SBA SOP Changes – Effective January 1, 2018

Effective January 1, 2018, the Small Business Administration (SBA) updated the Standard Operating Procedures SOP 50 10 5 (J) for Lender and Development Loan Programs. In addition to changes incorporated in ERI’s Records Search with Risk Assessment (RSRA) and desktop review products, ERI’s staff will also ensure our clients are meeting other procedural guidelines outlined in the recently released SBA SOP. An overview of the SBA changes include 1) Phase II ESAs for dry-cleaning operations, 2) gas station compliance equipment testing and compliance documentation, 3) historical sources used to perform RSRAs (Records Search with Risk Assessment), 4) acceptable Phase I ESA report age and requirements for conclusions and recommendations, 5) reliance letters, 5) new and modified NAICS Codes for Environmentally Sensitive Industries, 6) indemnification and 7) National Register of Historic Places. This article provides details on the changes to the SOP that apply to environmental due diligence.



A Phase I Environmental Site Assessment (ESA) and Phase II ESA must now be completed for any property with current or former onsite dry-cleaning facilities that used, likely used or use chlorinated and/or petroleum-based solvents. The previous version of the SOP required a Phase I ESA for all properties with current or former dry-cleaning operations and a Phase II ESA for a drycleaner that operated for five years or more and used PCE or TCE onsite. The time frame associated with the Phase II ESA requirement has now been removed. In addition, the SBA SOP further states that any soil and groundwater contamination and soil vapor intrusion that is identified must be addressed (Pages 204 and 318-319). For additional information regarding drycleaners, refer our April 2017 article,”Considering Lending on a Dry Cleaner.”


Gasoline Stations
Documentation must now be provided in the Phase I ESA that supports the Environmental Professional’s determination of the facility’s compliance with all regulatory requirements (if any) relating to tank and equipment testing. The loan may not be disbursed until full compliance is achieved, and any leaking or defective equipment that has been identified has been replaced or repaired (Page 362). Previous versions of the SOP as well as the updated version of the SOP include additional requirements for loans on gasoline stations which are discussed further in our March 2017 article entitled, “SBA Gas Station Loans.” For additional information regarding underground storage tank systems and testing documentation, refer to October 2017 article, “Underground Storage Tanks: Regulations, Requirements and Expectations.”


Records Search with Risk Assessment
In a Records Search with Risk Assessment (RSRA), historical sources, regulatory databases and an environmental questionnaire are used to determine current and historical uses of a property in order to provide a risk determination. Site reconnaissance activities are not part of a RSRA. The updated SOP introduces additional requirements for the historical sources used in a RSRA. The historical records should identify property uses back to the first developed use or back to 1940, whichever is earlier. In addition, the RSRA should include the database reports and historical records used to develop the opinion noted in the RSRA (Page 357).


Phase I Environmental Site Assessments (ESAs)
Phase I ESAs must include a conclusion by the Environmental Professional whether there is risk of contamination so minimal that no further investigation is warranted or that sufficient risk warranting additional investigation is present. In the case of the latter, recommendations should be offered to warrant additional investigation. Generally, the SBA will require compliance with all recommendations offered by the Environmental Professional, including those for housekeeping measures such as sealing floor drains, abandonment of monitoring wells, or secondary containment. In order to obtain an exception to the policy regarding Phase I ESA recommendations (noted as rare instances in the SBA SOP), the Lender must provide to the SBA Environmental Committee justification for not wanting to follow the recommendations of the Environmental Professional. In these cases, approval from the SBA Environmental Committee must be obtained (Pages 200, 314, and 356).

In addition, the updated SOP indicates that the SBA will accept an All Appropriate Inquiry (AAI) compliant Phase I if it was performed within one year of submittal to the SBA. This one-year time frame would not apply to liquidation situations. The previous version of the SOP followed the AAI time frame of 180 days. Involved parties may elect to follow more stringent time frames for legal and/or regulatory protections (Page 356).


SBA Reliance Letters
Reliance letters are required for Transaction Screen Reports, Phase I ESAs and Phase II ESAs. The SBA Reliance Letter template is included in Appendix 3 of the SBA SOP. Modification to the template by the EP is not acceptable. The updated SOP includes references to addendums of the environmental reports listed above (referred to as Environmental Investigations), as well as the original document. With regard to errors and omissions liability insurance coverage, coverage must be certified as of the date of the Environmental Investigation. In addition, any time limitations on liability must be waived by the Environmental Professional or Environmental Professional’s firm (Pages 357 to 359).


Codes of Environmentally Sensitive Industries
The North American Industry Classification System (NAICS) Codes of Environmentally Sensitive Industries are included in Appendix 4
of the SBA SOP (Page 360).

