Best Practices: SBA Gas Station Loans

The SOP 50 10 7.1 (the “SOP”) contains additional documentation requirements for gas station loans that SBA admits can be “voluminous and complex” for Lenders. This article will review the SOP requirements for gas station loans found in Appendix 7 of the SOP as well as best practices for Lenders to utilize when financing gas stations.

Environmental Site Assessment

Due to the environmental risks associated with gas stations, SBA requires a Phase I Environmental Site Assessment for any loan secured by real estate or personal property used to operate a gas station. Unlike other SBA loans, an Environmental Questionnaire or Records Search with Risk Assessment will not suffice the SOP’s requirements for an environmental investigation regardless of the loan amount. Additionally, the SOP requires that the Phase I must:

1. Be conducted by an independent Environmental Professional;
2. Include 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;
3. Include documentation supporting the Environmental Professional’s determination of compliance with all regulatory requirements, if any, pertaining to tank and equipment testing (even if the loan is secured by real property);
4. Include the results of any further investigation, which may include a Phase II, recommended by the Environmental Professional (Any Phase II performed in connection with a Gas Station Loan must be conducted by an independent Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of 3 years of full time relevant experience.); and
5. If the Property is Contaminated, include a detailed description of and cost estimate for the recommended Remediation.

SOP, Appendix 7

The Phase I will often reveal contamination or other environmental issues often referred to in the Phase I as Recognized Environmental Conditions (“RECs”) affecting gas stations that require remediation from the Borrower or Seller. SBA Lenders must address all RECs before funding a loan.  Remediation can be expensive and time-consuming and may delay the loan closing or result in the Borrower or Lender determining that the deal is not viable. To get ahead of these issues, SBA Lenders should order a Phase I as soon as possible to identify all RECs of the Property as soon as possible.

Indemnification and Title Searches

When oil companies transfer ownership of the real estate used to operate a gas station, the transfer deed may include the oil company’s right to indemnification from any damages related to contamination on the property. This right to indemnification will run with the land and prevent any future owner of the property from bringing a suit against the holder of the right related to contamination.

SBA requires any party with a right to environmental indemnification to waive all rights and release both SBA and the SBA Lender from any potential claims related to contamination associated with the gas station. The indemnitee must sign the SBA Environmental Indemnification Agreement (SOP, Appendix 8) or other similar recorded document to obtain the required waiver. If the oil company or holder is not willing to waive their rights to indemnification the deal will be ineligible for SBA financing.

How should Lenders identify and resolve any  environmental indemnification covenants running with the land on a gas station property? First, engage a title company as soon as possible in the closing process to obtain a title commitment with copies of all exception documents. Lender’s counsel should review the title commitment and exception documents for any environmental restrictions or rights to indemnification. Lenders should also request copies of the vesting deed to the property beginning from the date the property was developed as a gas station to present as these deeds may contain restrictions or covenants that are not listed in the title commitment

If a right to indemnification exists, the first step is to determine who is the current holder of such right.  Since many of the original oil companies have merged or gone out of business, tracking down the correct holder can be a challenge.  Next, Lender must determine if the party is willing to waive their rights via an SBA Environmental Indemnification Agreement. If the indemnitee is the current franchisor or fuel supplier to the subject property, they may be willing to waive the indemnification for the owner of the property to obtain financing needed to operate the gas station.

Recorded Documents at Closing

Lender should also request and review all documents to be signed by the Borrower or to be recorded against the property at closing, including the transfer deed, jobber agreement, brand management and franchise agreement.  To avoid any surprises at closing Lender should review these agreements for eligibility, as well as to identify any covenants or agreements in favor of the seller, jobber or franchisor that may render the loan ineligible for SBA financing.

Overall, Lenders financing gas stations should be prepared for an extended loan closing process due to SBA’s regulations and the environmental risks associated with gas stations. However, these hiccups can be mitigated by requesting all required due diligence early in the process and engaging counsel familiar with SBA requirements to review the title commitment for any issues on real estate collateral.

Lenders seeking further guidance on SBA gas station loans can contact the attorneys at Starfield & Smith at 215.542.7070 or info@starfieldsmith.com.