The U.S. Small Business Administration (SBA) Standard Operating Procedures, SOP 50 10 5(H), requires environmental assessments on all commercial properties offered as security for a loan. The level of environmental due diligence required is dependent on the environmental risk of the property, which is determined by the current and former property uses.
Environmental Due Diligence Requirements:
- The SBA has identified North American Industry Classification System (NAICS) codes that represent “environmentally sensitive industries.” If the property’s current or known prior uses are listed in Appendix 4 of the SOP as “environmentally sensitive industries,” then a Phase I Environmental Assessment (ESA) that meets the current Phase I Standard is required. To be considered acceptable, the Phase I must have been completed within the last 180 days.
- If there is no NAICS code match and the loan amount does not exceed $150,000, then the environmental assessment may begin with an Environmental Questionnaire. If the Environmental Questionnaire indicates the need for further assessment, then at a minimum, a Records Search with Risk Assessment (RSRA) must be conducted.
- If there is no NAICS code match and the loan amount is >$150,000, then the environmental assessment should begin with a minimum of an Environmental Questionnaire and a RSRA. If the RSRA indicates an elevated or high risk, then a Phase I Environmental Assessment must be performed.
- A Transaction Screen Assessment (which includes a site visit by the Environmental Professional and meets the current ASTM standard) can be performed in lieu of a Records Search with Risk Assessment.
In situations where the bank has environmental policies and procedures that are different than the SBA due diligence requirements noted above, then the more stringent of the two polices must be followed.
The Reliance Letter is not to be altered.
The Environmental Professional completing the Transaction Screen Assessment, Phase I ESA or Phase II ESA must provide a Reliance Letter and Certificate demonstrating Professional Liability Insurance coverage of $1,000,000. The Reliance Letter is not to be altered, and the date of the environmental assessment must be within the coverage period noted on the Certificate of Insurance. A Reliance Letter and Certificate of Insurance are not required for RSRAs.
The SBA has specific requirements for those properties defined as “Special Use Facilities.”
The SBA requires lead assessments for properties that will be occupied by childcare centers, nursery schools or residential facilities occupied by children that were constructed prior to 1980. The SBA defines these properties as “Special Use Facilities.” These facilities must undergo a lead risk assessment (for lead-based paint) and testing for lead in drinking water.
Dry cleaners and gasoline stations are also “Special Use Facilities” for which the SBA has outlined specific requirements. A Phase II Subsurface Investigation, in addition to the Phase I ESA, is required for dry cleaners using chlorinated solvents that have been in operation for more than five years. Appendix 5 of the SOP has been dedicated to Requirements Pertaining to Gas Station Loans. These requirements include a Phase I ESA, analysis of environmental records for the subject property and adjoining properties, and documentation that both the Underground Storage Tanks systems, as well as testing/monitoring equipment, are in regulatory compliance. The SOP further outlines the information required prior to loan disbursement in the event contamination is identified, including 1) the nature and the extent of contamination; 2) the status of any ongoing remediation; 3) the responsible party; 4) a plan, time-frame and cost estimate for completion of remediation, and 5) any activity use restrictions or intuitional controls associated with the property. A list of Mitigating Factors are also included in the SOP, which the SBA will rely upon when deciding whether to disburse funds for a contaminated property.