Two new categories were added:

  • 484 – Trucking (if service bays, truck washing or fuel tanks are present)
  • 713990 – Other recreational industry (indoor and outdoor shooting ranges only)

In addition, four clarifications were added. The clarifications are noted below.

  • 316 – Leather & Allied Product Manufacturing (not required if assembly only)
  • 326 – Plastics & Rubber Product Manufacturing (not required if assembly only)
  • 332 – Fabricated Metal Product Manufacturing (not required if assembly only)
  • 8122 – Death Care Services (unless no embalming or cremation at the property)


A new section relating to Indemnification was added to the Environmental Policies and Procedures section of the SBA SOP. Similar verbiage was included in Appendix 5 of the previous version of the SOP, relating to gasoline station loans, and is included in the updated version of Appendix 5. In the updated version of the SBA SOP, the Indemnification text refers to the release of rights to indemnification from subsequent owners of the property (Pages 205 and 319).

In cases where the SBA Indemnification Agreement as found in Appendix 6 is used, the language of the SBA Indemnification Agreement should not be altered (Pages 357 and 364).


National Register of Historic Places (NRHP)
For loans that have the potential to impact sites listed/eligible to be listed on the NRHP, SBA counsel should be consulted. If impacts to historic places are anticipated, the SBA is required to consult with the applicable State Historic Preservation Officer (SHPO), who typically has 30 days to provide feedback on the property. If no impacts are anticipated, the SBA counsel may determine that no further review is required (Pages 118, 294).


Understanding the changes and new requirements associated with the updated SBA SOP 50 10 5 (J) will assist in avoiding rejection of loan applications .  For additional information and/or assistance relating to the SBA SOP, please contact ERI at 704-548-9333. 

Article by Janine Willis, Edited by Gregory Lathan and Karen Nelson.

Underground Storage Tanks: Regulations, Requirements and Expectations

UST Regulatory History
In 1984, Congress directed the United States Environmental Protection Agency (EPA) to develop regulations for Underground Storage Tanks (UST) containing petroleum. The EPA issued federal regulations, effective December 1988, that delegated UST regulatory authority to State Program Approval (SPA).  State UST regulatory programs were required to meet federal UST regulations; however, many states developed programs that were more stringent than the federal regulations.

In the July 15, 2015 edition of the Federal Register, the EPA published the first major revision to the federal UST regulation issued in 1988. The 2015 UST regulation and SPA regulation enhanced the 1988 UST rules with the addition of new operation and maintenance requirements for UST equipment.  The revised regulations are intended to help prevent and detect releases from UST systems and ensure that all USTs in the United States meet the same minimum requirements.

Changes to the regulations included specific additions to the following original UST requirements:

1) Secondary containment requirements for new and replaced tanks and piping 2) Operator training requirements 3) Periodic operation and maintenance requirements for UST systems 4) Requirements to ensure UST system compatibility before storing certain biofuels blends

The changes also included removal of the 1988 deferrals for emergency generator tanksfield constructed tanks, and airport hydrant systems; updated codes of practice; and provided some editorial and technical corrections to the original UST regulatory requirements.  An overview of the specific requirements can be found here. As of March 2017, 38 states (in addition to Puerto Rico and the District of Columbia) had EPA-approved programs and the lead role in UST regulatory program enforcement. These states have three years to reapply in order to retain their SPA status. Contact information and a link to each state’s specific website can be accessed here.

What does all this mean to the Bank?



An Overview of UST Due Diligence Information Reviewing UST compliance documentation can be an intimidating task, but should be conducted as part of the bank’s environmental due diligence process.   If USTs are located on a property proposed as collateral for a loan, the bank will want to know that the UST system is not leaking, the leak detection system is working properly, and the system complies with the requirements set forth by the state. As mention above, in states that do not have an approved UST regulatory program, the UST system must comply with the federal EPA UST regulations. Depending on the use of the UST system, multiple components such as USTs, product lines, fuel dispensers, sumps, line leak detectors (automatic or electronic), various sensors, cathodic protection, vapor recovery, etc., may be present.

Monthly leak detection records, tank tightness and line tightness test results, annual compliance inspection results, regulatory agency inspections, as well as any previous Phase II subsurface investigations completed near the UST system should be reviewed.  The type of monitoring methods used for the UST system and state requirements will dictate the necessary testing.  However, the bank may require additional integrity tightness testing (tank tightness and line tightness tests) to ensure petroleum releases from the UST and associated piping have not occurred.

