer, 26-inch deep filing cabinet costing
about $100 (discount office supply price, May 1995), is estimated to hold approximately
25,000 sheets. Thus, the incremental filing cost per copy was estimated at $0,004 (see Exhibit
5).
Exhibit 6, Summary of Time Requirements for Time-Related Cost Components in Analysis of Lead-Paint
Hazard Disclosure Rule (next page), summarizes the estimated amounts of time incurred by affected parties
in complying with rule requirements. These estimates are based on conversations with persons in the
occupations that will be affected by the disclosure rule. Because these estimates are uncertain and play an
important role in determining the overall expected cost of the rule, the estimates were varied for the
sensitivity analysis presented at the end of this chapter.
The third of the data compendium exhibits, Exhibit 7, Number of Years for Annualization of Start-Up Costs
(next page), lists the lengths of time used for annualizing start-up costs by the various affected occupations.
These values are based on occupational tenure data obtained from the Bureau of Labor Statistics.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
August 1995
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Analysis of Costs by Affected Transaction
The following sections summarize the analysis of costs for the affected transfer transactions: sales and
rentals. Each discussion is accompanied by an exhibit outlining the components of the cost calculation.
Analysis of Sales Transactions
As outlined in Chapter 1, the parties affected by the disclosure rule in sales transactions are sellers, real estate
agents, prospective purchasers, and, less directly, lenders and attorneys. Exhibit 8, Cost Analysis for Sales
Transactions, summarizes the calculations leading to a total cost of the rule associated with sales
transactions. These costs are discussed for each of the four cost components below.
Exhibit 6: Summary of T
me Requirements for Time-Related Cost Components in
Analysis of
Lead-Paint Hazard Disclosure Rule
T ransaction
Cost Component
Basis for
Affected Pa rtv
Start-Up
Disclosure Event
Record-Keep
ng Estimates
Sales
5 minutesj
5 minutes^.
5 minutes
Real Estate Agents
1 hour
0.5 minutes
Discussions with
Sellers
1 hour
0.5 minutes
real estate
Offerors
None
None
agents and
associations
Mortgage Lenders
1 hour
None
None
Discussions with
(considered as part of
bank associations
the sensitivity analysis)
and lenders
Real Estate Attorney
1 hour
None
None
Discussions with
(considered as part of
attorneys and
the sensitivity analysis)
conveyancing
association
Rentals
Property Managers
1 hour
5 minutes
0.5 minutes
Discussions with
Owners/Lessors
1 hour
5 minutes
0.5 minutes
real estate agents,
Real Estate Agents
None (covered
under Sales)
5 minutes
rental property
owners/ m anagers
Tenants/Lessees
None
5 minutes
and associations
f These values were halved for the estimated number of sales of target housing in the three states with lead-based
hazard disclosure rules that are similar in scope
to the Federal disclosure rule.
Source: U.S. Environmental Protection Agency
Exhibit 7: Number of Years for Annuali/.ation of Start-Up Costs
Occupation of Affected Party Years
Real Estate Agents
6
Property Managers
6
Lenders (considered as part of sensitivity analysis)
6
Attorneys (considered as part of sensitivity analysis)
11
Source: U.S. Dept. of Labor, Bureau of Labor Statistics
Start-Up Costs
Start-up costs include the time required to learn the rule and the time to set up compliance procedures. For
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers 31 August 1995
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the base analysis, parties expected to incur start-up costs in sales transactions include sellers and real estate
agents; costs to real estate lenders and real estate attorneys are considered in the sensitivity analysis. The time
required to learn the rule was estimated on the basis of existing training programs in Massachusetts as well
as through personal communication with representatives of the various affected parties. For example, a
3-hour seminar entitled "Recent Developments in Lead Paint Law and Practice" was recently sponsored by
the Massachusetts Conveyancers Association. Isolating the disclosure portion of the course suggests that 1
hour is a reasonable amount of time for attorneys to learn the rule. Phone conversations with individual real
estate agents indicated that between one-half hour to two hours was a reasonable time for agents to learn the
rule. The time required for a real estate agent to learn the rule was therefore estimated to be about 1 hour as
well. Similarly, the time for lenders and sellers was also estimated to be about 1 hour. Prospective buyers
do not incur a start-up cost (See Exhibit 6).
The estimated start-up times were multiplied by the estimated hourly values of time (see Exhibit 5) to
determine the start-up costs per person in each party. The resulting per person costs were then multiplied by
the total number of individuals affected (see Exhibit 5), to yield the total start-up costs for each party.
For the existing stock of real estate agents (and lenders and attorneys in the sensitivity analysis), the value
of the start-up time is assumed to be retained for as long as they remain in their field. These start-up costs
were therefore annualized according to the expected tenure in each field as discussed above, and at interest
rates of three and seven percent. Also, as described above, the start-up costs incurred by new entrants to these
occupations were also included as an annua! cost in this analysis. Although sellers of owner-occupied
housing are assumed to incur a start-up cost in learning the rule's requirements and assembling any
information to be transferred to prospective buyers, these costs are assumed to provide only a one-time value
per transaction and are thus not annualized.
On the basis of these values, the estimated annual start-up costs for sales transactions sum to $25.8 million
at the three percent discountrate and $26.0 million at the seven percent rate (seeExhibit8; all regulatory cost
amounts are expressed in 1994 dollars). It should be noted that these costs include an allowance for sellers
of rental property that is based on the total estimated number of parties owning rental property. This value
exceeds the number that would be directly attributable to sales transactions under the disclosure rule.
However, these start-up costs would be incurred by these parties either in the course of property sales or in
rental property management activities (i.e., under the rental transaction disclosure requirement of the rule).
These costs are recognized in the sales transaction but, to prevent double counting, are excluded from the
rental transaction analysis.
Disclosure Event Costs
The cost of disclosure refers to the cost of time spent by each party in complying with the rule in an affected
transaction. For sales transactions, disclosure event costs are characterized as follows:
• Disclosure activities performed by the real estate agent, if involved, and the seller in providing
required notifications and information to offerors. These activities occur once for each offer
presented in a sale and include the time to provide the offeror with: a copy of an approved lead
hazard information pamphlet; any known information that may indicate the presence of lead-based
paint or a lead-based paint hazard on the property; and all known lead hazard evaluations,
information, and records. The disclosure time also includes providing the offeror with a disclosure
and acknowledgment statement, which includes the Lead Warning Statement, and obtaining needed
signatures on the disclosure and acknowledgment statement from the seller and the offeror. Parties
incurring these costs include sellers, real estate agents, and offerors. Real estate agents are assumed
to incur these costs in only those transactions in which the target housing is being offered through
an agent, or in about 85 percent of sales based on information from the from the National
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
32
August 1995
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Association of Realtors (see Exhibit 5). Because sellers must sign the Seller's Certification as part
of each sale contract, sellers were assumed to incur these costs in each offer on target housing.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
33
August 1995
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Exhibit 8: Cost Analysis For Sales Transactions (al
dollar values at 1994)
Cost Component: Start-Up Costs
Persons
Party Incurring Cost Affected
Hours/
Person
Cost/
Hour
Cost/ Total
Person Cost
Annual
Cost at
7 Percent
Annual
Cost at
3 Percent
Sellers, Owner-Occupied Housing 2,949,000
1.000
$8.16
$8.16 $24,067,025
$24,067,025
$24,067,02
Seller costs occur annually and are not annualized.
Costs for Existing Stock of Persons in Affected Occupations
These costs occur one time only at the first year of the rule and are annualized over a 6-year period.
Real Estate Agents 324,000 1.000 $19.71 $19.71 $6,386,947 $1,339,955
Sellers, Rental Property 92,000 1.000 $19.71 $19.71 $1,813,578 $380,481
$1,179,014
$334,782
Costs for New Entrants to Affected Occupations
These costs occur annually and are not annualized.
Real Estate Agents 8,000 1.000
Sellers, Rental Property 4,000 1.000
$19.71
$19.71
$19.71 $157,702
$19.71 $78,851
$157,702
$78,851
$157,702
$78,851
Total, Start-Up Costs:
$26,024,014
$25,817,37
5
Cost Component: Disclosure Event Costs
Total
Party Incurring Cost Sales
Hours/
Event
Cost/
Hour
Cost/ Events/
Event Sale
Annual
Cost
Costs for States Without Lead-Based Paint Hazard Disclosure Rule
Real Estate Agents, dealing with:
- Sellers
2,456,000
0.083
$19.71
$1.64
1
$4,034,553
- Offerors
2,456,000
0.083
$19.71
$1.64
2
$8,069,106
Sellers
2,889,000
0.083
$8.16
$0.68
2
$3,929,560
Offerors and Buyers
2,889,000
0.083
$8.16
$0.68
2
$3,929,560
Costs for States With Lead-Based Paint Hazard Disclosure Rule
Real Estate Agents, dealing with:
- Sellers
51,000
0.042
$19.71
$0.82
1
$41,890
- Offerors
51,000
0.042
$19.71
$0.82
2
$83,779
Sellers
60,000
0.042
$8.16
$0.34
2
$40,805
Offerors and Buyers
60,000
0.042
$8.16
$0.34
2
$40,805
Total, Disclosure Event Costs:
$20,170,05
9
Cost Component: Record-Keeping Costs
Total
Hours/
Cost/
T otal
Events/
Annual
Party Incurring Cost
Sales
Event
Hour
Hours
Sale
Cost
Real Estate Agents
2,507,000
0.0083
$19.71
20,892
1
$411,833
Property Sellers
2,949,000
0.0083
$8.16
24,575
1
$200,559
Total, Record-Keeping Costs:
$612,392
Cost Component: Materials Costs
Material
T otal
Cost /
Materials
T otal
Units/
Unit
Material
Cost bv
Annual
Party Incurring Cost and Material
Sales
Sale
Items
Unit
Category
Cost
Real Estate Agents
- Disclosure/Acknowledgment Pgs
2,507,000
6
15,042,000
$0,040
$601,680
- Contingency Clause Pages
2,507,000
6
15,042,000
$0,040
$601,680
- Lead Hazard Pamphlets
2,507,000
2
5,014,000
$0,240
$1,203,360
- Filing Material Costs
2,507,000
1
2,507,000
$0,004
$10,028
Total Materials Cost to Real Estate Agents
$2,416,748
Sellers without an Agent
- Disclosure/Acknowledgment Pgs
442,000
4
1,768,000
$0,040
$70,720
- Contingency Clause Pages
442,000
4
1,768,000
$0,040
$70,720
- Lead Hazard Pamphlets
442,000
2
884,000
$0,240
$212,160
- Filing Material Costs
Not Applicable
NA
Total Materials Cost to Sellers
$353,600
$2,416,748
$353,600
Total, Materials Costs: $2,770,348
Total Annual Costs for Sales at 3 Percent Discount Rate: $49,370,17
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
34
August 1995
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Total Annual Costs for Sales at 7 Percent Discount Rate: $49,576,81
3
Source: U.S. Environmental Protection Agency
• Disclosure activities performed bv the real estate agent, if involved, in informing the seller of
compliance responsibilities in the sale. If a real estate agent is involved in the sale of target
housing, it is assumed that the agent will spend time in explaining the requirements of the
disclosure rule to the seller. This event would be expected to occur once in each sale of target
housing and, for the disclosure event analysis, is applied to the agent only. The seller, but not
the agent, is assumed to spend additional time understanding the rule requirements as provided
for in the analysis of start-up costs.
