- The costs of Remediation could impair the borrower’s ability to repay the loan and/or continue to operate the business;
- The value and marketability of the Property could be diminished. If the borrower defaults, lender or SBA might have to abandon the Property to avoid liability or accept a reduced price for the Property;
- Lender or SBA could be liable for environmental clean-up costs and third-party damage claims arising from Contamination if title to contaminated Property is taken as a result of foreclosure proceedings and/or lender or SBA exercises operational control at the Property; and
- If a Governmental Entity cleans a site, it may be able to file a lien for recovery of its costs which may be superior to SBA’s lien.
What Type of Properties Does SBA Require an Environmental Investigation on?
SBA requires an Environmental Investigation of all commercial Property upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan or debenture. The type and depth of an Environmental Investigation to be performed varies with the risks of Contamination.
What are the minimum levels of Environmental Investigation Required by SBA?
Level 1: Environmental Questionnaire
The Environmental Questionnaire is accepted for loans of $150,000 or less where there is not a NAICS Code match to an environmentally sensitive industry as outlined in SOP 5010 5 (C) Appendix 4 pgs 357 – 358.
The Environmental Questionnaire means the questionnaire used by a Lender to determine the likelihood that Contamination may be present at Property offered to secure an SBA guaranteed loan.
What to remember when using an Environmental Questionnaire:
- Environmental Questionnaires must be completed or reviewed by a Lender that has made at least one site visit to the Property and a good faith effort to conduct an interview with the current owner or operator of the Property.
- The current owner or operator of the Property must sign the Environmental Questionnaire.
- If the current owner or operator of the Property will not sign the Environmental Questionnaire it cannot be used and lender must then, at a minimum, obtain a Transaction Screen.
On pages 351 – 352 of SOP 5010 5 (C) SBA has provided eleven bullet points of what needs to be addressed in an Environmental Questionnaire. For a free copy of an Environmental Questionnaire accepted by SBA visit Partner Engineering and Science, Inc.
Note: If at any time an Environmental Questionnaire reveals that further investigation is warranted, lender must obtain, at a minimum, a Records Search with Risk Assessment.
Level 2: Records Search with Risk Assessment (RSRA)
Required by U.S. Small Business Administration on both 504 and 7a loans when the loan amount is more than $150,000 and the property is not identified as a Environmentally Sensitive Industry according to SBA SOP 5010 5 (c) addendum C – NAICS Codes of Environmentally Sensitive Industries. SBA requires that you fill out the Environmental Questionnaire (above) and submit the Records Search with Risk Assessment (RSRA) AND the Environmental Questionnaire to SBA for approval.
The Records Search with Risk Assessment means and includes:
- A search of the government databases identified in 40 CFR § 312.265 for an AAI compliant Phase I as well as a search of historical use records (for example, aerial photography, city directories, reverse directories and/or fire insurance maps) pertaining to the Property and Adjoining Properties
- A risk assessment by an Environmental Professional based on the results of the records search as to whether the Property is either ―low risk‖ or ―elevated risk‖ or ―high risk‖ for Contamination. The choice of historical records to be reviewed on any particular site is at the discretion of the Environmental Professional.
- The report must identify by name the Environmental Professional that performed the risk assessment.
This report need not be addressed to the SBA and need not be accompanied by a Reliance Letter . A Records Search with Risk Assessment (RSRA) may be considered if it was completed up to one year prior to submission.
Note: If the Records Search with Risk Assessment concludes that the Property is an ―elevated risk or ―high risk for Contamination, lender must obtain a Phase I ESA.
Level 3: Transaction Screen Analysis (TSA)
Required when the owner or operator will not sign the Environmental Questionnaire.
The Transaction Screen Analysis must be performed by an Environmental Professional in accordance with ASTM 1528 .
The Reliance Letter found in SOP 5010 5 (C) Appendix 3 (pages 355 – 356) must be signed by the Environmental Professional or Environmental Professional’s firm and accompany the Transaction Screen Report.
Note: If the Environmental Professional conducting the Transaction Screen concludes that further investigation is warranted, the lender must obtain a Phase I ESA.
Required by the SBA when there is a NAICS code match to an environmentally sensitive industry regardless of the loan amount.
Every Phase I regardless of findings, must be accompanied by the SBA Reliance Letter executed by the Environmental Professional or Environmental Professionals firm.
If the Environmental Professional conducting the Phase I ESA concludes that further investigation is warranted (typically a Phase II), and the lender still wants to make the loan, the lender must proceed as recommended by the Environmental Professional, or in the alternative submit the results of the Environmental Investigation to the SBA with recommendations and seek SBA’s concurrence. In general, SBA will require compliance with all of an Environmental Professional’s recommendations (including ―housekeeping measures, such as secondary containment, decommissioning monitoring wells, sealing floor drains, etc.).
Requirements pertaining to Gas Station Loans is found in Appendix 5 (pages 359 – 360) of SOP 5010 5 (C), and there are additional requirements due to the nature and history of underground storage tanks. In addition to beginning with a Phase I Environmental Site Assessment the SBA requires:
- An analysis of all relevant environmental records concerning the Property and Adjoining Properties including any records provided by the seller if the loan is to purchase the Property;
- Must include testing of all USTs, lines and related equipment by an independent contractor using a methodology acceptable to the Governmental Entity with oversight authority. The testing must have been conducted within the 12 month period prior to submission of the Environmental Investigation Report for approval.
These are the basic environmental investigation reports required for 504 and 7a loans. For additional information visit www.partneresi.com and search the “RESOURCE” drop down menu.