Depending on the age of the UST system and/or the test results and compliance documentation submitted, the bank may also require a Phase II subsurface investigation to determine if a release has occurred. This Phase II investigation will include sampling around the USTs, dispensers and lines. Although equipment and various tests have been developed to aid in the detection of leaks from UST systems, very small leaks in the system can occur that are not detected by the monthly leak detection or annual compliance testing. Over a long period of time, these small, undetected leaks can result in soil and groundwater contamination.  Therefore, it is common for banks to require a Phase II subsurface investigation for UST systems that are older than 10 to 15 years when a recent Phase II has not been conducted.  In addition, since leaks can also occur from non-regulated UST systems, such as heating oil USTs and some farm USTs, banks generally require similar information and assessment for these USTs.

It is also important to note that due to limited funding or an insufficient number of UST program inspectors, annual UST compliance inspections are not always conducted by state regulatory agencies.  In many states, the issuance of a permit is not an indicator that the UST system is not leaking or that the UST system is in compliance with the regulatory requirements.  Since many states use a self-reporting system for compliance, as long as the required documents and the associated permit fee is submitted to the regulatory agency, the UST operating permit is issued.

Conducting the appropriate due diligence on proposed collateral containing UST systems should include review of documentation related to the integrity and compliance status of a UST system and documentation related to the likely presence or absence of contamination. This will enable the bank to be better informed of any potential risks and anticipated challenges associated with the collateral property and assist the bank in making a lending decision.

RSRAs and TSAs – The Similarities and Differences

Depending on the potential risk profile of a commercial property, Environmental Risk Managers realize that a Phase I Environmental Assessment (ESA) may not be necessary for all commercial properties targeted for commercial loans.  In these cases, environmental risk can be adequately assessed by employing alternative due diligence products, which require less effort and associated cost.

These alternatives include: Desktop Review, Records Search with Risk Assessment (RSRA) and Transaction Screen Assessment (TSA).  

These alternatives are similar in that they are not intended to provide the CERCLA liability protection offered by the Phase I ESA and are not intended to be used to assess high risk properties.  However, these products differ widely in the intended use, scope of work, preparation time and price. 

The Small Business Administration (SBA) has developed the “Records Search with Risk Assessment” (SBA RSRA) as a minimum requirement for SBA loans secured by low risk commercial properties with loan amounts exceeding $150,000. Due to the thorough nature of SBA RSRAs, many banks have also adopted versions of the SBA RSRA format for their non-SBA, lower risk commercial properties. These banks identify this due diligence product as a “Desktop Review” (or continue to use the term “RSRA”). The minimum scope of work outlined by the SBA for a RSRA includes (1) a search of government databases (a search of regulatory listings for the subject property and surrounding area within the distance parameters defined by AAI and included in the Phase I ESA scope); (2) historical records, such as aerial photographs, city directories and/or fire insurance maps; and (3) a risk assessment performed by an Environmental Professional.  An Environmental Questionnaire, which meets the SBA SOP, must also accompany the SBA RSRA.  RSRAs/Desktop Reviews generally do not reference “Recognized Environmental Conditions” (REC), but include a risk determination for the property by indicating a low or elevated/high risk.  Many banks modify the SBA RSRA format to meet their internal due diligence needs.  For example, a non-SBA RSRA/Desktop Review may not necessarily include an Environmental Questionnaire and may include less historical data.  The bank should define the specific scope of work for a RSRA/Desktop Review, or at a minimum, understand the scope of work being proposed by the Environmental Professional to ensure their version of the report meets the bank’s risk tolerance.

The Transaction Screen Assessment (TSA) scope defined by the ASTM E1528-14 standard includes a site visit and completion of a “Transaction Screen Questionnaire,” with the answers to the questions provided by the current property owner and any major occupants, including those occupants likely to be using, generating, treating, storing or disposing of hazardous substances or petroleum products.  The TSA also includes “limited research regarding certain government records and certain standard historical sources.”  The site visit is typically conducted during completion of the Questionnaire. According to the ASTM E1528-14 standard for a TSA, the report does not require an Environmental Professional signature. However, banks using the TSA generally require that the document be prepared and signed by an Environmental Professional.  Like the RSRA/Desktop Review, the TSA does not identify “Recognized Environmental Conditions,” but the report should identify “Potential Environmental Concerns.”  Depending on the environmental consultant engaged, the TSA could contain less historical documentation than the RSRA/Desktop product.  Therefore, banks that use the TSA often modify the scope to require additional historical sources, a full regulatory database report (which meets AAI) and Environmental Professional preparation and signature.