On the basis of conversations with Massachusetts real estate agents, a typical time for the disclosure activity
is estimated at between one and twenty minutes but would more typically fall in the low end of the range,
or about 5 minutes. For this analysis, it was assumed that the time for disclosure during the sale of target
housing is 5 minutes (or 0.083 hours) per disclosure event. For transactions in states that have a disclosure
rule similar in scope the federal rule, this time was halved to 2.5 minutes. For sales involving an agent, this
time is assumed to be spent by the real estate agent once in each sale in dealing with the seller, and once for
each offer in the sale in dealing with the offeror (see Exhibit 6). Sellers and offerors are assumed to spend
this time once for each offer in each sale of target housing. As previously discussed, the number of offers
assumed for the analysis is two per sale of target housing.
The number of annual disclosure events for the agent, seller and offeror is based on the number of sales in
total and with an agent (see Exhibit 5), and the number of events per sale. The number of annual disclosure
events for each party is then multiplied by the value of time for each party (see Exhibit 5) and the estimated
amount of time for disclosure to yield the estimated total cost for disclosure for sales transactions. The
estimated annual cost for sales-related disclosure events is $20.2 million ($1994).
Record-Keeping Costs
The record-keeping provisions of this rule require that both the seller and the selling agent maintain records
of the signed disclosure and acknowledgment statements for three years following the completion of the
transaction. The record-keeping requirement causes the seller and the selling agent to spend time in filing
the specified documents. In all likelihood, some type of filing system already exists for each party. What is
significant then is the amount of time that is directly attributed to the disclosure rule. From conversations
with Massachusetts real estate agents, the time required for filing the disclosure statements with the other
sales-related paper work is estimated at a few minutes. However, the incremental filing time that may be
reasonably attributed to the disclosure rule itself should be very small or approximately 0.5 minutes (or
0.0083 hours) per sales event.
The total annual cost of record-keeping is calculated by multiplying the time spent per event by the total
number of sales events and the value of time for each party, and is estimated at $0.6 million (see Exhibit 8).
Materials Costs
For sales transactions, the materials costs of the disclosure rule include the costs of a lead hazard information
pamphlet, copying costs for disclosure and acknowledgment statements, copying costs for lead-based paint
inspection contingency clauses, and any materials requirements for storing the signed disclosure and
acknowledgment statements as specified by the rule's record-keeping requirements. With regard to frequency
of cost events, one copy of a lead hazard information pamphlet is assumed to be required for each offer on
target property. The number of disclosure and acknowledgment statements per offer depends on whether or
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
35
August 1995
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not a real estate agent is involved in the transaction. For the 85 percent of transactions involving real estate
agents, three one-page disclosure and acknowledgment statements are assumed to be required for each offer:
one each for the seller, offeror, and the real estate agent for a total of three copies. If no real estate agent is
involved, only two copies of the disclosure and acknowledgment statement are assumed to be required for
each offer: one each for the seller and the offeror for a total of two copies. The same considerations apply
for lead-based paint inspection contingency clauses. For sales involving an agent, three contingency clause
pages are assumed to be required for each offer. For sales without an agent, two contingency clause pages
are assumed to be required for each offer. The storage costs (i.e., filing space) are a function of the number
of sales events, and whether the involved party is assumed to view filing as an incidental event that will, even
in aggregate, not likely impose a cost.
To calculate the total number of lead hazard information pamphlets required, the number of offers per sale
(two) is multiplied by the total number of sales of target property. As noted in Exhibit 5, the pamphlet is
expected to cost no more than $0.24 per copy. Multiplying the $0.24 per copy times the total number of
copies yields the estimated annua! cost of lead hazard information pamphlets for sales transactions (See
Exhibit 5 and Exhibit 8).
The disclosure and acknowledgment statements an Jlead-basedpaintinspection contingency clauses are each
assumed to cost $0.04 per copy. As described, the number of copies of each document per offer is three for
sales involving an agent, and two for transactions in which the owner acts as the selling agent. With an
estimated average of two offers per sale of target housing, 6 copies of the disclosure and acknowledgment
statement and 6 copies of the lead-based paint inspection contingency clauses are estimated to be required
for each sale of target housing involving an agent. For sales without an agent, 4 copies of the disclosure and
acknowledgment statement and 4 copies of the lead-based paint inspection contingency clauses are estimated
to be required for each sale of target housing. Thus, the total number of copies is calculated as the number
of copies per event times the total number of target housing sales — with and without an agent — and
multiplied by the number of offers per sale (see Exhibit 8).
Filing-related materials costs include the cost of storing the signed disclosure and acknowledgment
statements that result from a completed transaction. Accordingly, only the document signed by the actual
buyer (as opposed to unsuccessful offerors) is assumed to be stored and thus require storage capability.
Because of the low frequency of transactions for individual buyers and sellers of owner-occupied property,
filing-related materials requirements for these parties are assumed to be an incidental expense that does not
accumulate as a cost of the rule even when aggregated over the number of affected transactions (i.e., the
analysis effectively assumes that one more piece of paper, the disclosure and acknowledgment statement,
can always be put in the filing drawer of the seller who will keep a copy of the document).6 The materials
costs of filing are therefore only associated with real estate agents. Assuming that agents already maintain
a filing system, the only materials costs would be for the additional filing cabinets needed to retain signed
disclosure and acknowledgment statements, which is estimated at $0,004 per page (see Exhibit 5).
The total cost of materials resulting from sales of target housing is calculated by summing the products of:
(1) the total number of pamphlets times the cost per pamphlet; (2) the total number of disclosure and
acknowledgment statements and lead-based paint inspection contingency clauses times the cost per copy;
and (3) the total number of target housing sales events involving agents times the filing cost per sales event.
On this basis, the total annual materials costs for sales transactions is estimated at about $2.8 million.
6 The sellers of rental property may incur a storage cost because rental property ownership maybe their business
and the accumulation of signed acknowledgment documents may be more than an incidental event. However, this analysis
does not currently recognize this possible cost.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
36
August 1995
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Total Annual Cost for Sales Transactions
Combining the estimated cost values for the four components yields a total estimated annua! cost of the
disclosure rule for sales transactions of $49.4 million at the three percent discount rate for annualizing start-
up costs and $49.6 million at the seven percent discount rate for annualizing start-up costs (costs in 1994
dollars).
Non-quantified Costs
Additional costs resulting from actions taken by consumers in response to information were not quantified
(currently, data and methods limitations do not permit measurement of how the rules may affect behavior).
• Possible lost sales, delays in completion of sales, or reductions in sales prices. In many
cases, improved information may be advantageous to the buyer but disadvantageous to the
seller. For example, the disclosure rule may increase the probability that a buyer will
withdraw an offer to purchase target housing or to seek price concessions from the seller
based on the outcome of an inspection. However, such effects would result from the
improved information in the transaction and are indicative of rectifying the market
imperfection that is the focus of the disclosure rule. That is, absent information regarding
the possible presence of lead-based paint and related hazards in a sale, a buyer might
purchase a property or make pricing decisions regarding the property without understanding
possible health risks or cleanup costs that may accompany the purchase. The disclosure rule
attempts to remedy this imperfection by increasing the amount of information available to
prospective buyers.
• Possible outlays for lead hazard inspections, risk screens and risk assessments. An effect of
the rule may be to increase the number of lead hazard inspections, risk screens, and risk
assessments that are performed. However, the rule does not require these inspections.
Analysis of Rental Transactions
Because the disclosure requirements for rentals are essentially the same as for sales, the cost calculations are
similar. One difference in the calculations concerns the parties affected. The affected parties involved in
rentals are the owners of rental property, real estate agents and rental property managers who rent the
properties, and the prospective tenants. No information is currently available on the fraction of rental
transactions that involves an agent other than the owner. For this analysis, it was assumed that the same
breakdown as for sales — 85 percent of transactions involve an agent — would apply to rentals.
Exhibit 9, Cost Analysis for Rental Transactions, summarizes the calculations leading to the estimated cost
to private parties of the disclosure requirement for rental transactions. These costs are discussed for each of
the four cost components below.
Start-Up Costs
The analysis of start-up costs for the rental related component of the disclosure regulation uses the same
framework as described under start-up costs for sales: learning the rule andsettingup complianceprocedures.
EPA assumed that real estate agents and owners of rental property only need to learn the rule once for both
sales and rental transactions. The start-up costs for these parties were included in the start-up costs for sales,
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
37
August 1995
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and are not repeated under rentals. Thus, the only parties facing a start-up cost are rental property managers.
The time required for property managers to learn the rule, and the value of a property manager's time are
assumed to be the same as that identified for real estate agents under start-up costs for sales or one hour.7 The
start-up times are multiplied by the estimated value of time and the total number of property managers for
target rental housing (see Exhibit 5) to calculate the total start-up cost incurred by the existing stock property
managers. This cost is then annualized according to their expected tenure (see Exhibit 7) and using the 3 and
7 percent discount rates. Costs were calculated for new entrants based on the expected number of new
persons in the occupation as outlined at page 22. The total annua! start-up costs incurred for rentals is
estimated at $1.1 million at the 3 percent discount rate and $1.2 million at the 7 percent rate (see Exhibit 9).
Disclosure Event Costs
The only substantial difference between disclosure in a rental transaction and in a sales transaction is that
no 10-day inspection period is specified. This difference is not expected to affect the disclosure time.
Accordingly, it is assumed that the time for disclosure in a rental transaction is the same as that for sales
transactions. The disclosure event itself is assumed to occur once for each rental transaction and affects the
lessor/owner, the rental agent, if involved, and the tenant. As discussed in Chapter 1, it is assumed that the
disclosure activity and accompanying signing of a disclosure and acknowledgment statement will occur at
the time the tenant and property owner enter a lease agreement and thus would occur once for each rental
transaction. However, because of the possibility that this activity might occur more than once for some rental
transactions, in the sensitivity analysis, an alternative case was considered in which the disclosure event
would occur twice in each rental transaction.
7 A separate estimate for value of time was not found.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
38
August 1995
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Exhibit 9: Cost Analysis For Rental Transactions (all dollar values at 1994)
Cost Component: Start-Up Costs
Partv Incurring Cost
Persons
Affected
Hours/
Person
Cost/
Hour
Cost/
Person
Total
Cost
Annual
Cost at
7 Percent
Annual
Cost at
3 Percent
Costs for Existing Stock of Persons in Affected Occupations
These costs occur one time only at the first year of the rule and are annualized
Real Estate Agents Covered Under
Rental Property Owners Covered Under
Property Managers/Agents 243,000 1.000 $19.71
over a 6-year period.
