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SBA Environmental Due Diligence Guide

A Guide to Understanding Small Business Administration (SBA) Environmental Due Diligence for Commercial Properties

Applied Environmental has prepared this guide to provide you with information that explains:

  • Why the SBA requires Environmental Due Diligence
  • How the SBA determines the report type required for various properties
  • What is included in a Phase I ESA Report
  • What protections are included with a Phase I ESA Report
  • What is included in a Transaction Screen Assessment (TSA)
  • What is included in a Records Search with Risk Assessment (RSRA) Report
  • What the lender's responsibilities are when ordering a RSRA Report
  • When Reliance Letters are required by SBA
  • Scope of work for Phase II Investigations

Why the SBA Requires Environmental Due Diligence

In order to qualify for the SBA's guaranty for 7a and 504 loans, the SBA requires certain levels of environmental due diligence be performed to provide assurance that the property value is not hampered by previous contamination or environmental degradation.

Reasons for this would include:

  • The cost of remediation could impair the borrower's ability to repay the loan and/or continue to operate the business
  • The value and marketability of the property could be diminished
  • Lender or SBA could be liable for environmental cleanup costs and third-party damage claims arising from contamination

With certain property types being, or having been used by Environmental Sensitive Industries, the SBA requires the engagement of federal protection against CERCLA (Comprehensive Environmental Response, Compensation and Liability Act) liability. They also require the engagement of an Environmental Firm's Error & Ommissions Insurance to help protect the buyer, the lender and the SBA.


How the SBA Determines the Report Type

The SBA requires an Environmental Investigation of all commercial property upon which security interest such as a mortgage, deed or trust, or leasehold deed of trust is offered as a security for a loan or debenture. The type and depth of an Environmental Investigation to be performed varies with the risk of contamination. The higher the risk for contamination the more in-depth study will be required.

Please visit our website at to view a flow chart for conducting SBA Environmental Due Diligence for Commercial Properties.

What is Included in a Phase I ESA Report

The Phase I ESA is a non-intrusive study of the environmental condition of a property. The objective of the study is to identify any Recognized Environmental Conditions (RECs) in connection with the property, if any exist.

The American Society of Testing and Materials (ASTM) has created a standardized scope of work describing the preparation of a Phase I ESA (ASTM 1527 13). The requirements for a Phase I ESA may include:

Historical & Regulatory Records Review of:

  • Fire Department Records
  • Environmental Health Department Records
  • Histrocial Aerial Photographs
  • Building & Planning Department Records
  • Sanborn Maps
  • Historical City Directories
  • Interviews with State and/or Local Government Officials
  • Interviews with Past and Present Owners/ Occupants of the Property
  • Recorded Land Title Records
  • State & Federal regulatory agency review of properties within one mile, that may affect the subject property due to spills or releases of hazardous substances and/or petroleum products.

Site Reconnaissance

  • Visual Inspection of the Subject Property
  • Visual Inspection of Surrounding Properties

Finalized Report

A summary that includes the SBA's verbiage that no further investigation is warranted, or, that there are suspect environmental conditions or REC's connected with the subject property and further investigation (usually a Phase II ESA) is required by the SBA. 

Protection Afforded Through ASTM 1527 13 Phase I ESA

Performing the AAI provides expanded CERCLA landowner liability protections that include:

  • Bona Fide Prospective Purchaser: where a purchaser may knowingly acquire contaminated property while limiting furture CERCLA liability.
  • Contiguous Property Owner: a new defense category which provide protection for contamination caused by a neighbor's actions, and
  • Innocent Landowner Protection: to those who have performed an AAI and at a later date discover that they have unknowingly acquired contaminated property.

Scope of Work for Transaction Screen

  • A Site Reconnaissance
  • The completion of the ASTME 1528-06 Transaction Screen Environmental Questionnaire
  • Obtaining and reviewing environmental databases for the subject property and surrounding areas/properties
  • Review of reasonably ascertainable historical Sanborn Fire Insurance Maps or local city directories.