Similarities between the RSRA/Desktop and the TSA products include: (1) neither is intended to be used to satisfy CERCLA liability protection, (2) neither identify “Recognized Environmental Conditions,” and (3) neither is considered appropriate due diligence for high risk properties.  In addition to the limited historical research a TSA can sometimes provide, the timing and cost to prepare a TSA over a RSRA/Desktop Review is significant, with the fee for a TSA being several hundred dollars more than the fee for a RSRA/Desktop Review.  In addition, a TSA may take up to 10 business days to complete, whereas the turn time for a RSRA/Desktop Review is generally 4-5 business days. The primary difference between a TSA and RSRA is cost. The site visit conducted during a TSA can easily double the cost over that of a RSRA/Desktop Review.

Many banks are moving away from performing TSAs. The logic behind this move is simple.

The primary cost driver for a TSA over a RSRA/Desktop Review is mobilization to the subject property to conduct an abbreviated site inspection so that the Environmental Professional can adequately complete a “environmental check list.”  Many banks realize if they have already paid to mobilize an Environmental Professional to visit a subject property targeted for a commercial loan, it is probably prudent to pay the additional incremental cost for a Phase I ESA over that of a TSA. A Phase I ESA will satisfy CERCLA liability protection by adequately identifying RECs on the subject property, while a TSA will not provide this assurance.

Whether your bank’s environmental policy includes a RSRA/Desktop Review, a TSA, or both for those low risk properties associated with relatively low loan amount deals, it is important to understand the limitations of the products chosen. You should also ensure that the scope of work addresses the bank’s risk tolerance and is adequate for determining the environmental risk of the property.


Dry Cleaning Alternatives – How “Green” is Green?

The use of chemical agents for cleaning clothes dates back to the 1690s, when turpentine was used to remove oil and grease spots from clothing.  In the 1800s, mechanical cleaning machines were introduced that used turpentine, camphor oil, kerosene naphtha or white gasoline.  Once cleaned, the clothes were hung to dry as the chemical volatilized.  In the early 1900s, white gasoline became the solvent of choice. However, using white gasoline was hazardous due to the fires and explosions it sometimes caused.  In 1924, Stoddard solvent, which has a higher flashpoint than white gasoline, was introduced.  Stoddard became the dry cleaning chemical of choice until after World War II when widespread manufacture of perchloroethylene (PERC) began and machines that used the chemical were developed.  The use of PERC continued to grow throughout the 1960s and into the 1980s.  The toxicity of PERC became a significant environmental problem with the adaptation of environmental regulations and the mobility of the chemical to the subsurface.  It is estimated that 80% of dry cleaning operations currently use PERC; however, the use of PERC has been decreasing since the 1980s.  The shift away from PERC is due mostly to the toxicity of the chemical, more stringent regulations and increased costs associated with using the chemical.  Dry cleaning industry data indicate that by 2025 less than 30% of the dry cleaning operations will use PERC.


Several alternative methods are available to replace PERC as a dry cleaning chemical. 


  • Petroleum-based solvent (DF-2000, Hydroclene, EcoSolv) contains paraffins with flashpoints above 140o F.
  • Silicone-based solvent (Siloxane D5 or D5) contains decamethylcyclopentasiloxane, an ingredient also found in shampoo, make-up, antiperspirant and other personal care products.
  • Glycol Ether-based solvent (GenX, Solvair, Impress, Rynex) contains aliphatic propylene glycol ethers followed by a rinsing with liquid carbon dioxide to complete the cleaning process.
  • Butylal-based solvent (SolvonK4) contains dibutoxymethane, 1-(butoxymethoxy)butane with traces of N-butanol and formaldehyde in the cleaning process.
  • Liquid carbon dioxide (Solvair) contains carbon dioxide and detergents however, the high cost of the equipment has limited the use of this technology.

Because of the decreased toxicity compared to PERC, these alternative methods are often advertised as being “green” or “environmentally friendly.”  Petroleum-based solvents are regulated similarly to PERC, because while not as toxic as PERC are still hazardous; Glycol-ether is a suspected neuro-toxin; and liquid carbon dioxide releases up to 10 pounds of CO2, a greenhouse gas, during the dry cleaning cycle.   Siloxane reportedly degrades to silica sand, water and carbon dioxide. However, long-term toxicity data for Siloxane D5 and SolvonK4 are not available. Prior to cleaning, some garments are pre-cleaned or spot-cleaned to remove stains. The primary constituents of the spotting agents are non-aqueous solvents and alcohols, and may include PERC, trichloroethylene, 1,1,1-trichloroethane, carbon tetrachloride, methylene chloride, amyl acetate, acetone, ethanol, methanol, isopropyl alcohol and petroleum solvents. These spotting agents, while stored and used in small quantities onsite, constitute some of the most toxic chemicals used in dry cleaning operations.

