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October 14, 2015

Best Practices: Consideration for Environmentally Contaminated Commercial Real Estate

by Starfield & Smith

When SBA loan proceeds are being used to purchase commercial property, the SOP 50 10 H requires that the Lender perform an environmental investigation of the property, and failure to do so can result in a denial of the guaranty. The type of environmental investigation that is required is based on the risk of contamination of the property.

If environmental contamination is found on the property, or if environmental remediation is ongoing, SBA loans may not be approved or disbursed until the environmental risks have been satisfactorily minimized. The SBA requires a consideration of the following when determining whether loans may be approved or disbursed when there is contamination or on-going remediation:

  • The nature and extent of the contamination, considering relevant environmental investigation reports;
  • Remediation: the recommended method, status of the on-going remediation, the cost, estimated completion date and the responsible person(s)
  • Collateral value, assessing the proposed loan amount and use of proceeds, the appraised value of the property and any institutional or engineering controls that affect the collateral value and marketability of the property.
  • Mitigating factors, if any, including indemnification, completed remediation, a letter indicating that no further action is required, a letter indicating that contamination is minimal, the establishment of an escrow account holding 150% of the amount estimated to complete the remediation, whether groundwater contamination is coming from another site and whether additional or substitute collateral is being pledged.

An additional mitigating factor that the SBA will look at is whether any responsible person, who is not the Borrower or the Operating Company, possesses sufficient financial resources to cover the costs of remediation. If such person is available, the SBA will require this third party to sign the SBA Environmental Indemnification Agreement. However, lenders should be mindful that an indemnification agreement is only as strong as the indemnifying party, and that unless the indemnitor is large and has significant resources at its disposal, an indemnification agreement, standing alone, may be insufficient to adequately minimize the risk of contamination.

For more information regarding environmental requirements for SBA guaranteed loans, please contact Sarah at 267-470-1217 or at sminteer@starfieldsmith.com.