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

The selection of a vendor for the completion of Phase I Environmental Site Assessment (ESAs) in North Carolina should be based on the qualifications of the firm.  Over the last seven years, I have been personally involved in the completion or review of upwards of 1,000 Phase I ESAs in North Carolina.  A lender once jokingly accused me of memorizing the location of every drycleaner in the state. 

During my years completing reviews at major lending institutions, I saw the complete spectrum of report quality.   A quality report is defined not only by meeting ASTM Standard Practice E1527-05 and the Environmental Protection Agency (EPA) Standards and Practices for All Appropriate Inquiries (AAI) (40 CFR Part 312), but also by providing reasonable findings and conclusions that are supported with documentation provided in the report.  A poor quality report often lacks detailed information and includes illogical conclusions.  Often, this will delay the transaction that prompted the completion of the report. 

Recently, I reviewed a Phase I Environmental Site Assessment completed as pre-foreclosure due diligence.  The report identified the presence of a chicken broiler onsite from 1960-1965.  While there was no substantiating evidence, the consultant indicated that a UST may have been associated with the chicken broiler operations.  Consequently, at the request of a purchaser, the lending institution could end up chasing a non-existent UST.

It has been my experience that quality and price do not always go hand in hand.  It can be very troubling to inform a client that they overpaid for a report that does not meet industry standards.    On the other hand, if the price is substantially below market rates, the quality is likely to be substantially below industry standard as well. When ordering a Phase I Environmental Site Assessment in North Carolina, careful consideration should be given the credentials of the firm and their experience with similar property types.  Partner Engineering and Science has been involved in more than 5,000 environmental site assessments in North Carolina covering a wide range of property types.

Typically, when a lender is considering a real estate secured loan collateralized by a gas station, the environmental risk associated with the real estate can be a major factor in the lending decision.

The three main considerations are outlined below:

(1) What is the age of the current Underground Storage Tank (UST) system?   Regardless of other mitigating factors, internal risk tolerance thresholds may prescribe the completion of a Phase II ESA based solely on the age of the UST system?

(2) What is the age of the gas station/status of former tanks?  It is important to document the usage and removal of all historical fuel storage and dispensary systems.   If the gas station has been in operation since 1965, but the current tank system was installed in 1980, it is reasonable to assume that a fuel storage system preceded the current system.  The location of the system, type of material stored, and closure documentation could have a material impact on the environmental quality of the property.

(3) What is the regulatory status?  Many state funds require the UST system to be in compliance in order to fund re-reimbursement claims in the event of a release.  In addition, the regulatory status of any ongoing remediation is an important factor.  If the state is ‘responsible’ for cleanup, but is not funding cleanup, a secondary source of remediation funding may be necessary to make the real estate marketable in the event of default.

Finally, all of the environmental issues are typically subjugate to the credit package. Since it is possible to spread risk over numerous properties, a portfolio of gas stations, tend to be less risky than a single ‘mom and pop’ gas station loan.  Several major lending institutions currently require or are moving to require a higher percentage of equity when taking gas stations rather than other property types as collateral.

Partner Engineering and Science has qualified staff experienced in the completion of all stages of gas station due diligence.

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.