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By Dianne Crocker Senior economist and managing director EDR Market Research Group
The SBA’s New Standard
The latest standard operating procedure makes changes to environmental due diligence
The U.S. Small Business Adminis- tration’s (SBA’s) revised stand- ard operating procedure — SOP
50-10 5(C) — took effect this past Oct.
1. Within its provisions are several
modifications to the SBA’s environmental due-diligence requirements.
In today’s tightened credit markets, SBA lending is increasing, and
commercial mortgage brokers with
small-business clients must know the
latest rules. This means understanding the environmental due-diligence
requirements for SBA loans — which
are more rigorous than standard due-diligence practices — as well as the
importance of working with environmental consultants who meet the SBA’s
professional qualifications.
Changing due diligence
In August 2008, the release of the first
version of SOP 50-10 ( 5) changed how
lenders conducted environmental due
diligence before extending credit on
commercial real estate. Traditionally,
bank policies based the determination
of whether a particular commercial real
estate loan warranted a Phase I environmental site assessment on loan size.
The SBA’s SOP acknowledged that
environmental risk does not recognize
loan size. A property’s past use as a
gas station or dry-cleaner operation
has the potential to impact the collat-
eral behind a small loan just as eas-
ily as a large one. Instead of making a
decision based solely on loan size, the
SOP identified three main triggers for
a Phase I environmental site assess-
ment: 1. a property’s current or past
use in an industry identified as “en-
vironmentally sensitive”; 2. a recom-
mendation for further investigation in
a transaction screen; or 3. a records
search with risk assessment that
determines a property has a high or el-
evated risk for contamination.
The latest changes
With the most-recent SOP changes, the
SBA revised its environmental policies
and procedures in response to experience in the marketplace, as well as
feedback from SBA lenders and environmental professionals. There are
several notable changes to the policy.
First, Appendix 4 of the SOP identi-
fies the North American Industry Clas-
sification System (NAICS) codes that
the SBA considers “environmentally
sensitive” industrial classifications.
SBA lenders must make a good-faith
effort to determine the appropriate
NAICS codes for a property’s current
and known prior uses. If there is a NA-
ICS-code match, the environmental in-
vestigation must begin with a Phase I
environmental site assessment. The
only modification in the NAICS-code
list was to clarify that “laundry [and]
dry cleaning services” applies not only
to current operations, but also “if dry
cleaning operations have ever existed
on site.”
For loans of $150,000 or less, if the en-
vironmental questionnaire determines
that further investigation is warranted,
the SBA policy now states that the lender
must obtain a records search with risk as-
sessment by a qualified environmental
professional. This replaces the previous
requirement for a transaction screen.
Working with the SOP
Even after two years, the SBA’s environmental policies still are not widely
understood in the market. These provisions take more time. They take more
expertise and — in some cases involving loans on gas stations, dry cleaners,
Illustration: Dennis Wunsch
and certain daycare centers or residen-
tial facilities — they go beyond standard
environmental due-diligence practices.
Dianne Crocker is senior economist and
managing director of EDR’s Market Research
Group. For more than 15 years, she has
been analyzing trends in environmental risk
management and commercial real estate.
Her group routinely conducts surveys of
environmental consultants and commercial
real estate lenders to stay abreast of the
latest trends. Crocker is a frequent speaker
at industry events and author of the Market
Maven blog on commonground.edrnet.com.
Reach her at (800) 352-0050, ext. 156, or
dcrocker@edrnet.com.
