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How to Address Vapor Risk in SBA Due Diligence

Partner's Janet Annan discusses vapor migration risk in the commercial real estate industry

There is still a quite a bit confusion around vapor intrusion / encroachment / migration risk in the commercial real estate industry, particularly on how to address it during due diligence. Some, not all, lenders require it be specifically addressed in due diligence reports – either with a dedicated section in the Phase I ESA, or an additional Vapor Encroachment Assessment (sometimes called a Vapor Screen). SBA Lenders are required to follow the guidelines within the current SOP; but, what does it say about vapor migration risk? Well actually, the SOP is silent on vapor. But that doesn’t mean you won’t run into this issue during SBA due diligence. 

First, a quick recap on vapor. According to the EPA, vapor intrusion occurs as a results of vapor-forming chemicals from any subsurface source into an overlying building. Vapor-forming chemicals of concern can include volatile organic compounds (VOCs), such as trichloroethylene (TCE), tetrachloroethylene (PCE), and benzene. Typically TCE and PCE, along with other degradation products, are associated with dry-cleaning facilities while benzene and other petroleum hydrocarbons are associated with retail petroleum stations. These chemicals are known carcinogens capable of causing cancer from open exposure pathways, dependent on exposure time and dosage. These are not the only vapor-forming chemicals that pose a risk, but are the ones we hear of most often in commercial real estate transactions. Also, there is a much longer list of sensitive industries that use or have used vapor-forming chemicals of concern.

Now, back to SBA. For a loan guaranteed by the SBA, lenders at a minimum must follow the environmental requirements set forth in the current SBA SOP 50 10. The majority of SBA loans are administered though the SBA’s 7(a) lender and/or Certified Development Company (CDC) 504 loan programs. In order to protect the involved parties, applicants are required to fulfill the federally mandated due diligence obligations in order to receive the funds guaranteed through these programs.

The SBA SOP’s tiered risk approach is fairly comprehensive already. High-risk sites (including those more likely to have vapor concerns) undergo more comprehensive environmental investigation (a Phase I ESA and sometimes additional steps) while lower risk sites get a more slimmed down review. In order to begin to classify these site by operations, the SBA utilizes the NAICS Codes to help identify sensitive industries. These are self-classifying codes that are most representative of the business practices. The SBA uses these and other criteria to determine what minimum level of environmental due diligence is required, according to the following categories: Gas Stations and any Fueling Facilities; Other environmentally sensitive NAICS Code Matches; No NAICS Code Match (plus the amount of the loan); and Special Use Facilities. Partner created a flowchart to assist in this determination and process.

Currently, the SBA SOP does not specifically state the need to comment on or evaluate vapor intrusion within the environmental report. However, it does require the Phase I environmental investigation to comply with the current ASTM standard and AAI requirements in order to qualify for CERCLA liability. In the 2013 update to the ASTM Phase I ESA standard (e1527-13), ASTM added language to clarify that vapor intrusion and migration should be considered no differently than contaminated groundwater migration – i.e. it should address vapor risk anyways, without any additional stipulation being needed. The 2013 updates gave more prominence to the risks of vapor migration by including it in Sections 3.2.2 (Activity Use and Limitations); 3.2.56 (new definition of migrate/migration); 13.15.7 and X5.8 (Indoor Air Quality) and mention of the ASTM E 2600 Vapor Encroachment Screening Standard. Overall, the addition of the word vapor and/or soil vapor to these sections depicts a growing knowledge that environmental impacts are not limited to soil or groundwater.   

Now if a vapor concern is identified in the Phase I ESA, what is the next step? Again, SBA does not specify next steps in a vapor encroachment / intrusion assessment but it does specify that any recommendations for additional investigation made in the Phase I ESA have to be followed. Thus, those recommendations should not be made lightly – whatever additional research can be done as part of the Phase I to understand the potential vapor issue and its impact on the subject property (such as a file review) is generally a good practice, if it is readily ascertainable within the budget/timeframe/scope of the project. Your consultant should discuss this with you before issuing the Phase I report. Otherwise, the Phase I recommendation may be a Phase II Subsurface Investigation with soil-vapor sampling and possibly indoor air samples. In 2014, Joe Derhake, CEO of Partner Engineering and Science, Inc., provided examples of case studies and Key Steps of a Quality Vapor Intrusion Assessment, which remains applicable to determining a vapor intrusion risk.

Bottom line – if you are working with a quality environmental firm, they should automatically assess potential vapor risk in the Phase I ESA and any additional investigations if needed. And, of course, make sure they understand the SBA’s SOP and process, otherwise you could end up having delays or extra costs to gather additional information or redo a report to SBA’s specific criteria – that’s a headache whether or not you have a potential vapor risk on your hands.