When dealing with dry cleaning operations, it is important to understand the chemicals historically used in the process and to be aware of the risks associated with their use.

As the use of alternative dry cleaning methods increase and the risks associated with exposure are further studied, we can expect to see more information and possibly more regulation regarding these “green” alternatives.

Considering Lending on a Dry Cleaner?

Perchloroethylene (PCE), a chlorinated solvent, has been used in the dry-cleaning industry since the 1930s. A small amount of this “likely human carcinogen” released to the subsurface can impact soil and groundwater, and migration of vapors associated with a release can result in indoor air quality issues. With approximately 85% of dry cleaners nationwide still using PCE in onsite dry-cleaning operations, banks are frequently asked to consider properties that have been occupied by a drycleaner as collateral for a loan.

Prudent lenders want to understand the environmental risk associated with these properties by ensuring that the proper level of environmental due diligence is conducted.

Most ERI client banks require a Phase II subsurface assessment to determine if a property is contaminated with dry-cleaning solvents when a dry cleaner using PCE has operated on the property for 5 years of more. This is a requirement for approximately 85% of ERI client banks. This is also a requirement of the U.S. Small Business Administration. The remaining 15% of ERI client banks require a Phase II if a dry cleaner using PCE operated on the proposed collateral for 2 to 3 years. However, if a site audit reveals that business operations exhibit poor attention to good housekeeping practices, inadequate solvent inventory recordkeeping or there is evidence indicative of a prior release, a Phase II will likely be required, regardless of the duration of operations.

Many ERI client banks do not have hard guidelines for dry cleaners that claim to have never used PCE. Whether to require a Phase II for a non-PCE dry cleaner generally depends on business operations, compliance history, age of equipment, use of secondary containment and to a lesser extent on years of operation. Even when PCE is not used in the dry-cleaning machines, many operators will use products containing PCE for spot cleaning. “Drop-off only” locations (those locations where clothing is transferred to an off-site facility for cleaning) may use cleaning compounds containing PCE at the drop-off location for spot cleaning. If a business is claiming to have never used chlorinated solvents in spot cleaners, copies of Material Safety Data Sheets (MSDS) may be useful in demonstrating that these cleaning compounds do not contain PCE. However, the lack of such MSDS documentation will not confirm that chlorinated solvents have not been used. If there are questions regarding potential chlorinated solvent use in dry cleaning operations, the bank could request a historical review of dry-cleaning chemical inventory to confirm that non-chlorinated solvents are used in lieu of cleaning compounds containing PCE.

Planned property use is an important consideration when dealing with a former dry cleaner.

In addition, to site specifics such as years of operation, groundwater depth, gradient and planned property use is also an important consideration when dealing with a former dry cleaner. For example, if a day care center, school or residences are planned for a former dry-cleaning space, then a Phase II will likely be required regardless of the number of years the dry cleaner operated. The details of the transaction also play a role in determining whether additional assessment is required. For example, if the bank is considering foreclosing on the property, a Phase II may be required regardless of the number of years PCE was used onsite.

Site conditions can dictate Phase II sampling locations.

In cases where a Phase II is required by the bank, sampling is usually desired near dry cleaning equipment, in waste storage areas, at floor drains, along sewer lines, at the back door, dumpster, and downgradient of the facility, with both interior and exterior samples being part of the scope. The preferred sampling media includes soil and groundwater. Soil vapor sampling is required in situations where there is a vapor concern.

Site conditions can dictate where samples are collected. Sample locations can be influenced by the presence of utilities, depth to groundwater and surface topography (since surface topography can be a subdued replica of subsurface groundwater features). If the building covers the entire property, then interior borings will likely be required.

Once the Phase II has been completed and the property is determined to be contaminated, the bank will need a plan, time-frame and cost-estimate for remediating the property and obtaining regulatory closure. This information may come from the Phase II consultant, may be based on the Bank’s Environmental Risk Manager’s experience in dealing with similar properties or a combination of the two. This information is typically used to establish a reserve, mitigate the risk using some other method or to make a decision regarding whether to accept the property as collateral.

SBA Gas Station Loans

In order to identify and mitigate the environmental risks associated with gas station loans, the U.S. Small Business Administration (SBA) has developed guidelines that loan applicants must follow during the application process.

The SBA requires that the Environmental Investigation for a Gas Station loan include a Phase I Environmental Site Assessment, a review and analysis of relevant environmental records for the subject property and adjoining properties, and equipment testing (described below).  If a Phase II assessment is recommended by the Phase I consultant, the Phase II assessment must be prepared by an Environmental Professional who holds a Professional Engineer or Professional Geologist license and has a minimum of three (3) years of relevant experience.

