Best Practices: Contaminated Properties under SOP 50 10 8

During the closing process, lenders anticipate their Phase I Environmental Reports will show that real estate serving as collateral is clean. However, this is not always the case and lenders should be prepared for environmental issues to arise during due diligence – particularly when working with businesses in environmentally sensitive industries—such as gas stations, laundromats, or manufacturing facilities. If Phase I and Phase II reports indicate that the property is contaminated and the lender still wishes to proceed with the loan, how should they move forward? Under SOP 50 10 8, the process varies depending on whether the Lender is a PLP or non-delegated Lender.

Under SOP 50 10 7.1, lenders were only required to perform an environmental investigation when SBA loan proceeds were used to acquire, refinance, or improve the commercial real estate securing the lender’s mortgage or deed of trust. However, SOP 50 10 8 expands this requirement: lenders must now perform an environmental investigation on all commercial real estate collateral—including secondary collateral—even if it is not being acquired or improved with loan proceeds.

If the property is deemed contaminated based on the results of the investigation, the lender may either (i) deny the loan request or (ii) conduct an analysis to determine whether the contamination risk is limited enough to justify disbursement of the loan.

Before proceeding, the lender must fully document the file with the relevant facts and the rationale for disbursing prior to remediation. The documentation should explain how contamination risks have been mitigated, based on the following factors summarized from pages 104–107 of the SOP:

• Indemnification by a Third Party – A person (not the Borrower) with sufficient financial resources indemnifies the SBA for the contamination through execution of SBA’s Environmental Indemnification Agreement.
• Completed Remediation – If remediation is complete but additional monitoring is required, disbursement may be considered.
• No Further Action Letter – A letter from a government entity stating that no further remediation or monitoring is required.
• Minimal Contamination with Minimal Remediation – The extent of the contamination and the cost of remediation are de minimis in relation to the property’s value, and remediation is projected to be completed within one year.
• Clean-Up Funds – The lender has received evidence from a governmental entity that a government fund will pay for or reimburse remediation costs.
• Escrow Account – The Lender holds in escrow an amount equal to 150% of the estimated remediation costs. These escrowed funds cannot come from SBA loan proceeds.
• Contamination Originating from Another Site – Disbursement may be considered if the contamination originates from another property and (i) remediation is occurring and is properly financed and (ii) the property owner is not liable for the contamination or remediation.
• Additional Collateral – Additional collateral or an equity contribution is provided that is sufficient to offset the potential loss due to contamination.
• Other Factors – The SBA Lender may rely on additional or alternative factors when considering approval or disbursement

Non-delegated Lenders must upload all environmental documentation to E-Tran and separately submit a completed memo outlining the above factors to EnvironmentalReviews@sba.gov to obtain SBA approval and concurrence with the Lender’s determination. SBA’s Office of General Counsel may request additional information and will issue SBA’s determination. Non-delegated Lenders should review the process outlined on pages 101–102 of the SOP for further instructions.

After completing the memo outlining the mitigating factors, PLP lenders may proceed with the loan under their delegated authority without SBA concurrence—except when relying solely on Section ix, “Other Factors,” to justify disbursement. If relying solely on Section ix, “Other Factors,” a PLP lender should also submit their memo and supporting documentation to SBA, as outlined above, for approval.

Under SOP 50 10 8, PLP lenders have lost the option to submit specific loan applications for general processing. Previously, PLP lenders could use the general processing route for loans with complex environmental issues as a safeguard to obtain SBA’s approval. Without this option, lenders must carefully evaluate environmental issues and thoroughly document their files with the analysis outlined in the SOP if the property is deemed contaminated in order to protect their guaranty.

For questions regarding the SOP 50 10 8 provisions on environmental investigations, please contact the attorneys at Starfield & Smith at (215) 542-7070 or email us at info@starfieldsmith.com.