Cost Analysis for Sales Transactions
Cost Analysis for Sales Transactions
$19.71 $4,790,210 $1,004,966
$884,261
Costs for New Entrants to Affected Occupations
These costs occur annually and are not annualized..
Real Estate Agents Covered Under
Rental Property Owners Covered Under
Property Managers/Agents 10,000 1.000 $19.71
Cost Analysis for Sales Transactions
Cost Analysis for Sales Transactions
$19.71 $197,128 $197,128
$197,128
Total, Start-Up Costs: $1,202,094 $1,081,389
Cost Component: Disclosure Event Costs
Total Hours/ Cost/ Cost/ Events/
Partv Incurring Cost Rentals Event Hour Event Rental
Annual
Cost
Property Managers/Agents
Owners/Lessors
Tenants/Lessees
7,887,000 0.083
9,279,000
9,279,000
0.083
0.083
$19.71
$8.16
$8.16
$1.64
$0.68
$0.68
$12,956,23
8
$6,310,555
$6,310,555
Total, Disclosure Event Costs:
$25,577,34
8
Cost Component: Record-Keeping Costs
Partv Incurring Cost
Total
Rentals
Hours/
Event
Cost/
Hour
Total
Hours
Events/
Rental
Annual
Cost
Property Managers/Agents
Owners/Lessors
7,887,000
9,279,000
0.0083
0.0083
$19.71
$8.16
65,725
77,325
$1,295,624
$631,056
Total, Record-Keeping: $1,926,679
Cost Component: Materials Costs
Partv Incurring C ost and Material
Material Total Cost/ Materials
Total Units/ Unit Material Cost by
Rentals Rental Items Unit Category
Annual
Cost
Owners/Lessors without a Rental Agent
- Disclosure & Acknowledgment Pages
- Lead Hazard Pamphlets
- Filing Material Costs
Total Materials Cost to Owners/Lessors
1,392,000 2 2,784,000 $0,040
1,392,000 1 1,392,000 $0,240
1,392,000 1 1,392,000 $0,004
without a Rental Agent
$111,360
$334,080
$5,568
$451,008
$451,008
Owners/Lessors with a Rental Agent
- Disclosure & Acknowledgment Pages
- Lead Hazard Pamphlets
- Filing Material Costs
Total Materials Cost to Owners/Lessors
7,887,000 Not Applicable
7,887,000 Not Applicable
7,887,000 1 7,887,000 $0,004
without a Rental Agent
NA
NA
$31,548
$31,548
$31,548
Rental Agents
- Disclosure & Acknowledgment Pages 7,887,000 3
- Lead Hazard Pamphlets 7,887,000 1
- Filing Material Costs 7,887,000 1
Total Materials Cost to Rental Agents
23,661,000 $0,040
7,887,000 $0,240
7,887,000 $0,004
$946,440
$1,892,880
$31,548
$2,870,868
$2,870,868
Total, Materials Costs: $3,353,424
Total Annual Costs for Rentals at 3 Percent Discount Rate:
Total Annual Costs for Rentals at 7 Percent Discount Rate:
$31,938,84
0
$32,059,54
5
Source: U.S. Environmental Protection Agency
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
39
August 1995
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As mentioned above, 85 percent of the total target rental transactions are assumed to be handled by aproperty
manager, and 15 percent by the owner. Assuming that the disclosure occurs once for each rental transaction,
the cost of disclosure is calculated by multiplying the number of disclosures by the hours spent and the
estimated value of time for transaction participants. Exhibit 9 summarizes this calculation which sums to
$25.6 million for the involved parties.
Record-Keeping Costs
It is assumed that the record-keeping requirement for rental transactions falls on both the owners/lessors and
rental agents (i.e., real estate agent, property manager or other rental agent), if involved. As for sales, it is
assumed that a filing system is already in place, and that the only cost incurred results from the incremental
time spent in filing an extra piece of paper, the disclosure and acknowledgment statement, with the lease or
other rental documents. Rental property owners are also required to retain for the period of their ownership
any available information regarding the presence of lead-based paint or lead-based paint hazard. However,
no cost allowance was given for this requirement because of a lack of any reasonable basis for estimating
the frequency with which such information would be available to an owner of rental target housing.
The time required for filing is assumed to be 0.5 minutes (the same as that assumed for sales). Multiplying
this value by the total number of target rental transactions yields the total time spent filing the disclosure
materials. Multiplying the total filing time by the value of time yields an estimated total annual cost of
record-keeping for rental transactions of $1.9 million.
Materials Costs
Materials costs for the rentals disclosure rule fall in the same categories as listed for sales with the exception
that no costs are estimated for copying lead-based paint inspection contingency clauses as the 10-day
inspection provision is not included in the rentals rule. Thus, the relevant materials cost categories include
the cost of lead hazard information pamphlets, disclosure and acknowledgment statements, and anymaterials
requirements for storing the signed documents as specified by the rule's record-keeping requirements.
The total number of pamphlets distributed is assumed to equal the total number of rental transactions. The
total cost for pamphlets is determined by multiplying the total target rental transactions by the cost of the
pamphlet.
For the signed disclosure and acknowledgment statements, EPA estimated that a one-page copy would be
required for each participant in the rental transaction: owner, tenant, and rental agent, if involved. Total
copying cost is calculated by multiplying the number of copies per transaction — three for transactions
involving an agent (i.e., one page copied for each of the three parties); two, otherwise — times the number
of transactions.
Lastly, in the assumption that the owners/lessors and rental agents, if involved, will retain the signed
disclosure and acknowledgment statements in an existing, business-related filing system, the storage cost
associated with filing the signed statements is equal to the number of rental transactions in which each party
participates multiplied by the cost of filing, $0,004 per statement. The total cost of materials resulting from
rental transaction is equal to the sum of these three costs or $3.4 million (see Exhibit 9).
Total Annual Cost for Rental Transactions
Combining the estimated cost values for the four components yields a total estimated annua! cost of the
disclosure rule for rental transactions of $31.9 million and $32.1 million ($1994) at the 3 and 7 percent
discount rates, respectively. Using the reduced number of rental transactions expected to be subject to
regulation after finding and certifying additional lead-free units over a ten-year period, these costs fall
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
40
August 1995
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slightly to $31.8 million and $31.9 million ($1994) at the 3 and 7 percent discount rates, respectively.
Total Annual Costs to Private Parties of Compliance Requirements of Disclosure Rule for Real Estate
Transfers
The estimated annua! costs for sales and rental transactions are summed to yield the total estimated annual
cost to private parties of the disclosure rule for real estate transfers. The total annual cost is estimated at
$81.3 million at the three percent discount rate or $81.6 million at the seven percent rate (see Exhibit 10,
Estimated Annual Costs to Private Parties of Disclosure Rule for Real Estate Transfers).
While the total cost may appear large at about $82 million annually, the cost per affected transaction is small
in relation to the value of the transactions. In all, approximately 12.2 million transactions are expected to be
affected, which yields an average annual cost per transaction of about $6.70.
Exhibit 10: Estimated Annual Costs to Private
Parties of Disclosure Rule for Real Estate Transfers
Affected Transaction Categories
Cost Amount (1994 dollars)
and Cost Components
at 3 percent rate
at 7 percent rate
Sale Transactions
Start-Up Costs
Disclosure Event Costs
Record-Keeping Costs
Materials Costs
$25.8 million
$20.2 million
$0.6 million
$2.8 million
$26.0 million
$20.2 million
$0.6 million
$2.8 million
Total for Sale Transactions:
$49.4 million
$49.6 million
Rental Transactions
Start-Up Costs
Disclosure Event Costs
Record-Keeping Costs
Materials Costs
$1.1 million
$25.6 million
$1.9 million
$3.4 million
$1.2 million
$25.6 million
$1.9 million
$3.4 million
Total for Rental Transactions:
$31.9 million
$32.1 million
Total for Rental Transactions:
(after 10 years reduction in number of
rental units subject to regulation)
$31.8 million
$31.9 million
Total Estimated Annual Costs:
$81.3 million
$81.6 million
Total Estimated Annual Costs:
(after 10 years reduction in number of
rental units subject to regulation)
$81.2 million
$81.5 million
Source: U.S. Environmental Protection Agency
Sensitivity Analysis of Costs to Private Parties
Several variables were identified for use in a sensitivity analysis because of the level of uncertainty
surrounding the values used in the analysis and the likely magnitude of change in the overall cost of the rule
resulting from changes in the value of the variables. For the analysis of sales transactions, the variables
identified were the Times for Compliance (e.g., Start-Up Time, Disclosure Time, Record-Keeping Time) and
the Number of Offers per sale transaction. For rental transactions, the variables identified were the Times
for Compliance and the Number of Disclosure Events required per rental transaction. In addition, there is
some likelihood that lenders and attorneys would incur start-up costs in learning the disclosure rule.
However, because these costs are not required by the rule, they were not considered as part of the base
analysis of costs to real estate transfers but are considered in the sensitivity analysis.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
41
August 1995
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The primary values for compliance times (see Exhibit 5) are based on ranges reported in conversations with
real estate agents and other affected parties, and are intended to represent a reasonable average time required
to complete the various compliance activities. However, it is recognized that these values are "soft"
estimates. To provide a more conservative cost analysis, EPA doubled these times per event for the
sensitivity analysis. That is, start-up times were increased from one hour to two hours; disclosure event times
were increased from 5 minutes to 10 minutes; and record-keeping times were increased from 0.5 minute to
1 minute.
The primary value for the Number of Offers (see Exhibit 5) is based on a reported range of 1 to 5 offers per
sales event, with a more typical range being 2 to 3 offers per sale. Three offers per sale was used as an
alternative value for the sensitivity analysis. Similarly, for the sensitivity analysis, it was assumed that, on
average, two disclosure events would be required for each rental transaction.
For mortgage lenders and real estate attorneys, start-up costs were on the basis of a one-hour time to learn
the disclosure rule's requirements and using the cost of time values as summarized in Exhibit 1. These costs
were annualized over the expected tenure in profession as discussed earlier in the chapter. If incurred, these
costs are assumed to be part of the costs of real estate sales.
Exhibit 11, Sensitivity Analysis of the Cost of the Disclosure Rule for Real Estate Transfers, summarizes the
effects on the sale and rental compliance costs of using the alternative values in the sensitivity analysis. The
reported costs are based on use of the three percent discount rate for annualizing start-up costs. The cost
effects are reported both as an absolute increase and the percentage increase in total cost.
Exhibit 11: Sensitivity Analysis of the Cost of the Disclosure Rule for Real Estate Transfers
Cost Impact
Primary Alternative Absolute Percent
Variable Value Value Change Change Uncertainty Issue
Costs for Sales Transactions
Time for Compliance
- Start-Up:
- Disclosure:
- Record-Keeping:
1 hour
5 min.
