The Small Business Administration’s environmental policy (SOP 50 10 5) has particular requirements regarding environmental due diligence on “high risk” properties, which includes Phase I Environmental Site Assessments and sometimes additional investigation.
To recap my previous blogs about the SBA’s decision matrix on what kind of due diligence is done, generally all “high risk” properties require a Phase I Environmental Site Assessment (according to SBA’s NAICS code list of environmental sensitive industry). “Low risk” properties can start with a lower level of due diligence, usually either an Environmental Questionnaire or a Records Search with Risk Assessment (RSRA) report. There is one exception to the high risk property rule, which is for “car wash only” facilities, where there are no other environmentally sensitive operations such as auto servicing or fueling – these facilities can begin due diligence with the Transaction Screen Report. Otherwise, if you have a property type that is listed on the NAICS codes, then SBA requires that the environmental investigation begin with an AAI Phase I Environmental Site Assessment.
The SBA Phase I ESA
The scope of work for an SBA Phase I Environmental Site Assessment is the same as the AAI / ASTM E1527 scope of work, but there are a few nuances with the report discussed below. The main components of the Phase I ESA are a site and area reconnaissance, review of regulatory and historical records, and interviews with key site personnel.
You should plan on about a three week turn time. The more time you can give your environmental consultant the better, because the Phase I ESA report will have fewer data gaps (such as a file review that couldn’t be done due to a short turnaround time). This data can sometimes make the difference between having to recommend additional work or not. For example, sometimes we are able to track down a previous Phase Phase II Environmental Site Assessment (soil and/or groundwater testing) indicating that the site was not impacted by former gas station operations.
SBA Requirements for Dry Cleaners and Gas Stations
For these two well known high risk facilities, the SBA has additional requirements above the Phase I ESA.
Dry cleaners in operation for more than 5 years require a Phase I Environmental Site Assessment and a Phase II Environmental Site Assessment. This is due to the hazardous nature of the most common dry cleaning chemical known as Perc or PCE (perchloroethylene), as well as the high percentage of dry cleaner facilities that have had a release to the environment.
Gas stations (and other commercial fueling facilities) require a Phase I ESA and a compliance review to determine that underground storage tanks and associated equipment are in compliance with state requirements for tightness testing. If the environmental professional determines that further investigation is warranted (for example based on the age of the facility or a failed line tightness test), then a Phase II ESA will be necessary.
SBA Requirements for Child Care Facilities
Child care centers, nursery schools and residential care facilities occupied by children don’t require at Phase I ESA (unless some other high risk use is identified at the property), but if they were constructed before 1980 they must undergo a lead risk assessment for paint and testing for lead in drinking water. This is because children are of course the most sensitive to lead exposure. Lead testing is not required by the SBA for other properties without sensitive occupants.
What if your SBA Phase I ESA has a REC?
If your Phase I Environmental Site Assessment comes back “clean” with no Recognized Environmental Conditions and “No Further Action” recommended, then you would submit it to the SBA. If the Phase I ESA does come back with RECs then SBA requires the recommendations of the Environmental Professional be met, which is usually a Phase II Environmental Site Assessment. The Phase II ESA involved targeted soil, soil-gas or groundwater sampling in the areas of concern identified in the Phase I ESA to confirm whether a release has occurred. Expect about a 4 week turnaround time for the Phase II ESA Report.
The lender can petition the SBA to make an exception to the EP’s recommendations if there is an argument for doing so, but this is pretty rare.
Recognized Environmental Conditions are defined as the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, ground water, or surface water of the property.
What about non-scope items in an SBA Phase I ESA?
It is important to note that SBA also requires that any non-scope or non-REC items suggested by your EP be completed as well – for example, a recommendation to complete an asbestos survey. These are known as “housekeeping” actions and lenders have different risk tolerances regarding housekeeping items – some want recommendations others don’t. You may want to have them taken care of so they don’t have to be in the report – or slow down the process. A good environmental consultant that understands SBA requirements should communicate with you about these items prior to the report being finalized.
SBA Reliance Letter
Lastly but importantly, every SBA Phase I ESA must include a reliance letter, which grants the SBA ability to rely on the report. Sounds simple right? Well, the Reliance Letter is often a source of consternation to SBA lenders, so I’ll explain this a bit more in my next SBA Crash Course blog.