Since the latest revision to SBA’s SOP 5010 5 (C), that came out in October 2010, I have been asked some reoccurring questions in regards to the Environmental Requirements on 504 and 7a loans.

One of those reoccurring questions is when there is a NAICS Codes match does it mean that I will have to have a Phase I AAI Compliant ESA?  The answer to this is a definitive YES, and NO!

Take a look at SOP 5010 5 (C) pg 357 -358, Appendix 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES. If your property matches up to one of those NAICS codes you would be required to have a Phase I ESA performed if (and that’s a big “if”) you’ve read the little notes accompanying the NAICS code.  Let’s say you have a Motor Vehicle and Parts Dealer – NAICS code match 441.  You would assume that a Phase I would be required – however if you read what Appendix 4 says you would read (if service bays present).

Many dealerships are just car lots without service bays and therefore wouldn’t require a Phase I.  Based on the dollar amount of the loan SBA would require only a Records Search with Risk Assessment, or perhaps if the loan was small enough (under $150,000) SBA would only require an Environmental Questionnaire.

What’s important is to read the accompanying notes in Appendix 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES to determine whether or not you will be required to engage a full Phase 1 Environmental Site Assessment.

The next time you need to turn to the NAICS Code listing just let your eyes search through to the italicized notes in parenthesis within the document to see how many exceptions there really are.

I’ve also had calls requesting a Phase I for a property the borrower was constructing a gas station on.  If the property wasn’t a prior gas station (or NAICS code match) then again the requirement would be a Records Search with Risk Assessment, or, an Environmental Questionnaire  if the loan was under $150,000.

If you need assistance in determining the level of environmental due diligence that’s required on your property, Partner Engineering and Science, Inc. would be more than happy to assist.

In September 2010 the Small Business Jobs Act was passed into law.  Yesterday the rules for the refinance mechanism within the 504 loan program were announced.  This program will provide a significant tool for small business owners to refinance existing 504 program eligible debt.  Some key points from the new 504 Refi rules:

Eligibility

• Three sources of funding for the refinance project:
  • Third Party Lender (at least 50%)
  • SBA (not more than 40%)
  • Borrower (at least 10%)
• Most (at least 85%) of loan being refinanced must be used for 504 eligible purposes.
  • Borrower must certify that the debt meets the eligible use of proceeds standard.
  • Third Party Lender must also certify that it has no evidence of debt not meeting the use of proceeds standard.
• Loans being refinanced must be scheduled to mature on or before 12/31/2012.
• Loans being refinanced must be current.
• Small business must have been in business for two years prior to the submission of the application.
• Third Party loan and 504 loan cannot exceed 90% of the value of the fixed assets securing the loan.
  • The loan may never exceed the outstanding principal balance being refinanced.

Restrictions

• No refinancing of loans with an existing federal guaranty.
  • 7(a) loan
  • USDA loan
• No refinancing of debt to an Associate of the Borrower, SBIC, or New Market Ventures Capital Company.
• No refinancing of existing 504 projects.
• No refinancing where the creditor is in a position to sustain a loss causing a shift to SBA on all or a portion of a potential loss from an existing debt.
• All loans must be funded by the sale of the debenture within six (6) months of approval.
• The CDC must report any delinquency to SBA after loan approval but before loan funding.

As you can see the new regulations are specific in what types of loans can be refinanced and the requirements for both the lender and borrower.  This is a very exciting program from the SBA and should be a significant source of projects through 2012.

In accordance to SBA’s SOP 5010 5 (C), when obtaining a 504 or 7a Loan SBA requires an Environmental Investigation of all commercial Property upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan or debenture. The type and depth of an Environmental Investigation to be performed varies with the risks of Contamination.

Here is a simple “Steps of Environmental Investigation” flowchart describing what level of report would be required based upon the property site’s NAICS (North American Industry Classification System) Code .

For more information regarding SBA Environmental Due Diligence requirements, or the complete Standard Operating Procedures created by the U.S. Small Business Administration visit http://ftp.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sops_50105_c.pdf

You’ve been told you need to have a Phase I Environmental Site Assessment (ESA) and now may be looking for answers to the questions:

• Why you need one
• Where you get them
• How much they cost
• How long do they take
• Will it meet the Small Business Administration (SBA) environmental requirements .

When ordering a Phase I Environmental Site Assessment (ESA) you want to make sure that:

• It is AAI (All Appropriate Inquiry) compliant, and conforms to ASTM 1527 05
• The environmental firm maintains certain levels of liability insurance (required by the SBA for SBA 7a and SBA 504 loans)
• The environmental firm will sign the latest Reliance Letter  required by the SBA
• The environmental firm understands the latest environmental requirements outlined in the Small Business Administration’s Standard Operating Procedures (SOP), for year 2011 this would mean SOP 5010 5 (C)– valid through November 15^th 2011
• The Environmental Firm that you choose is approved by your lender

Why Do I Need a Phase I Environmental Site Assessment (ESA)?