0.5 min.
2 hours
10 min.
1 min.
$46,600,000
94.4%
Primary value based
on "soft" estimate of
range of values.
Number of Offers per
sale
2
3
$9,427,000
19.1%
Primary value based
on lower end of
"typical" range.
Start-Up Costs for
Mortgage Lenders and
Attorneys
0
1 hour
$940,000
1.9%
Primary value
assigns no cost.
Costs for Rental Transactions
Time for Compliance
- Start-Up:
- Disclosure:
- Record-Keeping:
1 hour
5 min.
0.5 min.
2 hours
10 min.
1 min.
$28,585,000
89.5%
Primary value based
on "soft" estimate of
range of values.
Number of Disclosure
Events per Rental
Transaction
1
2
$28,931,000
90.6%
Primary value based
on "soft" estimate of
how disclosure
requirement would
affect a rental
transaction.
Source: U.S. Environmental Protection Agency
For sales, the total cost is most sensitive to the change in time for compliance. Virtually all of the cost effect
Regulatory Impact Analysis of Lead-Based Paint
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is linearly related to time, so that a doubling in time nearly doubles the total cost: 94.4 percent, or an absolute
increase of $46.6 million from $49.4 million to $96.0 million. The change in number of offers per sale
produces a smaller but still sizable change in cost: 19.1 percent or an absolute increase of $9.4 million to
$58.8 million. The addition of start-up costs for lenders and attorneys has a minima! effect, increasing total
annual compliance costs by 1.9 percent or $0.9 million.
For rentals, the effect of doubling the compliance time estimates is similar to that observed for sales:
doubling the compliance time allowance increases the total annual compliance cost by $28.6 million or 89.5
percent as costs increase from $31.9 million to $60.5 million. Increasing the number of disclosure events per
rental transaction from 1 to 2 has a similar effect, raising total compliance cost by $28.9 million or 90.6
percent.
Compliance Monitoring Costs to Private Parties
The procedure, scope and frequency of compliance monitoring activities for the disclosure rule remain
somewhatuncertain. At present, EPA expects to perform both programmed compliance monitoring activities
and actions in response to complaints regarding failure of responsible parties (i.e., sellers, lessors, and sales
or rental agents) to comply with disclosure rule requirements. Although substantial uncertainty surrounds
the annual number of compliance monitoring events, it is possible to estimate the unit costs for a hypothetical
compliance monitoring event.
The hypothetical compliance monitoring event assumes that EPA will conduct an on-site compliance audit
on parties that have been identified as possibly not complying with the disclosure rule. The audit would
involve reviewing documentation for a sample of transactions that are subject to the rule. For estimating the
costs of the hypothetical compliance monitoring event, EPA assumed that the auditor would work with a
clerk for the audited party to retrieve and review the compliance documents for a sample of 10 transactions.
If the review of the sample transactions indicated that the audited party had failed to comply with the
disclosure rule requirements, then the auditor would undertake a more thorough review of transactions that
are subject to the rule. However, this analysis does not consider the costs of this more thorough review.
The activities involved in compliance monitoring therefore include: locating and retrieving the compliance
documents for each of the ten transactions; making copies; and re-filing the originals. The cost of compliance
includes Cost of Time and Cost of Materials:
• Cost of Time. About 1 hour is estimated as the time for retrieving, copying, and re-filing the
original compliance documents (i.e., the signed and dated disclosure and acknowledgment
statements). For the labor cost of this activity, EPA used the same hourly labor rate as used for
calculating the cost to lending organizations for compliance with the disclosure rule. The total
unit hourly cost of $ 15.42 (including the 64 percent allowance for fringe and overhead) is based
on the average weekly earnings in 1994 for persons in the "Financial Records Processing"
occupational category (.Employment and Earnings, Bureau of Labor Statistics, January 1995).
Thus, at one hour of effort, the cost of time is estimated at $15.42.
• Cost of Materials. Materials costs includes the cost of copies (10 transactions x 1 page per
transaction x $0.04 per page), which amounts to $0.40.
For this hypothetical case, the cost to affected parties is therefore estimated at $15.82 per compliance
monitoring event or $1.58 for each of the ten transactions assumed to be audited.
Whether the total costs to private parties for compliance monitoring activities will add substantially to the
total costs of regulatory compliance will depend on the volume of compliance monitoring events undertaken
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Hazard Disclosure Rule for Real Estate Transfers
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annually by EPA. To illustrate, to cause a one percent increase ($813,000) in the estimated total annua! cost
of compliance for real estate transfers ($81.3 million in 1994 dollars), EPA would have to monitor
approximately 514,000 transactions or about 4.2 percent of the 12.2 million sale and rental transactions
estimated to be subject to the rule annually. If each compliance monitoring event involved 10 transactions,
as specified in the hypothetical case above, EPA would therefore need to conduct 51,400 audits. As discussed
in the next section, EPA currently anticipates that the compliance and monitoring activity will involve
substantially fewer audits — 5 00-1,000 per year — than would be required to achieve a one percent increase
in the total costs of regulatory compliance. Accordingly, the costs borne by affected private parties for
compliance monitoring activities are not likely to add substantially to the total costs of complying with the
disclosure rule for real estate transfers.
Costs to Government for Administering the Disclosure Regulation for Real Estate
Transfers
To ensure compliance with the final regulation, resources will be required to conduct a number of activities,
including:
• Inspections;
• Violation case management;
• Establishment and maintenance of cooperative agreements, if applicable;
• Compliance assistance;
• Development of performance measurement criteria; and
• Management.
In estimating the magnitude of the resource requirements associated with these activities, EPA took into
account its overall program needs; that is, rules which provide for the disclosure of information prior to
residential remodeling or renovation activities and rules which establish standards for conducting lead-based
paint activities (e.g., risk assessment, abatement) are also under development, and resource commitments
made to satisfy one program goal may also serve to satisfy similar needs associated with an alternate goal.
Nevertheless, to the extent that overall resource requirements could be apportioned to achieving the goals
of the rules for information disclosure at the time of real property transfer, the estimates which follow are
intended to represent costs to the government solely for the purposes of ensuring compliance with those
rules.
Estimates in this section are based on preliminary recommendations of and discussions held by EPA
enforcement and compliance personnel and draw on experiences in other program areas (e.g., PCBs,
asbestos, pesticides, and EPCRA).
Inspection and Case Management Costs
To most accurately project costs associated with these activities, the frequency of inspections and resultant
rate of violations is required. Because these rules are to form part of a new program, it is at this time
unknown what level of effort will be deemed appropriate. F or illustrative purposes, an inspection rate ranging
between 500-1,000 per year (10-20 per state) is incorporated into this analysis, resulting in an estimated
federal personnel increase of 25-50 full-time equivalent positions (FTEs), or and average of 2.5-5.0 FTEs
per EPA region. In addition, a 0.5 FTE increase in headquarters staffing is assumed to be required to permit
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national coordination of inspector training, inspection and case development guidance, and compliance
monitoring strategy development.
Performance Measurement and Management
It is assumed that 5.0 FTE (0.5 per EPA region) will be necessary to perform tracking and management of
program activities so that appropriate measures of success may be developed. While these resources are
assumed to be constant on an annua! basis in this analysis, more effort may be required up-front to assess
alternative strategies.
Compliance Assistance
Compliance assistance activities involve outreach to inform and educate the regulated community. Such
activities may be undertaken at both the EPA headquarters and regional offices. As explained above in
connection with inspection and case management activities, the level of effort required is unknown. For the
purposes of this analysis, it is assumedthat FTE increases of 0.5 for headquarters and 1.0 for regional offices
(0.1 per EPA region) will be necessary to ensure that the regulated community is aware of the requirements
of the information disclosure rules and is kept abreast of any policy or interpretive modifications as the
program matures.
Total Costs to Government
Total costs were estimated by summing the assumed FTE needs for each major activity area described above
and multiplying the total by the estimated annual cost per FTE.
Total FTE requirements =
(25.0+0.5) + 5.0 + 1.5 = 32 (low)
(50.0+0.5)+ 5.0+ 1.5 = 57 (high)
Cost/FTE =
($68,861 + $82,954)/2 = $75.9088
TOTAL COST = $2.429.056 (low) - $4.326.756 (high)
This range represents the upper-end estimate of intramural Agency resource requirements, given the
inspection frequencies specified above. It is assumed that extramural resource needs will also be identified,
to allow for the addition of Senior Environmental Employment (SEE) inspectors. Total costs may, therefore,
exceed the estimates presented above, though tradeoffs between intramural and extramural resources could
result in overall costs in fact falling within the range developed.
Total Costs to Private Parties and Government of the Disclosure Regulation for Real
Estate Transfers
The estimated costs to private parties and the federal government were summed to yield a comprehensive
estimate of the total annual costs of the lead-based paint hazard disclosure regulation for real estate transfers.
Exhibit 12, Estimated Total Annual Costs of the Disclosure Rule for Real Estate Transfers, summarizes this
8 Average of the fully-loaded wage rates for GS-12 and GS-13 employees, $1994.
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calculation.
The estimated total annual costs range from $83.7 million, based on the low estimate of government
administrative costs and the 3 percent discount rate for annualizing one-time outlays, to $85.9 million, based
on the high estimate of government administrative costs and the 7 percent discount rate for annualizing one-
time outlays.
Exhibit 12: Estimated Total Annual Costs of the Disclosure Rule for Real Estate Transfers
Estimated Cost (1994 dollars)
Cost Category
at 3 percent rate at 7 percent
rate
Costs to Private Parties
Total Costs for Sale Transactions:
$49.4 million $49.6 million
Total Costs for Rental Transactions:
$31.9 million $32.1 million
Total Annual Costs to Private Parties:
$81.3 million $81.6 million
Costs to Government
Low Estimate (lower annua! inspection
$2.4 million
rate)
High Estimate (higher annual inspection
$4.3 million
rate)
Total Annual Costs
Based on Low Estimate of Government
$83.7 million $84.0 million
Costs
Based on High Estimate of Government
$85.6 million $85.9 million
Costs
Source: U.S. Environmental Protection Agency
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Chapter 4
Effect of the Lead Paint Hazard Disclosure Rule for Real Estate
Transfers on Small Businesses - Regulatory Flexibility Analysis
EPA investigated the potential impacts of the rule on small businesses, and has prepared a Regulatory
Flexibility Analysis (RFA), in accordance with EPA guidelines. While a large number of small
establishments will be potentially affected by the rule, cost impacts were not found to be of sufficient
magnitude to cause undue harm to such establishments. Consequently, EPA did not further modify the
regulation based on small business impact considerations. EPA's RFA is presented in this chapter. The first
section provides a brief introduction regarding EPA's approach in considering and analyzing small business
impacts. The next section reviews the participation of small businesses in the affected industries, while the
final section uses compliance cost estimates from the previous chapter together with example information
on small business operations and cost to illustrate the rule's likely affects on small businesses.
