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April 22, 2015

Best Practices: What Type of Environmental Review is Required?

by Jessica L. Conn

The SOP requires a lender to perform an environmental investigation of all commercial property that will secure an SBA loan. The type of investigation required is based on the level of risk of contamination. The lender must submit the environmental investigation report to the SBA for approval unless the loan is a PLP Loan, 7(a) Small Loan, SBA Express or Export Express Loan.

For all property, except a unit in a multi-unit building, the lender should begin by establishing the NAICS code(s) that best describes the property’s “current and known prior uses.” If the NAICS code matches an environmentally sensitive industry listed in Appendix 4 of SOP 50 10 5(G), then the lender’s environmental investigation must begin with a Phase I, regardless of the loan amount. If (i) there is not a NAICS code match to an environmentally sensitive industry or (ii) if the property is a unit in a multi-unit building, the appropriate investigation depends on the Loan amount.  If the Loan amount is $150,000 or less, the investigation may begin with an environmental questionnaire.  If the Loan amount is greater than $150,000, the investigation must begin with an environmental questionnaire and records search with risk assessment, at the very least. The following is a brief description of the various types of environmental investigations:

  • ENVIRONMENTAL QUESTIONNAIRE (“EQ”): The EQ is created by the lender, as the SBA does not currently have a form that is required to be used. There are, however, certain standards that the lender’s EQ must meet:
    • The EQ 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 must sign the EQ. If the current owner or operator refuses to sign, then the lender must obtain a transaction screen. Please note, a common misconception is that the borrower signs this document. If the borrower is the current owner or operator of the premises, then the borrower would be the appropriate party to sign. However, if the borrower is using loan proceeds to purchase real estate at which it does not currently operate, then the seller of the property should sign the EQ.
  • RECORDS SEARCH WITH RISK ASSESSMENT (“RSRA”):  An RSRA includes:
    • A search of government databases for a compliant Phase I and a search of historical use records for the property and adjoining properties, and
    • A risk assessment by an environmental professional as to the level of risk for contamination based on the search. The report must identify the environmental professional by name, but a reliance letter is not needed.
  • TRANSACTION SCREEN (“TS”): A TS is an investigation which complies with the standards set by ASTM International that includes:
    • An interview with the owner or operator of the property,
    • A visit to the property,
    • Completion of an environmental questionnaire, and
    • A review of government records and historical sources.
  • PHASE I: A Phase I is an investigation which complies with the Phase I standards set by ASTM International and includes an opinion of an environmental professional regarding the presence of contaminants and the risk involved with such contaminants. The environmental professional should provide a recommendation of how to proceed, if they conclude that further investigation is warranted.
  • PHASE II: A Phase II is similar to a Phase I in that it will contain an opinion of an environmental professional regarding potential contamination. However, Phase II addresses not just the presence of potential contaminants but also the quantity of such contaminants.
Note that all transactions screens, Phase I and Phase II investigations must be performed by an environmental professional and must be accompanied by a reliance letter. If the results of any particular environmental investigation are that further investigation is warranted, lenders should follow the guidelines set forth in the SOP 10 50 5 (G) as to the next stage of investigation.

It is crucial that lenders follow the guidelines set forth by the SBA in their environmental investigations as failure to do so may result in a denial of the guaranty. For more information on this and other SBA related topics, please contact Jessica at jconn@starfieldsmith.com or at 267-470-1188.