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Records Search with Risk Assessment vs. Transaction Screen Assessment for SBA Loans

FAQs of tiered environmental due diligence

Environmental due diligence is a sound part of all commercial real estate transactions to lower liability and manage risk for the stakeholders involved. Usually, this involves engaging with an Environmental Professional to conduct a Phase I Environmental Site Assessment. Should there be a need to confirm the presence or degree of a Recognized Environmental Condition (REC), this would be followed by a Phase II Environmental Site Assessment and/or a site remediation plan.

Not all loans, however, require or warrant a full Phase I Environmental Site Assessment. A tiered approach to environmental due diligence, involving streamlined environmental reports that are more limited in scope, can be a cost-effective and efficient tool for screening high risk properties.  These “environmental desktop reports” are often used on smaller loans and/or those loans involving lower-risk properties. 

Two of these types of reports, a Records Search with Risk Assessment (RSRA) and a Transaction Screen Assessment (TSA) are a compulsory part of the Small Business Administration’s (SBA) environmental policy for SBA lenders. What are these reports and how are they used for SBA loans? We delve into that below.

Records Search with Risk Assessment (RSRA) Reports

For SBA loans over $150,000 and if a property type is not listed on SBA’s NAICS codes list of Environmentally Sensitive Industries, a borrower or lender may begin their due diligence with a Record Search with Risk Assessment (RSRA) report. A RSRA is defined as a risk assessment by an Environmental Professional based on the results of the records search as to whether a property is “low risk” or “high risk” for contamination.

The report must identify the Environmental Professional that performed the assessment and include a search of the government databases identified in 40 CFR § 312.265 for Phase I ESA reports. It must also include a search of historical use records dating back to 1940 or first developed use pertaining to the subject property. Appropriate records can include aerial photography, city directories, reverse directories and/or fire insurance maps. Topographic maps are also appropriate; however, should not be used as a sole-source for determination of risk.  A RSRA protocol will generally conform to the Phase I ESA ASTM Standard (E1527-13).

When the RSRA is ordered, it is the responsibility of the lender to perform a good faith site visit with the property owner/occupant (signature required), to assess the property and complete an Environmental Questionnaire (EQ). If the property owner refuses to sign the EQ, at a minimum the lender must complete a Transaction Screen Assessment (TSA), as detailed below.

SBA Transaction Screen Assessment (TSA) Reports

A Transaction Screen Assessment (TSA) is also a cost-effective limited environmental due diligence report, but slightly more detailed in scope than the RSRA report.  Also called an Environmental Transaction Screen, the TSA is essentially a scaled down version of the Phase I Environmental Site Assessment, however it follows an alternative ASTM method (E1527-14). An SBA TSA report satisfies lender due diligence requirements for low risk properties (such as a residential property adjacent to a car wash, or sites with no historical records of high-risk use), but for higher-risk properties, a complete Phase I ESA is required. The report requires a TSA Questionnaire to be completed in addition to a site visit, a review of regulatory records, key personnel interviews and limited historical research.  Based on the additional work required by the transaction, a TSA will typically take longer than a RSRA to complete.

Aside from the Phase I ESA, the TSA is the only other environmental due diligence product that is governed by an ASTM Standard Practice. However, because it adheres to an alternative standard, the TSA does not meet the requirements of the EPA’s All Appropriate Inquiry and will not offer the stakeholder protection from CERCLA liability. To learn more about the latest CERCLA updates and liability risks for different commercial real estate parties, click here.

Due Diligence Assessment Reports as a Part of Comprehensive Environmental Policy

For either of the above-described reports, if a significant environmental concern is identified by the consultant during the assessment and records review process, then the evaluation may be elevated to a more comprehensive report such as the Phase I ESA. Prior to engaging in the due diligence process, consider if the consultant will credit the cost of limited environmental assessments towards a Phase I ESA if the report comes back High Risk or with Potential Environmental Concerns (PECs). If not, the client may end up paying twice. Some firms can only provide desktop reports and are unable to assist when a higher level of due diligence is needed.

Another important consideration is that even though the lowest environmental reporting level requiring an Appendix 3 SBA Reliance Letter and a Certificate of Insurance is a TSA, clients will still often request the reliance letter with an RSRA report.  Due to the limited, non-ASTM scope of assessment in an RSRA, and one of the purposes of the reliance letter being to engage the Environmental Professional’s Liability Insurance, SBA stipulates that the RSRA report “need not be addressed to the SBA and need not be accompanied by a Reliance Letter.”  Upon special client request, however, consultants can include all Users in the addressing of the final report.

As a part of its latest SOP update, the SBA has clarified that when an environmental consultant recommends proceeding directly from a TSA to a Phase II ESA, and this is agreed upon by the Lender, the Lender must seek in advance a case-by-case policy exception from the SBA Environmental Committee.

To ensure you are performing the necessary level of due diligence for the transaction at hand, and that the environmental reports you submit meet the stringent requirements of the SBA and/or lender, engage with an experienced due diligence consultant who is knowledgeable about SBA lending requirements

A good third-party firm will provide guidance, resources and exceptional report quality in a timely manner to help facilitate a successful transaction.