Background and Approach
In formulating an approach for the RFA, certain preliminary steps are recommended. First, statutory authority
to consider regulatory options should be established. EPA has determined that, under the Lead-Based Paint
Hazard Reduction Act of 1992, the Agency has discretion in prescribing record-keeping requirements to
facilitate enforcement of regulations promulgated pursuant to the Act. Thus, in the event that regulatory
burdens should prove too severe for smaller establishments, the Agency could seek to tailor its record-
keeping provisions to mitigate such impacts. However, as demonstrated in the RFA, cost impacts were not
found to be of sufficient magnitude to justify the formulation of regulatory alternatives. In fact, small
businesses were found to constitute the maj ority of affected establishments; consequently, the final regulation
reflects the government's concern for small business in that all provisions were carefully crafted to minimize
impacts on all regulated entities.
EPA also considered how it would define a small business concern for this regulatory action. EPA has
considered businesses employing 1 to 10 workers as small entities, and this definition is both appropriate and
very likely consistent with the level of economic activity recognized in 13 CFR Part 121 for businesses in
sectors affected by the rule ($1.0 [excluding commissions] to $10 million annua! revenues). Thus, EPA is
not seeking to establish alternative definitions of small entities in connection with this rulemaking.
The following sections of the RFA include a profile of affected businesses, segmented by employment size
class, and a financial analysis in which regulatory costs are measured against labor and overhead expenses
for a "typical" small establishment in each affected sector.
Role of Small Businesses in Affected Industries
As discussed in the preceding chapters, the disclosure rule for transfers will impose requirements on
businesses that participate in the sale and rental of residential real estate. Two business groups were
identified as being directly affected by the rule's requirements: Real Estate Operators and Lessors (SIC code
651) and Real Estate Agents and Managers (SIC code 653). Both business groups are comprised
predominantly of "small business entities." As such, the costs of complying with the disclosure rule will
largely fall on small businesses.
As shown in Exhibit 13, Small Business Participation in Affected Business Sectors, both of the affected SIC
groups are dominated by small establishments as defined on the basis of number of employees. Using Bureau
of the Census data for 1990, Exhibit 13 summarizes the number of establishments, number of employees and
annual payroll for establishments of different employment size classes. For both business groups, more than
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70 percent of establishments fall in the smallest employment size classification — 1-4 employees — and
more than 90 percent of establishments have less than 20 employees. Thus, by any reasonable standard, the
vast preponderance of establishments in these business groups are small businesses.
Exhibit 13: Small Business Participation in Affected Business Sectors, 1992
Establishments, Employment and Payroll by Employment Size Class
Employment Size Class (number
of employees)
Data Item
Total
1-4
5-9
10-19
20-49
50 or more
Real Estate Operators and
Lessors
-------
For this analysis, example small business establishments were structured in terms of number of employees,
and gross annua! cost of employment and overhead. The choice of number of employees for the example
establishments is somewhat arbitrary but falls within the range of small businesses and further reflects
information obtained in conversations with representatives of businesses likely to be affected by the rule.
Unit hourly costs of employment and overhead are the same values as those on which the aggregate cost
estimates presented in Chapter 3 are based. The estimated annual costs of compliance for the example
businesses require three components:
1. Cost estimates from Chapter 3 of the unit values for both the start-up costs (per employee with
disclosure rule responsibilities) and the unit costs per affected transaction.
2. Estimated fraction of employment in a small business with responsibilities under the disclosure
rule. This value is needed to assign start-up costs to the example business.
3. Estimated number of transactions per year that would be subject to the disclosure rule. The
volume of affected transactions is the most important variable affecting the estimated cost to
a business from compliance with the disclosure rule. The values for both the numbers of
transactions per year and the fraction of employment with disclosure rule responsibilities were
estimated from conversations with representatives of businesses likely to be affected by the
disclosure rule.
The example establishments are not meant to be rigorously defined representative models of establishments
operating in the affected business groups. However, they are meant to serve as credible illustrations of the
cost impacts of the disclosure rule on small businesses.
Example establishments for assessment of the disclosure rule for transfers were defined and analyzed for
three organizations:
1. A 10-person organization primarily engaged in residential sales;
2. A 5-person organization primarily engaged in residential rentals; and
3. A 10-person organization engaged in both sales and rentals.
The definition of the organizations and related analytic findings are discussed below for each organization.
Organization Primarily Engaged in Residential Sales
From conversations with real estate firms, it was determined that a 10-person organization was reasonable
for illustrating a small real estate sales organization. Gross annual, pre-compliance labor and overhead costs
were calculated on a baseline, or pre-regulation, basis as the product of the number of persons (10), the
average hourly earnings with overhead for persons in the real estate sales business ($19.71, see Exhibit 5,
page 25), and an assumed 2,080 hours per year. The resulting value of $410,000 per year is compared with
the estimated annual costs of compliance to provide insight into the significance of disclosure rule
compliance costs to small businesses {Exhibit 14, Illustration of Effects of Disclosure Rule for Transfers on
Small Businesses, summarizes the calculations leading to the estimated costs to the example real estate
organizations.). It may be noted that real estate agents are not typically compensated as salaried employees
but earn their income through commissions on sales. However, whether the gross employment cost is
considered a payroll obligation or a payment contingent on performance is irrelevant for the analysis as,
either way, it provides a measure of the expected gross payments to persons who are associated with the
example small business organization plus overhead.
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Exhibit 14: Illustration of Effects of Disclosure Rule for Transfers on Small Businesses
Number of
Number with Disclosure Event
Disclosure Costs to Organization Transactions
Organization
Number Rule Start-Up, All other, Low High
Persons Responsibility per person per event Estimate Estimate
Real Estate Sales
Real Estate Rentals
Sales and Rentals together
10
5
10
10 $19.71
5 $19.71
10 $19.71
$6.06
$2.17
100 250
150 400
250 650
First-Yeai
Compliance Costs
Estimated
Labor and
Compliance Cost
as a Percentage
of
First
Year
Transaction Costs
Total First-Year
Compliance Cost
Overhead
Cost, pre-
Labor and
Overhead Costs
Organization
Start-lip
Low High
Low High
Regulation
Low High
Real Estate Sales
Real Estate Rentals
Sales and Rentals
together
$197
$99
$197
$606 $1,514
$326 $868
$932 $2,382
$803 $1,711
$425 $967
$1,129 $2,579
$410,000
$205,000
$410,000
0.20% 0.42%
0.21% 0.47%
0.28% 0.63%
Costs in 1994 dollars.
Source: U.S. Environmental Protection Agency
Conversations with real estate organizations also indicated that typically 80 to 90 percent of the people in
a real estate sales organization would be involved in sales activities and thus would have direct responsibility
for knowing and performing the disclosure rule's requirements. However, non-sales people may also have
responsibility for preparing or filing compliance-related materials. Therefore, for this analysis, it was
assumed that all persons in the organization would need to learn the disclosure rule's requirements and thus
the start-up cost per person of $19.71 is assumed to be incurred for 10 persons, for a total start-up cost of
$ 197 (see Exhibit 14). As discussed in Chapter 3, the start-up cost would be expected to generate value for
more than one year and in the analysis of aggregate costs of the rule, the start-up cost was annualized over
a several year time-frame. However, to be conservative in assessing the effect of disclosure rule costs on
small businesses, the start-up cost is not annualized but treated as a direct cash outlay occurring in the year
that serves as the basis of the analysis. In this regard, the example analysis may be interpreted as representing
the first-year of compliance with the rule. In subsequent years, the start-up cost would be incurred only for
new persons in the real estate organization.
The critical item for the analysis is the number of sales transactions that would be expected to be subject to
the disclosure rule. Real estate agents indicated that the number of transactions per year in a 10-person
organization could vary over a wide range. For example, in a good year, a 10-person organization might
participate in as many as 250 transactions but, in a poor year, might record less than 100 transactions.
Because of the possibility that an organization might operate in an area in which virtually all transactions
would involve target housing, no reduction was made to the number of transactions to account for the
possibility that sales would fall outside the disclosure rule's requirements. A range of 100 to 250 transactions
was used in this analysis.
Costs per transaction were calculated from the rule's estimated costs to real estate agents as presented in
Chapter 3. Specifically, the costs to real estate agents for each of the three cost categories — disclosure
event, record-keeping, and materials — were divided by the number of transactions to yield a unit cost per
sale of target housing: $6.06. To be conservative, in performing this calculation, no credit was given for the
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expected lower costs in states already having a disclosure rule. That is, the unit cost for the disclosure event
was calculated using the aggregate costs and number of transactions for only states without a disclosure rule.
The product of the number of transactions and the unit cost yields the gross annua! cost of transactions to
the organization, or $606 at the low estimate of number of transactions and $1,514 at the high estimate.
Summing the start-up costs and the transaction costs yields total compliance cost estimates of $803 and
$1,711, for the low and high estimates of number of transactions, respectively (see Exhibit 14).
To gauge the effect of these costs on the example small business, the gross costs were divided by the
estimated annual labor and overhead costs for the organization, $410,000. For both the low and high number
of transaction values, annual compliance costs are well less than one percent of the estimated annual labor
and overhead costs for the organization. Specifically, at the high estimate for number of transactions,
compliance costs were 0.42 percent of annual labor and overhead costs, and, at the low estimate for number
of transactions, 0.20 percent (see Exhibit 2).
Organization Primarily Engaged in Residential Rentals
From conversations with real estate firms, it was determined that residential rental organizations would
typically be smaller than sales oriented organizations and a 5-person organization was thus used as the basis
for the rental organization analysis. As above, gross annual pre-compliance labor and overhead costs were
calculated as the product ofthe number of per sons (5), average hourly earnings ($19.71), and assumed2,080
hours per year with a resulting value of $205,000 (see Exhibit 14).9 As above, it was assumed that all persons
in the organization would need to learn the disclosure rule's requirements and thus the start-up cost per
person of $19.71 is assumed to be incurred for 5 persons, for a total start-up cost of $99 (see Exhibit 14).
Because of the lower value per transaction, a rental-oriented real estate organization must generate a volume
of transactions than a sales-oriented organization to be financially successful. In the same way as for sales
transactions, real estate agents indicated that the number of rental transactions per year in a 5-person
organization could vary widely from a low of perhaps 150 rentals per year to 400 or more, which is the range
used in this analysis. Following the same procedure as outlined for sales, the unit cost to real estate agents
was calculated from the Chapter 3 results as $2.17 per transaction. Thus, the estimated range of transaction-
related costs incurred annually is $326 to $868. Summing the start-up and transaction costs yields total
compliance cost estimates of $425 and $967, for the low and high estimates of number of transactions,
respectively. Because of the higher volume of transactions per person, the rental organization's costs are
slightly higher as a percentage of labor and overhead costs than the costs estimated for the sales organization
but still less than one percent. At the high estimate for number of transactions, compliance costs were 0.47
percent of annual labor and overhead costs, and, at the low estimate for number of transactions, 0.21 percent
(see Exhibit 14).
