Effective January 1, 2018, the Small Business Administration (SBA) updated the Standard Operating Procedures SOP 50 10 5 (J) for Lender and Development Loan Programs. In addition to changes incorporated in ERI’s Records Search with Risk Assessment (RSRA) and desktop review products, ERI’s staff will also ensure our clients are meeting other procedural guidelines outlined in the recently released SBA SOP. An overview of the SBA changes include 1) Phase II ESAs for dry-cleaning operations, 2) gas station compliance equipment testing and compliance documentation, 3) historical sources used to perform RSRAs (Records Search with Risk Assessment), 4) acceptable Phase I ESA report age and requirements for conclusions and recommendations, 5) reliance letters, 5) new and modified NAICS Codes for Environmentally Sensitive Industries, 6) indemnification and 7) National Register of Historic Places. This article provides details on the changes to the SOP that apply to environmental due diligence.
A Phase I Environmental Site Assessment (ESA) and Phase II ESA must now be completed for any property with current or former onsite dry-cleaning facilities that used, likely used or use chlorinated and/or petroleum-based solvents. The previous version of the SOP required a Phase I ESA for all properties with current or former dry-cleaning operations and a Phase II ESA for a drycleaner that operated for five years or more and used PCE or TCE onsite. The time frame associated with the Phase II ESA requirement has now been removed. In addition, the SBA SOP further states that any soil and groundwater contamination and soil vapor intrusion that is identified must be addressed (Pages 204 and 318-319). For additional information regarding drycleaners, refer our April 2017 article,”Considering Lending on a Dry Cleaner.”
Documentation must now be provided in the Phase I ESA that supports the Environmental Professional’s determination of the facility’s compliance with all regulatory requirements (if any) relating to tank and equipment testing. The loan may not be disbursed until full compliance is achieved, and any leaking or defective equipment that has been identified has been replaced or repaired (Page 362). Previous versions of the SOP as well as the updated version of the SOP include additional requirements for loans on gasoline stations which are discussed further in our March 2017 article entitled, “SBA Gas Station Loans.” For additional information regarding underground storage tank systems and testing documentation, refer to October 2017 article, “Underground Storage Tanks: Regulations, Requirements and Expectations.”
Records Search with Risk Assessment
In a Records Search with Risk Assessment (RSRA), historical sources, regulatory databases and an environmental questionnaire are used to determine current and historical uses of a property in order to provide a risk determination. Site reconnaissance activities are not part of a RSRA. The updated SOP introduces additional requirements for the historical sources used in a RSRA. The historical records should identify property uses back to the first developed use or back to 1940, whichever is earlier. In addition, the RSRA should include the database reports and historical records used to develop the opinion noted in the RSRA (Page 357).
Phase I Environmental Site Assessments (ESAs)
Phase I ESAs must include a conclusion by the Environmental Professional whether there is risk of contamination so minimal that no further investigation is warranted or that sufficient risk warranting additional investigation is present. In the case of the latter, recommendations should be offered to warrant additional investigation. Generally, the SBA will require compliance with all recommendations offered by the Environmental Professional, including those for housekeeping measures such as sealing floor drains, abandonment of monitoring wells, or secondary containment. In order to obtain an exception to the policy regarding Phase I ESA recommendations (noted as rare instances in the SBA SOP), the Lender must provide to the SBA Environmental Committee justification for not wanting to follow the recommendations of the Environmental Professional. In these cases, approval from the SBA Environmental Committee must be obtained (Pages 200, 314, and 356).
In addition, the updated SOP indicates that the SBA will accept an All Appropriate Inquiry (AAI) compliant Phase I if it was performed within one year of submittal to the SBA. This one-year time frame would not apply to liquidation situations. The previous version of the SOP followed the AAI time frame of 180 days. Involved parties may elect to follow more stringent time frames for legal and/or regulatory protections (Page 356).
SBA Reliance Letters
Reliance letters are required for Transaction Screen Reports, Phase I ESAs and Phase II ESAs. The SBA Reliance Letter template is included in Appendix 3 of the SBA SOP. Modification to the template by the EP is not acceptable. The updated SOP includes references to addendums of the environmental reports listed above (referred to as Environmental Investigations), as well as the original document. With regard to errors and omissions liability insurance coverage, coverage must be certified as of the date of the Environmental Investigation. In addition, any time limitations on liability must be waived by the Environmental Professional or Environmental Professional’s firm (Pages 357 to 359).
Codes of Environmentally Sensitive Industries
The North American Industry Classification System (NAICS) Codes of Environmentally Sensitive Industries are included in Appendix 4
of the SBA SOP (Page 360).
Two new categories were added:
- 484 – Trucking (if service bays, truck washing or fuel tanks are present)
- 713990 – Other recreational industry (indoor and outdoor shooting ranges only)
In addition, four clarifications were added. The clarifications are noted below.
- 316 – Leather & Allied Product Manufacturing (not required if assembly only)
- 326 – Plastics & Rubber Product Manufacturing (not required if assembly only)
- 332 – Fabricated Metal Product Manufacturing (not required if assembly only)
- 8122 – Death Care Services (unless no embalming or cremation at the property)
A new section relating to Indemnification was added to the Environmental Policies and Procedures section of the SBA SOP. Similar verbiage was included in Appendix 5 of the previous version of the SOP, relating to gasoline station loans, and is included in the updated version of Appendix 5. In the updated version of the SBA SOP, the Indemnification text refers to the release of rights to indemnification from subsequent owners of the property (Pages 205 and 319).
In cases where the SBA Indemnification Agreement as found in Appendix 6 is used, the language of the SBA Indemnification Agreement should not be altered (Pages 357 and 364).
National Register of Historic Places (NRHP)
For loans that have the potential to impact sites listed/eligible to be listed on the NRHP, SBA counsel should be consulted. If impacts to historic places are anticipated, the SBA is required to consult with the applicable State Historic Preservation Officer (SHPO), who typically has 30 days to provide feedback on the property. If no impacts are anticipated, the SBA counsel may determine that no further review is required (Pages 118, 294).
Understanding the changes and new requirements associated with the updated SBA SOP 50 10 5 (J) will assist in avoiding rejection of loan applications . For additional information and/or assistance relating to the SBA SOP, please contact ERI at 704-548-9333.
Article by Janine Willis, Edited by Gregory Lathan and Karen Nelson.