Equipment testing must include testing of the underground storage tanks (USTs), lines and associated leak detection devices.  The testing must occur within the 12-month period prior to submission of the Environmental Investigation and must be conducted by an independent contractor using a method that is accepted by the regulatory agency having jurisdiction. Finally, the Environmental Professional must conclude whether or not the gas station is in compliance with regulatory requirements.

If the property is contaminated and the lender does not intend to decline the loan, an SBA Indemnification Agreement signed by the seller is required. A template for this document can be found in Appendix 6 of the SBA Standard Operating Procedure, SOP 50 10 5(I).   A waiver from the SBA Environmental Committee can be sought under circumstances where an Indemnification Agreement is not practical. In addition to the Indemnification Agreement, the Environmental Policies and Procedures section of the SOP, “Approval and Disbursement of Loans when there is Contamination or Remediation” must be followed. The information submitted under this requirement includes documentation regarding the nature and extent of contamination; the method, status, costs and time-frame for remediating the site; Responsible Party designation and financial responsibility for the contamination; collateral value variables; and a determination of possible mitigating factors.

The SBA’s “Requirements Pertaining to Gas Station Loans” are found in Appendix 5 of the SOP 50 10 5(I)which has an effective date of January 1, 2017. For additional assistance addressing the SBA’s new requirements, please contact us at 866.913.9738.

Activity and Use Limitations

In many instances, exposure to soil, groundwater contamination and vapor on a commercial property can be limited by federal and state regulatory bodies through “Activity and Use Limitations” or AULs.  Information regarding AULs is typically contained in the “restriction of record on the title.” Most Phase I Environmental Assessments identify AULs associated with the subject property and the future restrictions they impose. However, it is crucial that the environmental assessment also address how these AUL restrictions can impact future property use.

The purpose of the AUL is to limit exposure pathways for chemicals of concern.

The two types of AULs typically encountered during the lending process are Engineering Controls and Institutional Controls.  Engineering Controls are engineered barriers that prevent human contact with contaminants when accessibility, technology and/or expense prohibit remediation to regulatory standards.  Examples of Engineering Controls include a concrete cap or pavement over contaminated soil to prevent contact with contaminants or vapor barriers such as membranes and/or sub-slab depressurization systems that prohibit vapors from entering structures.

Institutional Controls, sometimes called Administrative Controls, are AULs that legally prohibit onsite activities and/or actions that place the public at risk.  Examples of Institutional Controls include:

  • Groundwater restrictions that prevent the installation of potable and/or irrigation wells on or near a contaminated property.
  • Land use restrictions that prohibit residential use and restrict the property to industrial or commercial use only.  Special uses, such as day care centers, medical facilities, elderly care facilities and residential care facilities, may be prohibited as well.
  • Periodic inspection and certification of engineering control maintenance.
  • Public notification, signs, markers and fencing restricting access to areas of contamination.

Providing public notice and recording the AULs on the deed are typically required by state regulatory agencies as a stipulation for regulatory closure, No Further Action (NFA) and Certificate of Completion.  AULs can also be associated with finalized Brownfields agreements.  Failure to adhere to the restrictions may void any release from liability associated with the closure or agreement.  Information regarding the AULs is typically contained in the “restriction of record on the title.”

It is important that lenders understand any AULs associated with a collateral property and how those AULs might affect the planned use of the site and ongoing responsibilities of the borrower.

Requirements for SBA Lending

The U.S. Small Business Administration (SBA) Standard Operating Procedures, SOP 50 10 5(H), requires environmental assessments on all commercial properties offered as security for a loan.  The level of environmental due diligence required is dependent on the environmental risk of the property, which is determined by the current and former property uses.

Environmental Due Diligence Requirements:

  1. The SBA has identified North American Industry Classification System (NAICS) codes that represent “environmentally sensitive industries.”  If the property’s current or known prior uses are listed in Appendix 4 of the SOP as “environmentally sensitive industries,” then a Phase I Environmental Assessment (ESA) that meets the current Phase I Standard is required.  To be considered acceptable, the Phase I must have been completed within the last 180 days.
  2. If there is no NAICS code match and the loan amount does not exceed $150,000, then the environmental assessment may begin with an Environmental Questionnaire.   If the Environmental Questionnaire indicates the need for further assessment, then at a minimum, a Records Search with Risk Assessment (RSRA) must be conducted.
  3. If there is no NAICS code match and the loan amount is >$150,000, then the environmental assessment should begin with a minimum of an Environmental Questionnaire and a RSRA.  If the RSRA indicates an elevated or high risk, then a Phase I Environmental Assessment must be performed.
  4. A Transaction Screen Assessment (which includes a site visit by the Environmental Professional and meets the current ASTM standard) can be performed in lieu of a Records Search with Risk Assessment.