Organization Engaged in Residential Sales and Rentals
T o provide a modestly more conservative illustration of the effects on small businesses of the disclosure rule
for transfers, the compliance costs for both the sales and rental organizations were blended in a single
example business. Specifically, the 10-person sales organization was assumed to perform both the sales
business previously analyzed and the rental business for the 5-person organization from the preceding
discussion. From a calculation standpoint, the transaction-related compliance costs for the 5-person rental
organization were added to the total costs for the 10-person sales organization while holding the
organization's labor and overhead costs constant. In this way, the example sales organization is forced to bear
9 The structure of calculations for rental organizations parallels that discussed above for sales organizations.
Accordingly, the discussion for the additional example organizations is briefer in describing the structure of calculations.
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the additional compliance costs associated with rental activity without an increase in the base labor and
overhead costs to which compliance costs are compared. No additional cost burden is assumed for start-up
costs since the start-up activity for sales is assumed to subsume that required for rentals.
Summing transactions-related costs for both sales and rentals yields total annua! transactions costs of $932
to $2,382 at the low and high volumes of transactions, respectively. With the addition of start-up costs, total
annual compliance costs come to $1,129 and $2,579, which amount to 0.28 percent and 0.63 percent of the
organization's estimated labor and overhead costs. Thus, for both the low and high estimates of number of
transactions, the disclosure rule's annual compliance costs remain below 1 percent of labor and overhead
costs (see Exhibit 14).
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Chapter 5
Assessment of Benefits
The lead hazard disclosure rule for real estate transfers is expected to yield benefits by reducing exposure
to the health hazards of lead-based paint by persons and households buying or renting target housing.
Because of uncertainty regarding how households will respond to the information provided by the lead
hazard disclosure requirements, it is not possible to quantify these benefits, either in terms of the numbers
of adverse health effects avoided or in terms of the monetary value of those avoided adverse health effects.
In lieu of a quantitative assessment, this chapter assesses qualitatively how the disclosure rule is expected
to benefit households that would otherwise be exposed to health hazards from lead-based paint. To aid in
understanding these benefits, the chapter first reviews the market imperfection present in real estate transfer
transactions regarding lead-based paint hazards and then outlines the mechanisms of exposure to lead from
lead-based paint and the associated health effects. The third section describes how the disclosure rule is
expected to achieve benefits. The final section of the chapter reviews certain evolving approaches that may
provide a basis for valuing the benefits of information-based regulations.
Understanding the Market Imperfection
The market imperfection that the lead hazard disclosure rule for real estate transfers aims to correct is that
prospective buyers and renters of housing frequently lack important information regarding the possible
presence of lead-based paint and its associated hazards in housing units being considered for purchase or
lease. The failure of the marketplace to provide this information means that prospective buyers and renters
mightpurchase or lease aproperty, ormake pricing or rental payment decisions regarding properties, without
understanding possible health risks or risk management costs that may accompany the transaction. The
disclosure rule attempts to remedy this imperfection by increasing the amount of information available to
prospective buyers or renters regarding the possible presence of lead-based paint in a housing unit and the
associated health risks. As a result, prospective buyers or renters will have better information on which to
base decisions regarding whether and at what price to purchase or rent a housing unit, and whether to
undertake abatement or other risk-management activities upon possession of the unit.
Exposure to Lead from Lead-Based Paint and Related Adverse Health Effects
The reason that the lack of information in real estate transfers is of sufficient concern to warrant intervention
in the market process is that exposure to lead from lead-based paint presents significant health risks. The
documented health risks of exposure to lead include reduced intelligence in children, and increased
probability of hypertension, stroke, heart disease and premature death in adults. The costs stemming from
these health risks are born both by individuals who are affected by exposure to lead, and by society at large
through increased health care and educational costs and losses in the economic productivity of affected
individuals. This section reviews the mechanisms by which residents maybe exposedto lead from lead-based
paint in a household and summarizes information on the known health risks from exposure to lead.
The presence of lead-based paint in a housing unit presents a health risk because of the possibility that
residents will take lead into their bodies. The mechanisms of bodily intake include inhalation and ingestion
of paint dust and debris containing lead-basedpaint residue. Lead-based paint residue enters the environment
in and around housing units in several ways, including flaking and chipping of paint from deteriorated paint
surfaces, and formation of lead-containing dusts from the normal wear and tear of painted surfaces. Because
of the friction and abrasion of normal usage, window and doors, in particular, contribute to formation of lead-
containing dusts that may be ingested or inhaled. The scraping and sanding involved in preparation for
painting also contributes to formation of lead-containing dusts.
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Among household members, young children are generally considered at higher risk of lead intake because
of the frequency of hand-to-mouth activity and the likelihood of their inhaling dusts from floors and window
wells. Young children may also chew paint from otherwise intact surfaces that are within their reach such
as window sills and doors. The intake of lead-containing materials by children is not only a risk inside a
housing unit but also outside as paint dusts, both from normal deterioration and preparation work for exterior
painting, may contaminate the soils in children's play areas. Adults and older children are also subject to the
risk of lead intake through inhalation of dusts, preparation and eating of foods without proper washing of
hands, and preparation of foods in areas where lead-containing dusts have accumulated.
Numerous studies, including several by the U. S. Environmental Protection Agency (EPA), have documented
the adverse human health effects associated with exposure to lead. In a pioneering study, Schwartz et al.
quantified a number of health benefits that would result from reductions in lead content of gasoline. The
work was extended by EPA's analysis of lead in drinking water and by an EPA-funded study of alternative
lead National Ambient Air Quality Standards. Although uncertainty remains as to the full extent of the health
impacts, these studies have all shown that lead has significant adverse effects on humans. In addition, recent
studies suggest thatthere is virtually no "safe" threshold for exposure to lead. The documented humanhealth
effects associated with lead exposure include the following:
For Men: hypertension; cancer; heart disease, stroke, and premature death.
For Women: possible hypertension, heart disease, stroke and death; cancer; fetal effects from
maternal exposure, including diminished childhood IQ, premature birth, and reduced birth
weight; and possible increases in infant, mortality resulting from maternal exposure.
For Children: reduced intelligence; interference with growth; impaired hearing; behavioral
changes; interference with peripheral nervous system development; metabolic effects, impaired
heme synthesis, and anemia; and cancer.
Within these population groups, EPA has identified two groups that are believed to be at particular risk from
the hazards of lead-based paint: children less than seven years of age and pregnant women. Infants and young
children are at particular risk because of the greater likelihood of intake of lead-contaminated dusts or paint
debris in a housing unit containing lead-based paint, and the relatively low levels of lead intake that cause
adverse health effects. Pregnant women are considered a high risk population primarily as a surrogate for
the fetus. Exposure to lead before or during pregnancy may have severe effects on fetal development,
including miscarriage.
These health effects are costly to both the affected individuals and society because of the pain and suffering
associated with the adverse health effects, increased health care costs, increased education expenses for
children, and lower economic performance associated with less productive individuals and lost work days
from morbidity and premature mortality. The avoidance of these health effects and their associated costs are
the benefits of the disclosure rule.
Benefits of the Disclosure Rule
The lead-based paint hazard disclosure rule requires that information about the possible presence of lead-
based paint and associated hazards be given to prospective buyers or renters of housing units that, because
of the time of their construction, may contain lead-based paint. It is expected that this information will lead
buyers and renters to modify their behavior in a way that will reduce health risks from lead-based paint and
thus achieve benefits to society. However, the extent to which these benefits will occur depends on how
transaction participants respond to the additional information. The regulation does not require housing buyers
and renters to modify their behavior; rather it provides them additional information on which to make
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decisions regarding purchase or rental and avoidance of the hazards of lead-based paint. Currently, data are
not available to permit estimation of how prospective buyers and renters are likely to modify their behavior
in response to the information disclosed as a result of the lead hazard disclosure rule. Accordingly, it is not
possible to quantify the rule's expected benefits. However, it is possible to assess the likely mechanisms of
personal and market response to the information provided by the disclosure rule and thus understand how
the disclosure rule is expected to benefit households that would otherwise be exposed to health hazards from
lead-based paint.
Response mechanisms by which the disclosure rule would be expected to generate benefits through
avoidance of lead-based paint hazards include the following:
• Because of the informationprovided by the disclosure rule, households that rent or buy housing
units containing lead-based paint hazards may be more likely to undertake abatement activities
or exercise other precautions to eliminate or reduce the health risks from deteriorated lead-
based paint. Such actions would be expected to reduce directly the likelihood that residents of
the household would be exposed to lead, and thus to yield benefits from avoided adverse health
effects. If households respond by undertaking abatement activities, these actions may require
substantial monetary outlays. However, even if abatement is not undertaken, less expensive and
even low cost measures may substantially reduce the risk from exposure to lead in lead-based
paint. For example, maintenance of painted surfaces and regular, careful cleaning of areas in
which lead-based paint debris or dust accumulates can reduce health risks. The reduction in
these health risks, whether by abatement or other precautionary activity, would generate
benefits as a result of the disclosure rule.
• As a result of the information regarding possible presence of lead-based paint and its associated
hazards, households with young children and/or pregnant women may be less likely to purchase
or rent housing units containing lead-based paint hazards. That is, if alternative housing is
available that does not present a lead-based paint hazard, households with higher risk
individuals may choose to buy or rent such alternative housing. Such a response would be
expected to reduce the frequency with which children and pregnant women live in housing units
that may present a lead-based paint hazard, thus yielding benefits from reduced exposure by
these more susceptible members of the population to lead-related health risks. This response
is qualitatively different from the first discussed above in that the household does not undertake
abatement or risk management activity before or while living in the housing unit. On the
surface, this response appears to not require any out-of-pocket cost for reducing or avoiding
lead-based paint hazards. However, a systematic shift by a segment of the market to favor
purchase or rental of housing containing no lead-based paint hazards would be expected to
result in a price premium for such housing compared to otherwise comparable housing with
such hazards. Thus, the decision to purchase or rent housing without lead-based paint hazards
is not likely to be costless.
• Market forces may induce property owners to undertake abatement activity before selling or
renting property containing lead-based paint hazards. As discussed above, because of the
disclosure rule, some prospective buyers and renters may become reluctant to buy or rent units
containing lead-based paint hazards and thus assign a higher value to housing units that are
known to not contain lead-based paint hazards. As a result, sellers and lessors of target housing
may receive lower prices and rents, or see their units remain on the market for longer periods
before being purchased or rented, relative to otherwise comparable units that do not contain
lead-based paint hazards. However, the property owner should be able to avoid this diminution
in market value by undertaking abatement activity and obtaining a certified report for the unit
declaring it free of lead-based paint hazard. To the extent that sellers and lessors of target
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housing undertake such abatement activity, the disclosure rule will generate benefits through
avoidance of lead-related health risks by the subsequent buyers or renters of the abated units.
