Small Business Administration SOP 50 10 5 (J) Updates and What It Means for Your Due Diligence

By now, you have already heard the Small Business Administration (SBA) just released the new SOP 50 10 5(J), which includes (among other revisions) some notable changes to the environmental policy. These changes went into effect on January 1, 2018.  While some of these changes seem to tighten up due diligence, others appear to loosen policies. The impact of these changes will likely be evident in the number of loans made by the SBA until the next change to its environmental policy.

The details of the biggest changes identified in the SOP, as well as their immediate impact on due diligence requirements for lenders and owners, are discussed below and in a recent webinar I presented.

The biggest SOP changes is that the SBA now requires a Phase I ESA and a Phase II on all onsite dry cleaners, no questions asked. This change may have a substantial effect on how many properties with current and/or historic dry cleaners on-site can be financed through SBA. For other subtler changes, such as the acceptance of a Phase I ESA up to 1 year, inclusion of historicals dating back to 1940 or first developed use in a RSRA and the updated NAICS codes, it remains to be seen the impact they will have on the overall SBA environmental due diligence process.

Will any of these changes affect price of services? Most likely not if you were previously working with knowledgeable, quality environmental consultants who were well versed with the SBA SOP.

Dry Cleaners and Phase II Environmental Site Assessments

Let’s talk specifically about the change in the language with regards to dry cleaners. The new version J in the SOP summary states:

“…On-site dry cleaning facilities, which may have utilized Trichloroethylene (TCE) and tetrachloroethylene (PCE) and/or petroleum-based solvents in the course of their business operations may present significant clean-up costs if these contaminants have entered the soil, soil vapor and/or groundwater.  Prudent lending practices dictate and SBA requires that any Property with on-site dry cleaning facilities, whether currently in operation or operated historically at the site, that did, do or likely used chlorinated and/or petroleum-based solvents undergo a Phase II ESA…Any soil and groundwater contamination and soil vapor intrusion must be addressed.”

The biggest takeaways (in bold) are the elimination of a timeframe on when a Phase II is required and the addition of soil vapor and petroleum-based solvents as recognized contaminants. Will we see fewer SBA loans on dry cleaners? It is possible. Will there be an up-tick in Phase II ESAs? Yes, if the lender wants to make the loan and the borrower has enough collateral to afford the assessment. Where does this leave the Environmental Professional’s best judgement? The compulsory Phase II ESA really takes the liability off the EP, with no wiggle room.

Is it worth the time to try and submit a Phase I without a Phase II and potentially go through appeals? Based on what the SOP says, you likely will not win in appeals, with the exception of trying to argue a site that has always been a drop station or a green dry cleaner that uses something other than a petroleum or chlorinated-based cleaners in their operations.

In order to ensure that the lender and borrower have enough time in their due diligence to complete a Phase I and Phase II ESA concurrently, it is more crucial than ever to engage experienced consultants and Environmental Professionals that provide these services.

Phase I Environmental Site Assessment Report Age

The SBA has now broadened the definition of a Phase I ESA to allow for an AAI compliant Phase I ESA for review if it was performed within one year of the date upon which it was submitted to the SBA Loan Processing Center OR for Lenders and CDCs post the date of approval of the Environmental Investigation.  However, caution should be taken as this does not coincide with ASTM and the SBA states those that choose to submit and/or accept these Phase I ESAs are still at risk for legal and regulatory implications under the EPA’s regulatory timeframe of 180 days (i.e. no CERCLA liability protection). So you will want to make sure that the report was completed correctly and is AAI compliant. As such, it is likely we might see fewer Phase I updates (180 days – 1 year) ordered by lenders/borrowers.

Records Search with Risk Assessment Report Scope

When conducting Records Search with Risk Assessments (RSRAs), the choice of historical records to be reviewed on any particular site is at the discretion of the Environmental Professional and that has remained the same. However, the EP’s review of historical records must now date back to 1940 or first developed used and be included in the report. The RSRA historical review is now in-line with the requirements of a Phase I ESA. This could very easily work in the favor of sites that are elevated and require a Phase I ESA, as the historical records and research are already available.

Updated NAICS Codes

SBA environmental policy changes include clarifications to NAICS Codes. Language to clarify manufacturing codes 316, 326 and 332 are sensitive unless the operations are assembly only. Code 8122 for Death Care Services has added “unless no embalming or cremation at the Property”. By adding these clarifications, the due diligence can start with a RSRA rather than jumping straight to a Phase I. Newly added codes that require the start of due diligence with a Phase I ESA include 484 for trucking and 713990 for Other Recreational Industries (indoor and outdoor shooting ranges ONLY). Other smaller but notable changes include the change in the language and addressing options of a reliance letter, new sections for 7a and 504 loans relevant to contaminated sites and indemnification of future owners and submission size being increased to 15 MB.

Other Noteworthy SBA SOP Changes

Gas Station loan requirements have always included a comment on compliance and review of supporting state requirement documentation pertaining to tank and equipment testing. A prudent Environmental Professional would have reviewed and included these documents in the reports; however, the SBA is now putting it in writing that the documents supporting the EP’s determination must be included. In order to determine compliance, an EP would check for current permits, tank and equipment testing records and potentially other necessary items, such as financial assurance. However, the SBA has omitted the word “State” and changed it to “All Regulatory Requirements,” accounting for not only a federal default, but any specific regulatory requirements from the city, county, and/or fire department requirements, where applicable. Territories, such as DC and Puerto Rico do not fall under a State, making the need for a FOIA response even more valuable. What happens when the site has had a release and you do not have a NFA or a closure letter? Will you just needed to go through appeals? Not anymore, as the SBA has now deemed a State Equivalent document signed by a licensed professional will be acceptable

For example, many years ago, the State of Kansas (where I am located) would open a leaking underground storage tank (LUST) file for every underground storage tank removal. During the removal, the State Geologist would complete a form know as a Buried Tank Leak Assessment (BTLA) which would state what is occurring in the field, where and what field readings were collected, how the readings were taken and if any further actions were needed.  In no further action was necessary, the LUST listing was subsequently closed, indicating no release identified on the site.  A NFA or closure letter was not issued. However, the site was considered closed based on the BTLA findings. As such, the BTLA would be considered a State Equivalent document to a NFA and Closure Letter.  But a key to remember is that a licensed professional must be signed the acceptable document.

There has still been no direction added in regards to conducting Farm Loans and what is required with the Environmental Worksheet and Farm Loan Checklist or on conducting Lead Assessments.  It has only been stated they must be completed.

It has been a long time since we have seen major edits to the SOP and even more specifically to the environmental policy. The SBA is continually working to improve their policy and be receptive to feedback even as many suggestions submitted did not make it into this revision. But the SBA SOP is only a minimum guideline to follow. Lenders, owners and investors would best be served by engaging the expertise of environmental professionals who are familiar with SBA SOP standards and can offer a range of due diligence services.

Janet Annan