In situations where the bank has environmental policies and procedures that are different than the SBA due diligence requirements noted above, then the more stringent of the two polices must be followed.

The Reliance Letter is not to be altered.

The Environmental Professional completing the Transaction Screen Assessment, Phase I ESA or Phase II ESA must provide a Reliance Letter and Certificate demonstrating Professional Liability Insurance coverage of $1,000,000.  The Reliance Letter is not to be altered, and the date of the environmental assessment must be within the coverage period noted on the Certificate of Insurance.  A Reliance Letter and Certificate of Insurance are not required for RSRAs.

The SBA has specific requirements for those properties defined as “Special Use Facilities.” 

The SBA requires lead assessments for properties that will be occupied by childcare centers, nursery schools or residential facilities occupied by children that were constructed prior to 1980.   The SBA defines these properties as “Special Use Facilities.”  These facilities must undergo a lead risk assessment (for lead-based paint) and testing for lead in drinking water.

Dry cleaners and gasoline stations are also “Special Use Facilities” for which the SBA has outlined specific requirements.   A Phase II Subsurface Investigation, in addition to the Phase I ESA, is required for dry cleaners using chlorinated solvents that have been in operation for more than five years.  Appendix 5 of the SOP has been dedicated to Requirements Pertaining to Gas Station Loans.  These requirements include a Phase I ESA, analysis of environmental records for the subject property and adjoining properties, and documentation that both the Underground Storage Tanks systems, as well as testing/monitoring equipment, are in regulatory compliance.  The SOP further outlines the information required prior to loan disbursement in the event contamination is identified, including 1) the nature and the extent of contamination; 2) the status of any ongoing remediation; 3) the responsible party; 4) a plan, time-frame and cost estimate for completion of remediation, and 5) any activity use restrictions or intuitional controls associated with the property.  A list of Mitigating Factors are also included in the SOP, which the SBA will rely upon when deciding whether to disburse funds for a contaminated property.

Asbestos in Commercial Buildings: Abate or Manage in Place?

Health hazards associated with airborne asbestos exposure were originally known to impact workers involved in building trades, the maritime industry, mining, and the manufacturing/processing of products which contained asbestos. Three of the major adverse health effects associated with long term (10-40 years) exposure to airborne asbestos fibers include asbestosis, lung cancer, and mesothelioma. Asbestos exposure associated with the industries noted above are radically different than the potential exposure expected for building occupants in commercial buildings with asbestos containing building materials (ACBMs). ACBMs are defined as building materials containing greater than 1% asbestos.

ACBMs, if undamaged and properly managed, should pose no airborne exposure to building occupants. 

However, to ensure that ACBMs were properly identified and managed, the air toxic regulations under the Clean Air Act required the EPA to specify work practices intended to minimize the release of asbestos fibers during renovation and demolition activities in buildings containing asbestos. These EPA National Emission Standards for Hazardous Air Pollutants (NESHAP) regulations require 1) a thorough asbestos inspection where demolition or renovation activities are planned, 2) notification of the appropriate delegated entity (or state agency) before initiating the demolition of a commercial building that contains regulated amounts of ACBMs (these threshold amounts are discussed in detail below) and 3) designation of specific work practice standards designed to control asbestos emissions during demolition and/or renovation of these facilities.

The paranoia surrounding asbestos has driven many professionals involved in commercial building management and financing to consider asbestos abatement as the only alternative available to address concerns regarding ACBMs. Removal of asbestos to address concerns surrounding ACBMs is often a costly alternative to managing ACBMs in place. The vast majority of ACBMs in commercial buildings are not damaged and pose no health hazard to the building occupants when properly managed in place.

The majority of ACBMs in commercial buildings are typically non-friable (cannot be crushed or manually manipulated to render the material airborne). These materials primarily include resilient floor coverings, floor tile, and construction adhesives where the asbestos is embedded in a matrix. Friable asbestos (ACBMs that can be crushed or manipulated, rendering the material airborne) include ACBMs such boiler insulation, pipe insulation, duct insulation, spray applied fire-proofing for structural steel and textured ceiling treatments. Friable and non-friable asbestos pose no health hazard if these materials are not disturbed or damaged.