The net benefit of these activities that is attributable to the disclosure rule will be the amount
by which the economic value to society fromreducing lead-based paint hazards exceeds the cost
of abating those hazards.
While it is not possible to estimate the quantitative extent of these responses, it is certain that the disclosure
rule will provide the information base that would be expected to yield such personal and market responses.
Methodological Options for Predicting Response to Information Products
As noted above, EPA has not quantified the estimated benefits of the rule. An information base and the
associated accepted analytic methods necessary to predict consumer reaction to information products on lead-
based paint hazards are not readily available; thus, quantifying the expected benefits of this rule would be
extremely difficult. Given the high level of uncertainty associated with the results from such a quantitative
analysis, and given the prescriptive nature of section 1018 of the Act, EPA and HUD believe that the
information provided in the qualitative analysis presented above served to inform decision-making in this
case.
Nevertheless, it maybe useful to briefly review certain approaches currently evolving and which maybe seen
as a starting point in an effort to expand the level of understanding of how information products may be
"valued" and used to modify behavior. The rule would provide two kinds of information: 1) a lead
information pamphlet developed by HUD and EPA that must be provided to renters/buyers; and 2)
information about the presence of or abatement of lead in the specific unit being considered for rent or
purchase.
First, the "value" of information to the public might be developed via a contingent valuation type study. Such
a study would seek to obtain a dollar equivalent representing the amount a recipient ofthe information would
be willing to pay to acquire it. Since many members of the public may not be fully aware of the reasons
behind the distribution of the information, the methodology would need to ensure that all respondents are
provided with adequate background materials on the intended purpose of the information so that a more
meaningful response can be made.
A second approach for estimating the value of the information would be to estimate transaction costs to
buyers and renters of obtaining similar information from currently available sources, to the extent it is
available. By providing the information directly, the rule would save users of the information the trouble and
costs of obtaining comparable information through their own effort. These benefits accrue to individuals who
wouldhave sought out the information anyway or who find the information of some value but would not have
spent the time and/or money to acquire it through available sources because of the transaction costs.
While this approach may permit the development of an estimate representing the costs to individuals seeking
similar information, actual costs to duplicate the information provided under the rule would be considerably
higher. This is because the information pamphlet provided by EPA and HUD will have been thoroughly
researched and will have undergone peer and public review; thus, the quality of information provided by EPA
and HUD would be expected to exceed that collected by an individual homebuyer/renter. Also, certain
information on the presence of lead paint hazards and/or abatement histories of specific housing units would
most likely be unavailable or, when available, obtainable only at much higher cost from other sources.
Since it is expected that information provided to the public will lead many recipients to modify their
behavior, a third approach to estimate the benefits of the regulation would be to assess the potential outcomes
of the provision of information. One approach to studying behavioral impacts would be to examine
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behavioral changes in response to similar types of information dissemination events. These behavioral
changes could then be evaluated to assess the extent to which beneficial impacts may be expected.
Such a study wouldbe highly complex, since many factors may contribute to an individual's decision-making
process. Thus, any research method designed to study the impacts of information alone would need to
carefully account for numerous confounding variables. For example, under this rule, information may cause
buyers and renters to modify their behavior in a way that may reduce health risks from exposure to
deteriorated lead-based paint. However, changes in behavior, such as increased lead-paint abatement
activities, may be influenced by a wide range of factors other than the information provided pursuant to this
rule. Therefore, under this approach, it is extremely difficult to estimate the benefits of reduced health risks
that would accrue as a result of this rule. Further, any estimate of benefits based on the outcome of behavioral
change assumes that the information provided under the rule is accurate to the best of our current knowledge.
However, if the information understates risks, renters/owners may take fewer actions than would be optimal.
On the other hand, if the information provided by this rule turns out to overstate the true risks of lead-based
paint in the home, some individuals may take actions that they otherwise would not have taken, leading to
a suboptimal outcome.
Additionally, actions taken in response to new information will involve costs. To assess the net benefits to
society from these actions, such costs would have to be estimated and subtracted from the expected benefits
associated with the actions. However, because a number of possible outcomes with respect to risk
management are possible (as discussed above), the magnitude and distribution of these cost impacts depend
highly on how transaction participants interact in the market. That is, for any particular home offered for
sale, the cost to manage any risk posed by lead-based paint hazards will vary due to buyer and market
characteristics. Often, this cost may be borne by the seller (through, for instance, price concessions),
although market situations may exist (for example, where a home is in particular demand) where costs could
be borne by the buyer or shared between buyer and seller.
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Appendix A: Summary of Existing State Rules
Regarding Lead Paint Hazards and Disclosure
Several states currently have laws that require sellers to disclose information regarding the condition of
residential property to prospective purchasers. In some cases, these laws may encompass or overlap some
parts of the federal disclosure rule. As a result, the affected parties in those states may already be performing
some of the disclosure-related activities that are required by the federal rule and compliance with the federal
rule in these states may be less costly than in other states. However, even in states with an existing disclosure
requirement, it is expected that affected businesses and persons will incur at least some of the costs of the
disclosure rule for transfers. For example, affected parties will incur costs for materials that are specific to
the rule (e.g. the Lead Hazard Pamphlet and Disclosure and Acknowledgment Statement), and will be subject
to the rule's record-keeping requirements. To identify whether and to what extent some of the requirements
of the federal disclosure rule may be offset by existing state rule requirements, a review of state rules was
undertaken.
In general, two kinds of disclosure rules for real estate transfers were identified:
1. General disclosure rules. Several states currently have laws that require sellers to disclose
information regarding the condition and contents of the property to prospective purchasers.
These states include California, Delaware, Mississippi, Missouri, Oregon, Tennessee, Texas,
and Wisconsin. The rules in these states require that sellers disclose a host of information
regarding property condition including whether the seller is aware of any hazardous materials
on the property, including but not limited to materials such as lead-based paint, asbestos, and
radon. However, these rules do not target lead-based paint hazards specifically and neither the
seller nor the real estate is required to provide information regarding the hazards of lead-based
paint to prospective purchasers.
2. Environmental hazard disclosure rules. A few states have disclosure rules with respect to sales
that are targeted at lead-based paint (and perhaps other environmental hazards) and provide
information on its hazards. These states include Massachusetts, Rhode Island, and Maine. The
rules of these states require explicit disclosure regarding the potential health hazards associated
with lead-based paint and generally require signed acknowledgment by the prospective
purchaser of being informed of the possible presence and hazards of lead-based paint.
The following three criteria were used to determine which rules overlap sufficiently with federal rule
requirements to offset some of the costs of compliance with the federal disclosure rule:
• Does the rule require disclosure of the presence of lead-based paint?
• Is the seller or agent required to provide any information (either verbally or through written
material) that is specific to the hazards associated with lead-based paint?
• Is the buyer required to acknowledge that he/she has been made aware of the hazards of lead-
based paint and that the requirements of the disclosure rule with respect to lead-based
specifically have been satisfied?
If a state's disclosure rule meets the first of these conditions and at least one of the remaining two, then
affected parties in that state are already performing activities that are similar to the sale-related disclosure
requirements the federal rule. Affected parties in these states are assumed to need half the time for disclosure
for sales as that required in those states with no disclosure rule or whose rule does not meet the above
condition. In short, disclosure requirements that ask if there is any known lead-based paint, but do not
highlight the hazards of lead-based paint, or do not require acknowledgment by the buyer of having been
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informed of those hazards are assumed to not overlap sufficiently with the federal disclosure requirements
to result in reduced costs of compliance. No rules were deemed to contain requirements that would offset
any of the federal rule's requirements with regard to rentals.
Of the rules reviewed, only the rules of Massachusetts, Rhode Island, and Maine were identified as meeting
the above condition. Thus, compliance in these states is expected to be less costly than in other states because
affected parties are already performing some of the disclosure-related activities that are required by the
federal rule.
Below, the rules of Massachusetts, Rhode Island, and Maine are summarized. In addition, the rule for
California is also reviewed as an example of a more general disclosure rule that was judged to not result in
reduced compliance costs.
Massachusetts
Chapter 773 of the Acts of 1987 authorizes the Childhood Lead Poisoning Prevention Program to prepare
a packet that sellers or real estate agents are required to distribute to prospective purchasers of residential
property constructed prior to 1978. The packet informs prospective purchasers about lead poisoning and the
requirements of the Massachusetts Lead Law and regulations. A signed and dated acknowledgment must be
obtained from the buyer stating that the packet was provided prior to the signing of a purchase and sale
agreement. In addition to the notification package, any information known to the seller or real estate broker
regarding the presence of dangerous levels of lead in paint, soil or other materials and any letter of
compliance must be provided to the prospective purchaser.
The legislation also requires that a real estate agent who has provided a prospective purchaser with the
notification package verbally inform the prospective purchaser about the possible presence of lead hazards
and provisions of the Lead Law and regulations. After receiving the notice, the prospective purchaser has
at least 10 days, or longer if agreed to by seller and purchaser, to have a lead paint inspection done, although
an inspection is not required.
Rhode Island
The Lead Poisoning Prevention Act becomes effective June 1, 1993. Section 23-24.6-16 of this act refers to
notification prior to transfer of residential property. The rule states that every purchase and sale contract for
residential property will include language that requires the seller to provide the buyer with a copy of any lead
inspection report in the seller's possession, and to notify the buyer of any known lead poisoning problem.
The absence of this language in the contract does not void the sale, but places civil penalties on the seller and
or agent. In addition, the rule states that written materials concerning environmental lead exposures and lead
hazards are to be made available to real estate brokers and the general public.
Section23-24.6-15 of this act deals with lead inspections of rental property. The legislation sets up aprogram
by which state inspectors will conduct extensive lead inspections in response to complaints by occupants of
rental property with children under the age of six. The landlord/owner is then required to provide the results
of such an inspection to the occupants within 5 business days from the time they receive the report. In
addition, the results of such an inspection must be presented to all prospective tenants before occupancy or
prior to signing a lease agreement. This requirement to inform all prospective tenants is waived if the owner
obtains a certification of lead abatement for the dwelling.
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Maine
The Maine Real Estate Commission License Law requires licensed agents to ask sellers about any known
hazardous materials that may affect the health and well-being of prospective purchasers. Such materials
include, but are not limited to, lead-based paint. Any information regarding the presence of lead-based paint,
the source of this information and whether there is any cracking peeling or flaking of paint must be given to
a prospective purchaser in writing before or during preparation of an offer. If no information is known to the
seller than this must be made known to the prospective buyer in writing.
The agent is required to present a written statement to the buyer encouraging the buyer to seek information
from professionals regarding any specific issues or concerns. Under the Maine legislation, the state is
required to prepare an information pamphlet for distribution to real estate agents and the general public
which contains information on environmental hazards in housing, including the hazards of lead-based paint.
