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 SBA published their latest update their environmental policy in SOP 50 10 5 (C).    The SOP revisions take effect on October 1^st, 2010 we should all bone up on a few of the new elements of SOP 5010 5 (C) (pages 199 – 206 & 310 – 317).

One now technical, but important point, is that the Reliance Letter has had a revision and the Reliance Letter from SOP 5010 5 (B) will no longer be accepted by the SBA.   Lenders should make sure their environmental consultant knows of the new Reliance Letter before ordering an SBA Phase I Environmental Site Assessment.   

Overall the Environmental Requirement changes in this latest SOP were minor and summarized below.

• For loans less than $150,000 where the Environmental Questionnaire comes back showing further investigation is required, you may now have a Records Search with Risk Assessment (RSRA) performed instead of having to go to a Transaction Screen Report.  SBA believed that this was more with the natural progression of reporting and therefore made this change.
• When reviewing the NAICS Codes of Environmentally Sensitive Industries the code 8123 LAUNDRY & DRY CLEANING SERVICES it now will state if dry cleaning operations have ever existed on-site.  Prior to the revision it stated if dry cleaning operations on site.
• In Section f) Mitigating Factors that SBA will rely upon to disburse before completion of remediation or monitoring, for section f) titled Escrow Account the new SOP clarifies two issues.  The first being that the money put into the escrow account can’t come from funds from the SBA loan itself.  The second clarification answers the question if the money in the escrow account can be used for the actual remediation itself or if it needs to stay in the escrow account until the remediation is completed.  Yes, it can be used for the remediation costs—similar to a construction loan.
• In Section g) Groundwater Contamination Originating from Another Site, the revision to the SOP eliminates the sentence, “and lender can demonstrate that the contamination has not caused significant damage to the collateral value and marketability of the Property”.   They made this change understanding the lender really couldn’t demonstrate or comply with this requirement.
• The Reliance Letter in appendix 3 has been modified by adding the words “as it impacts the property” at the end of the last sentence in regards to a Phase II Environmental Site Assessment.
• Special Use Facilities (Section H), when a Phase II is required for a dry cleaners in operation for more than five years the Phase II 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 three years of full-time relevant experience.
• Appendix 5: Requirements Pertaining to Gas Station Loans, Phase I’s no longer need to be conducted by an 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.  It can now be conducted by an Environmental Professional meeting the requirements as outlined in Appendix 2: Definitions. 
• Appendix 5: Requirements Pertaining to Gas Station Loans, Phase II’s must be conducted by an 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.

Partner Engineering and Science has a SBA Division dedicated to assisting lenders in understanding SBA’s Environmental Requirements and providing Environmental Reports nationwide for 7a and 504 loans.  Gary Reynolds is our SBA Expert and works closely with many lenders, CDC’s, and attorneys nationwide.

Keywords

SBA Phase I Environmental Site Assessment, SOP 50 10 5 (C), SBA Environmental Policy, Phase 1 ESA

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.

My previous experience with gas stations comes from a regulatory standpoint where the focus for evaluating the USTs was compliance. Currently, as an environmental professional, the evaluation of a gas station for a lender, involves more than just compliance when performing a Phase I ESA on gas station. The Energy Act of 2005 required that all USTs not inspected since 1998 to be inspected by August 8, 2007, and inspections every three years thereafter. In addition, the Energy Act requires training for the operator of the UST.  But is this inspection and training criteria stringent enough to give lenders a level of comfort to proceed with a loan? Could a lender, use inspection records and increased training alone and be comfortable that a release had not occurred.  Should a lender require Phase II’s on all gas stations regardless of compliance records?

I think compliance records along with a good visual inspection should always be included in evaluating a gas station. On newer stations, this maybe all that is needed.  But for older USTs compliance records and a visual inspection may just be the starting point. Since December 22, 1998, all UST systems (tanks and piping) should meet the new tank requirements in regards to spill and overfill prevention, corrosion protection, and release detection requirements.  These tanks are now at least 12 years old.  Even with good recordkeeping, a Phase II may be necessary to give the lender the level of confidence that the property value will not be diminished by latent contamination not identified by the due diligence process, especially if the borrower ended up defaulting on the loan.

Is this a no-brainer?  Any thoughts?

By Kimberly Houston