Article by Roger Schlueter
Banks and SBA have many of the same concerns when funding Real Estate Loans for Commercial Purposes. Sometimes you think the SBA is in Cahoots with the Bank. This is not the case when dealing with the issue of Environmental Policies and Procedures.
Many Times, Banks will not worry about the Environmental Issues unless the facility is an industry where the Environmental Contamination is more likely. These Industries are Gasoline Stations, Auto Repair, Mining or Processing of Minerals, and Dry Cleaning. Many Banks will not Require any Environmental Documentation but most will at least ask for a Questionnaire to be filled out. This Questionnaire will ask questions about the Current and Prior Use as well as the Neighboring Sites and their Current and Prior Use. SBA on the Other hand will want a Questionnaire to be filled out but if the industry is one of fifty three (53) that the SBA considers Environmentally Sensitive Industries then the SBA will want much more Environmental Information.
I will list here the steps that most Lenders take in dealing with Environmental Issues First:
1) An Environmental Questionnaire is the first thing to obtain in any Environmental Procedures. The
answers on this document will determine if further investigating is warranted. ( If the property is
considered to the lender to be an Environmentally Sensitive Industry then you will start with a
phase 1 Report that has to be done be a Environmental Company.
2) Phase 1 ESA Report – this Report is done be an Environmental Professional. He or She must
physically Examine the property to determine if any environmental Issues Exist. They will make a
decision as to whether further Investigation is Required. This further Investigation is a Phase 2
ESA Report.
3) Phase 2 ESA Report – This Report is also done by an Environmental Professional. The
Professional must drill or take Dirt Core Samples and have them Analyzed for Contamination.
4) This Step would be if Contamination was Found and Remediation (Getting Rid of the
Contamination) or monitoring is Warranted. If Remediation is needed then the Department of
Natural Resources must give a No Further Action Letter on the property.
The SBA will take the following Steps but remember this is a general guideline and not a detailed course of Action. The actual SBA Guidelines may be found in the SBA SOP:
1) The SBA will want the Borrower to Identify the NAICS Code for the property and compare
this number with the SBA’s List of Sensitive Industries. If the Property is listed a Sensitive
Industry then the Borrower will have to start with a Phase 1 ESA Report (SBA has more
detailed instructions for a Gas Station) The SBA will want the Borrower to Fill Out a
Environmental Questionnaire. For Loans of Up to and including $150,000 the Environmental
Investigation may begin with an Environmental Questionnaire. If the Amount of the Loan is more
than $150,000 then the Environmental Investigation must begin with an Environmental
Questionnaire and Records Search with Risk Assessment.
2) The Environmental Questionnaire: if the results are Low Risk from the Questionnaire and if the
project is $150,000 or less then the Lender can see if the SBA concurs with no further action. If
the Loan is above $150,000 then the Questionnaire must also have a Records Search (checking
Federal Records for contamination at all known sites) and a Risk Assessment by the
Environmental Professional.
3) If the Environmental Questionnaire shows Problems with the Site then a Phase 1 ESA Report
will probably have to be done. the Phase 1 ESA may be all that is needed if the professional
decides that no further action is required. The SBA will have to Concur with that Request. If the
Environmental Professional decides that further investigation is needed then the property will have
to have a phase 2 ESA Report done.
4) The Phase 2 ESA Report will provide Core Drilling Results of the Analysis of the Ground and if
needed the property will have to have some sort of Remediation or Monitoring on the Site.
This is the point where, things get murky as to what happens next, and if the Department of Natural Resources need to be brought in for their input. Once the Department of Natural Resources is brought in they must release the property with a No Further Action Letter.
This has been an overview of the Environmental Policies and Procedures applied by Banks and SBA on Commercial Property that they may be lending on. This is a good guide to give you an overview but this is not the absolute Law of the Land. The Absolute Law of the Land will be given by the banks and the SBA (SBA has a SOP with more detailed Information).
Please Email me any questions or comments at roger@rogerschlueter.com I also have another website at schlueterfinancial.com