The SBA’s environmental policy, which has been adopted by many lenders as a sound risk management approach, allows smaller loans on less risky properties to get by without doing comprehensive environmental due diligence – at least at first.
If the loan amount is under $150,000 and the property type is not listed on SBA’s list of environmentally sensitive operations (such as industrial use, gas stations or auto shops), then the environmental due diligence can start with just an Environmental Questionnaire.
(Side Note: The SBA Environmental Questionnaire is also required for all loans on low risk properties, regardless of the loan amount, as the questionnaire will be included in the desktop environmental report required for this category – the Records Search with Risk Assessment or “RSRA.” Refer to my previous blog about what the RSRA includes, and click for a flowchart of the steps in SBA’s environmental policy.)
What is the SBA Environmental Questionnaire?
Back to the Environmental Questionnaire… The questionnaire must inquire about the property’s current and past uses, as well as the adjoining properties, with the intent of identifying current or previous environmentally risky operations that could have contaminated the property. The SBA has its own format for the Environmental Questionnaire, but it covers many of the same items as the ASTM questionnaire used for the Phase 1 Environmental Site Assessment.
The questionnaire “must be completed or reviewed by a Lender that has made at least one site visit to the Property and a good faith effort to conduct an interview with the current owner or operator of the Property.” The lenders really serve as the eyes and ears for the SBA when visiting the property.
The Environmental Questionnaire needs to be filled out AND signed by the lender and the owner/occupant. If the owner is unwilling to sign, then the level of due diligence increases to an Environmental Transaction Screen (discussed more in my next blog). In our experience, it is pretty uncommon that an owner won’t sign the questionnaire.
If the Environmental Questionnaire identifies the possibility of contamination, then the level of due diligence increases to a minimum of a Records Search with Risk Assessment to try and uncover more information about the property.
Using the Environmental Questionnaire Appropriately
The SBA only uses the Environmental Questionnaire as a preliminary screening tool, and I would encourage other lenders to use it just as that, because it is not without its flaws.
For one, loan officers are not trained for what to look for on-site like an environmental professional is, but some eyes on the property are better than none.
Furthermore, there is a potential for bias in the way the loan officer or owner answers the questions because they are incentivized to get the deal done, or simply because they are not aware that something could result in an environmental concern. I of course do not mean to imply that there are tons of less than honest loan officers out there! But there is naturally some risk of this occurring here and there, whether consciously done or not.
For these reasons, some lenders are not comfortable lending on a property, even for a small loan, without some additional measure such as a government records search.
Nevertheless, some due diligence is always better than none and the SBA makes good use of the Environmental Questionnaire as one piece of a very thorough environmental risk management policy.