The purpose of an Environmental Site Assessment (ESA) is to identify any existing environmental contamination on the subject property.  You as a buyer do not want to unwillingly become financially responsible for the prior environmental practices on the subject property.  An ESA saves you from assuming liability for existing contamination and the costs of remediation (if needed).  A Phase I ESA provides a current and historical record search as well as a site visit and inspection by a trained and certified Environmental Professional.  The Environmental Professional’s job is to provide you with a report of the property site that informs you that either the site is clean, or there are Recognized Environmental Conditions (REC’s) that exist.

Where Do I Get a Phase I Environmental Site Assessment (ESA)?

Your banker can suggest some names of Environmental Firms that are on the bank’s approved lists.  In cases where no recommendations are given, you can search the Internet for Phase I Environmental Site Assessments.

How Much Will a Phase I Environmental Site Assessment (ESA) Cost?

Typically you can expect to pay between $2,000 and $3,000 depending on the property. 

How Long Does it Take to have a Phase I Environmental Site Assessment performed?

The average turn around time for a Phase I Environmental Site Assessment is three (3) to four (4) weeks.  Many firms can provide rush jobs as well.

Will the Phase I Environmental Site Assessment meet the Small Business Administration (SBA) Environmental Requirements?

The Phase I Environmental Site Assessment performed in accordance with  ASTM 1527 05 does meet the environmental requirements of the U.S. Small Business Administration.

Entry by: Gary Reynolds

So what report do you need for your 504 or 7a loan?  This depends on the current and past businesses that occupied your property.  SBA has created a NAICS codes list of “Environmentally Sensitive Industries”.  The type and depth of an environmental investigation to be performed varies with the risks of contamination.  The higher the risk for contamination, the more in-depth the study that will be required. This list can be found at www.partneresi.com under the “Resources” tab.   Once there simply click on SBA NAICS Code List.  If the property type is not listed (and the loan value is over $150,000) you can begin your environmental investigation with a RSRA (Records Search with Risk Assessment) as shown in the SBA SOP Decision Tree (Flowchart) found on Partner’s “Resources” page.  If the loan amount is under $150,000 (and the property type is not found on the NAICS list) then the lender can fill out an EQ (Environmental Questionnaire) with the owner/occupant of the property and submit to SBA.

When you order a Records Search with Risk Assessment (RSRA), the lender is required to do a site visit and fill out an EQ (Environmental Questionnaire) with the owner/occupant and submit with the RSRA report to SBA.  For a copy of an Environmental Questionnaire, that meets SBA requirements, you can find one on Partner’s “Resources” page. ( Please note that the SBA Reliance Letter is not to accompany a RSRA report.)

When a RSRA report comes back with High Risk, SBA requires that the lender must then proceed to a Phase I.
For property types that are listed on the NAICS list, SBA dictates that the lender/borrower must begin with a Phase I Environmental Site Assessment (ESA).  The Phase I must be AAI compliant (ASTM 1527-05) and must be accompanied by the SBA Reliance Letter.

In Appendix 2 of SOP 5010 5 (B) you will find a great resource, “Definitions” (available on our “Resources” page).  Here, you will find various definitions including those regarding an Environmental Professional, various report types, information needed in an Environmental Questionnaire, etc.

Appendix 5 of SOP 5010 5 (B) “Requirements Pertaining to Gas Station Loans” (available on “Resources” page) shows that all Gas Stations must begin with a Phase I ESA with the additional requirement that it be conducted by an independent Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience. This has been a common screen out when the Environmental Professional isn’t a PE or PG – and something that anyone engaging an Environmental Firm should be asking about.

A great source of information for understanding a Phase I can be found on Partner’s “Resources” page under the heading, “A Guide to Understanding SBA Environmental Due Diligence for Commercial Properties”.  This “booklet” can be ordered from Partner at no cost, or you can view it online.

The SBA Environmental Appeals committee Environmentalappeals@sba.gov is a great resource for those that have situations that are “abnormal”.  They can provide clarification and rulings for those types of properties.  Another valuable resource is Stephen Reynolds, Chief Environmental Engineer for SBA in Sacramento.  Steve Reynolds can be reached at Stephen.Reynolds@sba.gov and is a valuable resource for CDC’s and various other lenders.

The assumption of an SBA loan would fall under SOP 50 50 4A (“Loan Servicing”).  There is no requirement in SOP 50 50 4A for an environmental investigation when an existing SBA loan is being assumed.  You as a lender may have your own environmental requirements apart from what SBA requires.