A thorough asbestos inspection performed by an accredited and licensed inspector should identify whether an ACBM is friable or non-friable, the condition of the material, the potential for disturbance and if the ACBM poses a potential airborne exposure hazard.  Asbestos building inspections must only be performed by an accredited, licensed and experience asbestos inspector capable of identifying, sampling and characterizing all building materials that are presumed to contain asbestos.  At a minimum, asbestos inspectors must meet minimum accreditation requirements established by the USEPA.  Licensing requirements for asbestos professionals may also vary between states, as some states have developed specific accreditation requirements, which go beyond the minimum licensing requirements established by the USEPA for asbestos inspectors, asbestos management planners, asbestos third party air monitors and asbestos abatement design professionals, among others.

ACBMs can EASILY be managed in place by drafting and implementing an Asbestos Operations and Maintenance Plan (O&M Plan), which identifies the type, location and condition of all ACBMs. 

The Asbestos O&M Plan should be accessible for review by all building maintenance and renovation professionals. Adherence to an Asbestos O&M Plan will ensure that any building maintenance/renovation activities performed by these professionals, which impact ACBMs, include the proper precautions to prevent personal exposure to asbestos and that those activities are performed in a manner which will also prevent an airborne health hazard to building occupants. Costs for the development of an Asbestos O&M Plan for a commercial building can vary, depending on building size and the amount of ACBMs identified, but typically range from $1,000-$2,000 and are usually closer to the low end of this cost range. However, the cost associated with engaging a third party consultant to manage the asbestos abatement process are only a fraction of the overall cost of physically removing ACBMs. In fact, engaging an experienced third party consultant to develop an effective asbestos abatement design, solicit competitive bids and manage ACBM removal performed by abatement contractors are key to cost-effective ACBM abatement.

If the asbestos inspection does identify damaged ACBMs, which may result in occupant exposure to asbestos fibers, asbestos removal or abatement should be performed. Costs for ACBM removal depends on the type and quantity of the ACBM and are fairly standard. Some good “rules of thumb” for unit prices for ACBM removal:

1)   Floor tile and mastic (glue which adheres the floor tile to base floor) is typically $3.00-$5.00/square foot (depending on substrate and mastic used a glue)

2)   Pipe insulation or ductwork insulation-$10-15/linear foot (depending on diameter and accessibility of piping)

3)   Sprayed on structural steel insulation and spray on ceiling texture ranges from $25-40/square foot (depending on substrate and accessibility)

The unit costs for asbestos abatement above do not include the 1) the original asbestos abatement design developed by a licensed asbestos design professional, 2) performance of abatement contractor pre-bid meetings to obtain competitive asbestos abatement pricing, 3) third party air monitoring during performance of abatement activities by an accredited asbestos air monitor or 4) post abatement inspection and air sampling prior to building re-occupancy. These asbestos abatement management activities should be performed by a competent, accredited and experienced third party asbestos consultant, who is unrelated to the company performing actual abatement activities. Some states prohibit asbestos air monitors from working directly for an abatement contractor to prevent a conflict of interest.

No Further Action or Closure Letters: “Perceived Liability Protection?”

The majority of commercial lenders place significant emphasis on the importance of closure or “No Further Action” letters obtained from regulatory authorities. Their focus is on the impact such documentation may have in reducing future liability associated with a former release on a collateral property.

Depending on the type of closure letter issued and the level of assessment previously completed, a closed release may still pose a concern to the bank.  Closure letters for properties where contaminated soil and/or groundwater is left in place typically include a statement indicating that the release was closed using risk-based criteria or alternate standards and that restrictions apply.

Some of the restrictions that can be placed on properties with this type of closure are:

1) limits to the use of soil and/or groundwater at the property,
2) requirement of a deed restriction on the property, and
3) a stipulation that the property is limited to commercial or industrial use.

Closure letters for properties that are remediated to the most stringent regulatory standards do not include any restrictions or controls.   In situations where remediation to the most stringent standards are unattainable or are time/cost prohibitive, regulatory agencies may evaluate the level of contamination, the exposure potential to the surrounding area and to property occupants and the use of the site to determine whether risk-based closure is acceptable.

Properties that are undergoing a change in use, such as commercial or industrial sites that are being redeveloped for residential use, previous risk-based closures for the property may require extra scrutiny.  In addition, knowledge of the planned future use will aid in the evaluation of future risk.  If impacted soils remain in place and earth moving/future development is planned, environmental management of soils and/or groundwater may be warranted.  Vapor intrusion should be a consideration for properties that received risk-based closure with contaminants remaining or where contaminants may migrate onto the subject property from off-site releases.

If you are involved in a commercial property transaction and you were provided a No Further Action or closure letter, but are concerned that change in property use/redevelopment or vapor encroachment could impact environmental liability, seek the advice of an environmental professional.  The experience and insight of such an expert will be beneficial in understanding the “perceived protection” offered by a closure letter.