SBA Crash Course – Topic 6: Reliance Letters

As part of the U.S. Small Business Administration’s environmental policy, reliance letters, along with certificates of insurance are required for Transaction Screen Assessments (TSAs), Phase I Environmental Site Assessments (Phase I ESAs) and Phase II ESAs. It is not “just a letter” that can be whipped together and signed haphazardly. It is in fact, one of the most common sources of issues for SBA lenders during environmental due diligence.

So, what is a Reliance Letter? A Reliance Letter is letter that is used to convey the right for particular parties to rely on the contents of a report. Typically, the lender, CDC, and SBA are the relying parties. If there are other parties, they would also need to be included. Without reliance, an additional party could review a report, but would not be able to rely on it for their own due diligence or liability protection.

The SBA Reliance Letter is a specific SBA form to be filled out and signed by the environmental professional and the firm providing the report verifying that they meet the qualifications of an environmental professional as stated by the SBA. The SBA SOP specifically states it cannot be altered in any way. The form requires listing of the relying parties (“Lender”), borrower, project details, level of due diligence performed (i.e. TSA, Phase I ESA, or Phase II ESA), and the dates of the respective report. In addition, the Reliance Letter is to be accompanied by evidence of insurance of the environmental professional/firm.

In the case of a Records Search with Risk Assessment (RSRA) report, a Reliance Letter is not required due to its very limited scope of work and because it is a non-ASTM report. This is a common misunderstanding among some SBA lenders who often request the Reliance Letter when ordering the RSRA report. One of the purposes of the Reliance Letter is engaging the environmental professional’s liability insurance, however, RSRA reports are a very specific SBA report. The SBA SOP 50 10 6 clearly states in Appendix 4: Definitions – Environmental under Records Search and Risk Assessment (pages 541-542) that “this report need not be addressed to the SBA and need not be accompanied by a Reliance Letter.”

I mentioned above that Reliance Letters were a common issue for the SBA. Particularly, on occasions when environmental professionals and/or consultants are unwilling to sign the SBA’s Reliance Letter. This could be for several reasons, including:

• SBA requires that the letter be on the consultant’s letterhead and the verbiage not be altered.
• The contract is between the consultant and their client. [When the consultant grants third party reliance to the SBA, their liability exposure opens up.]
• The letter requires liability insurance coverage of $1,000,000, and a policy of this amount is usually matched with a substantial deductible. [This coverage amount is the industry standard and shouldn’t be a burden for most consulting firms, but again, granting additional reliance increases a consultant’s liability exposure and some may not be comfortable with this. Furthermore, a consultant may have the appropriate protection when the letter is signed, but what if they do not have the same protection when a claim is made? The consultant would be on the hook and could lose everything.]

One firm can’t provide reliance on another firm’s report, nor would they ever want to because the Reliance Letter engages the firm’s liability insurance. In these cases, the lender would need to reorder their report when they are close to closing, doubling the cost and the turnaround time. Reliance Letters follow the ASTM timeframe of 180 days; after that, the reliance and report will need to be updated. After one year, a new report will need to be completed again.

When engaging an environmental professional or environmental consultant to perform an SBA Transaction Screen Assessment, Phase I ESA, or Phase II ESA, make sure to always provide the most recent Reliance Letter, currently found in Appendix 5 of SBA 50 10 6 (pages 543-545). Make sure to ask if they will sign it, without changing it, upon completion of the project. If they say no, you will need to find a new environmental professional that can stand behind their work and be able to provide the Errors & Omissions insurance levels required by SBA.

The SBA Crash Course Series:

Topic 1: The SBA SOP and Why You Should Care
Topic 2: The Environmental Questionnaire
Topic 3: The Records Search with Risk Assessment
Topic 4: The Transaction Screen Assessment
Topic 5: SBA Screen Outs and Appeals
Topic 6: Reliance Letters
Topic 7: The Phase I ESA and Beyond