California
The California Civil Code includes language that applies to disclosure of lead-based paint hazards in a sales
transaction. The law requires that a disclosure form be completed and signed by the seller prior to the sale
of residential property. This disclosure form asks if there are any substances, materials or products which
may be an environmental hazard, such as, but not limited to, lead-based paint. The disclosure form asks a
number of other questions relating to the condition and contents of the property. The seller is required to
answer yes or no to these questions, and to provide additional information if the answer is yes. Failure to
comply with provisions of the article does not invalidate the sale of property. If any disclosure or relevant
information is submitted after an offer to purchase has been submitted, the transferee can terminate his/her
offer by written notice of termination. The prospective buyer is allowed 3 days after personal delivery of
disclosure or five days after mail deposit delivery to terminate sale.
The disclosure form also states that "the buyers and sellers may wish to obtain professional advise and/or
inspections of the property and to provide for appropriate provisions in a contract between buyer and seller
with respect to any advice/inspections/defects." If a real estate agent participates in the sale of the subject
property, the agent is required to exercise reasonable diligence in verifying that the information provided by
a seller is accurate. Failure by the agent to meet the act's standards would expose an agent to penalties under
the act.
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Appendix B: Data Sources
Data sources include text materials and information received through telephone conversations or written
communication.
Text Citations
Blalock, Joe. Economic Commentary. Economic Outlook, Vol. 1, No. 2, February 1993.
Consad Research Corporation. Economic Analysis of OSHA's Interim Final Standard for Lead in
Construction, Pittsburgh, PA, April 1993.
California Civil Code, Article 1.5, Disclosures Upon Transfer of Residential Property.
Code of Massachusetts Regulations, 105 CMR 460.000 Lead Poisoning Prevention and Control.
Economic Outlook Quarterly Supplement, February 1993.
Farquhar, Doug, J.D., Status of State Laws on Lead-Based Paint, Abatement, and Poisoning Prevention,
National Conference of State Legislatures.
Illinois Lead Poisoning Prevention Act, Public Health and Safety, Chapter 1 lVA, paragraphs 1301-1316.
Massachusetts Department of Public Health, Childhood Lead Poisoning Prevention Program. Guidance
document regarding property transfer lead notification and disclosure under the Massachusetts
Regulations for the Prevention and Control of Lead Poisoning 105 CMR 460.000.
National Association of Home Builders of the United States. Forecast of Housing Activity. NAHB,
Washington, D.C., November 1992.
National Association of Home Builders of the United States. Forecast of Housing Activity. NAHB,
Washington, D.C., January 1993.
National Association of Home Builders of the United States. Housing Economics. NAHB, Washington, D.C.,
February 1993.
National Association of Home Builders of the United States. Profile of the Remodeler. NAHB, Washington,
D.C., January 1992.
Real Estate Transaction Disclosure Requirements fromDelaware, California, Mississippi, Missouri, Oregon,
Tennessee, Texas, and Wisconsin obtained from Doug Farquhar at the National Council of State
Legislatures.
Real Estate Transfer Disclosure Statements from California, Oregon, New Hampshire, Minnesota, and
Massachusetts obtained from Doug Farquhar at the National Council of State Legislatures.
Rhode Island Lead Poisoning Prevention Act, Chapter 24.6 § 15-16.
State of Maine, Department of Professional and Financial Regulation, Real Estate Commission. Buyer/ Seller
Information, 1990.
Regulatory Impact Analysis of Lead-Based Paint
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State of Maine, Department of Professional and Financial Regulation, Real Estate Commission., License Law
and Rules Reference Book, 1991.
State of Rhode Island, What Does the New Lead Law Mean to Me? Questions and Answers for Property
Owners. 1993.
State of Rhode Island and Providence Plantations, Department of Health. Rules and Regulations for Lead
Poisoning Prevention, R23-24.6-PB. February 1992 (E).
Staples Office Superstore Catalog Supplement. April/May 1993.
U.S. Department of Commerce. County Business Patterns 1990 United States. U.S. Department of
Commerce, Economics and Statistics Administration, Bureau of the Census, Washington, D.C.,
January 1993.
U.S. Department of Commerce. County Business Patterns 1992 United States. U.S. Department of
Commerce, Economics and Statistics Administration, Bureau of the Census, Washington, D.C.,
January 1995.
U.S. Department of Commerce. Statistical Abstract of the United States 1994, 114th Edition. U.S.
Department of Commerce, Economics and Statistics Administration, Bureau of the Census,
Washington, D.C., 1994.
U.S. Department of Commerce. Statistical Abstract of the United States 1992, 112th Edition. U.S.
Department of Commerce, Economics and Statistics Administration, Bureau of the Census,
Washington, D.C., 1992.
U.S. Department of Commerce. U.S. Industrial Outlook 1992, U.S. Department of Commerce, International
Trade Administration, Washington, D.C., January 1992.
U.S. Department ofCommerce. U.S. Industrial Outlook 1993, U.S. Department of Commerce, International
Trade Administration, Washington, D.C., January 1993.
U.S. Department of Commerce. U.S. Industrial Outlook 1994, U.S. Department of Commerce, International
Trade Administration, Washington, D.C., January 1994.
U.S. Department of Housing and Urban Development. Comprehensive Workable Plan for the Abatement of
Lead-Based Paint in Privately Owned Housing: Report to Congress, U.S. Department of Housing
and Urban Development, Washington, D.C., December 1990.
U.S. Department of Labor. Employment and Earnings, Vol. 40, No. 2, U.S. Department of Labor, Bureau
of Labor Statistics, Washington, D.C., February 1993.
U.S. Department of Labor. Employment and Earnings, Vol. 42, No. 1, U.S. Department of Labor, Bureau
of Labor Statistics, Washington, D.C., January 1995.
U.S. Department of Labor. Occupational Outlook Quarterly, Vol. 36, No. 1, U.S. Department of Labor,
Bureau of Labor Statistics, Washington, D.C., Spring 1992.
U.S. Department of Labor. Occupational Projections and Training Data, 1992 Edition, U.S. Department of
Labor, Bureau of Labor Statistics, Washington, D.C., May 1992.
Regulatory Impact Analysis of Lead-Based Paint
Hazard Disclosure Rule for Real Estate Transfers
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U.S. Department ofLabor. Occupational Projections and Training Data, 1994 Edition, U.S. Department of
Labor, Bureau ofLabor Statistics, Washington, D.C., May 1994.
U.S. Department ofLabor. Occupational Wage Survey: Hospitals, January 1991. Bulletin 2392, U.S.
Department ofLabor, Bureau ofLabor Statistics, Washington, D.C., January 1992.
U.S. Department ofLabor. The 1992-2005 Job Outlookin Brief, U.S. Department ofLabor, Bureau of Labor
Statistics, Washington, D.C., Spring 1994.
U.S. Department ofLabor. The American Work Force: 1992-2005, U.S. Department ofLabor, Bureau of
Labor Statistics, Washington, D.C., April 1994.
Value Line Investment Survey, Edition 6, Part 3, Ratings & Reports, Vol. L, No. 32, April 21, 1995 and
Edition 8, Part 3, Ratings & Reports, Vol. L, No. 34, May 5,1995. Value Line Publishing, Inc., New
York, NY.
Personal Communications
Amirault, Tom (Occupation Outlook Quarterly, Bureau ofLabor Statistics, Washington, D.C.). Personal
communication, 1993.
Attorney General's Office (Sacramento, CA). Personal communication, 1993.
Ball, Terry (Attorney General's Office, Jefferson City, MO). Personal communication, 1993.
Biland, Larry, EPA Region 9 office. Personal communication, 1993.
Bowes, Bob (Scanlan & Bowes Real Estate, Arlington, MA). Personal communication, 1993.
Century 21 Gallagher Realty, W. Roxbury, MA (no name). Personal communication, 1993.
Commercial Investment Real Estate Institute (Chicago, IL). Personal communication, 1993.
Conway, Joy (Rental Housing Assn., Greater Boston Real Estate Board). Personal communication, 1993.
Cook, Stephen (South Shore Home Inspection, Braintree, MA). Personal communication, 1993.
Dindal, Ann (Greater Boston Real Estate Board). Personal communication, 1993.
Dundulis, Bill (Assistant, Environmental Health and Risk Assessment, Providence, RI). Personal
communication, 1993.
Goldstein, Susan. Massachusetts Conveyance Association, Boston. Personal communication, 1993.
Jones, Edna (Coordinator, Childhood Lead Poisoning Prevention Program, Augusta, ME). Personal
communication, 1993.
Jordan, Carl (analyst, Small Business Administration, Boston, MA). Personal communication, 1993.
Kiley, Kevin (Executive Vice President of State Legislative and Regulatory Policy for Massachusetts
Bankers Association). Personal communication, 1993.
Regulatory Impact Analysis of Lead-Based Paint
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Le Vaux, Jean (Prudential Le Vaux Properties, Cambridge, MA). Personal communication, 1993.
Mahoney, John, Realty Collaborative (West Roxbury, MA). Personal communication, 1993.
Mahoney, Mathew (Housing Environmental Services, Inc., Cambridge, MA). Personal communication, 1993.
Massachusetts Bar Association (Boston, MA). Personal communication, 1993.
National Association of Home Builders of the United States, Washington, D.C. Personal communication,
1993.
National Association of Realtors, Chicago, IL (reference librarians). Personal communication, 1993.
National Mortgage Bankers Association., Washington, D.C. Personal communication, 1993.
Riley, Jack (Executive Director, Continuing Legal Education [MCLE], Boston). Personal communication,
1993.
Ruffo, David (Ruffo Management, Brighton, MA). Personal communication, 1993.
Schlag, Bob (Acting Chief, Childhood Lead Poisoning Prevention Program, Sacramento, CA). Personal
communication, 1993. .
Shortsleeve, Mrs. (Pleasant Realty, Jamaica Plain, MA). Personal communication, 1993.
Shortsleeves, Dave (Century 21 Regional Office, Boston, MA). Personal communication, 1993.
Social Law Library, Boston (reference librarian). Personal communication, 1993.
South, Linda (National Assn. of Real Estate License Law Officials, Salt Lake City, UT). Personal
communication, 1993.
Staples Office Superstore, price validation for filing cabinets and photocopying services, June 1995.
Steinbergh, Alex (Resource Capital Group, Cambridge, MA). Rental Property Owner and Property
Management Firm. Personal communication, 1993.
Turifer, Delores (Bureau of Labor Statistics, Washington, DC). Personal communication, 1993.
Vagar, Caryl (Century 21 Baily Realty, Newton, MA). Personal communication, 1993.
Vandenbroucke, David A. (Department of Housing and Urban Development), personal communication.,
March 1, 1993.
Vanderslice, Bob (Program Chief, Environmental Health and Risk Assessment, Providence, RI). Personal
communication, 1993.
Wittenbourg, Peter (Kaye, Fialkow, Richmond and Rothstein law firm, Boston). Personal communication,
1993.
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