(Note: A Transaction Screen Assessments affords no Federal Liability Protection)

Records Search with Risk Assessment (RSRA)

A Records Search with Risk Assessment includes:

  • A search of government databases identified in 40 CRF 312.265 for a AAI compliant Phase I ESA as well as a search of historical use records (for example, aerial photographs, city directories, reverse directories and/or fire insurance maps) pertaining to the subject property and Adjoining Properties; and
  • A risk assessment by an Environmental Professional based on the results of the records search as to whether the Subject Property is either "low risk" or "elevated risk" or "high risk" for contamination. The choice of historical records reviewed on any particular site is at the discretion of the Environmental Professional. The report must identify by name the Environmental Professional that performed the risk assessment. 

Lenders Responsibilities When Ordering a RSRA

It is the respnsibility of the lender to perform a site visit and fill out the Environmental Questionnaire with the property owner/occupant when a Records Search with Risk Assessment is ordered from the Environmental Porfessional. From the SBA SOP:

"Environmental Questionnaire" means the questionnaire used by a lender to determine the likelihood that contamination may be present at the subject property offered to secure an SBA guaranteed loan. Environmental Questionnaires must be completed or reviewed by a Lender that has made at least one site visit to the Subject Property and a good faith effort to conduct an interview with the current owner or operator of the site. An Environmental Questionnaire may be considered if it was completed up to one year prior to submission. The current owner or operator of the subject property must sign the Environmental Questionnaire.

Reliance Letters

Reliance Letters are only required with TSAs, Phase I ESAs, and Phase II ESAs. They are not required for RSRAs.

Phase II ESA Scope of Work

In the current SOP 5010 5 (A) there are certain situations that require a Phase II ESA be performed. A Phase II ESA is a subsurface investigation sometimes referred to as a physical, intrusive investigation.

The purpose of the Phase II ESA is to quantify the existence and extent of environmental hazards on a property. The Phase II ESA begins after the identification of possible or actual contamination. The Phase II ESA utilizes site exploration, sampling, monitoring, and laboratory analysis to quantify and classify the potential contamination.

The objectives include:

  • Identify the presence or absence of contamination related to an identified REC
  • Quantifying the extent of impact to affected media (i.e. soil or groundwater)
  • Developing a cost effective remediation plan

In Michigan, if the concentrations of contaminants exceed the Michigan Department of Environmental Quality (MDEQ) Residential Cleanup Criteria, the subject qualifies as a "facility." In order to qualify for an SBA loan on a contaminated property, a Baseline Environmental Assessment (BEA) is required, as well as an MDEQ approved Due Care Plan.

Applied Environmental, Inc.,

........... the Experienced SBA Environmental Consultant

We have completed the environmental requirements for countless SBA loans throughout the State of Michigan. We provide exceptional service and the confidence that your work will be performed with speed and accuracy, utilizing the correct verbiage and report structure that satisfies the SBA  Environmental Due Diligence requirements, and ensures timely closing of your loan.

Typical turnaround times for our reports are as follows:

  • RSRAs - 5 business days
  • TSA - 10 business days
  • Phase I ESAs - 10-15 business days
  • Phase II ESAs - vary depending on the scope of work required

If Contamination is Identified in the Phase II ESA

  • BEA - 3 to 4 weeks: The BEA Report must be submitted to the MDEQ within six months of the date of purchase or occupancy. Please note that in a property purchase the Phase I ESA, Phase II ESA, and data interpretation must be completed within 45 days of purchase or occupancy, whichever is earliest.
  • Due Care Plan: Documentation of due care evaluations and response activities need to be available, but not submitted, to the MDEQ within 8 months of the date of purchase or occupancy whichever is earliest.

Applied Environmental realizes how important SBA guarantees are to the State of Michigan, hundreds of loans in Michigan are guaranteed by the SBA each year. Applied Environmental strives to maintain continued excellence in assisting lenders and borrowers through the SBA Environmental Due Diligence Process.

Please contact us to discuss any questions regarding SBA environmental loan requirements and how we can guide you through the process.