Navigating Environmental Risk: A Guide for SBA Lending

As a Small Business Administration (SBA) lender, understanding when to order environmental risk assessments, such as a Records Search with Risk Assessment (RSRA), Transaction Screen, or Phase I Environmental Site Assessment (ESA), is crucial to managing loan risks effectively. The decision largely depends on two factors: the dollar amount of the loan and the North American Industry Classification System (NAICS) code(s) associated with the business operation.

Understanding NAICS Codes:

NAICS codes classify businesses into industry sectors based on their primary business activities. By assigning a NAICS code to a business, lenders and the SBA can understand the current nature of the business, its industry, and potential associated risks. The SBA’s NAICS Codes of Environmentally Sensitive Industries can be found in Appendix 6 of the Standard Operating Procedure (SOP).

Understanding the Reports:

RSRA (Records Search with Risk Assessment): A “lower level” report is appropriate for loans exceeding $250,000 without an “environmentally sensitive” NAICS code match. An RSRA includes a review of regulatory databases and historical research to identify potential environmental risks, followed by an Environmental Professional’s risk assessment.

Transaction Screen: A “middle-ground” report typically used on lower-risk properties, involving the ASTM Questionnaire, a regulatory databases review, limited historical research, and a site visit to identify any potential environmental concerns (PECs).

Phase I ESA: The most in-depth report, involving comprehensive regulatory and historical records and research/reviews, a site inspection, and interviews to identify recognized environmental conditions (RECs), historical RECs (HRECs), and or controlled RECs (CRECs). This report is required on properties with “environmentally sensitive” NAICS codes.

A Phase I ESA is also required if either an environmental questionnaire (utilized on loans up to and including $250,000 with no “environmentally sensitive” NAICS code match) or the RSRA or Transaction Screen reveals the potential for contamination or historical property use that would be considered environmentally sensitive (i.e., “high risk”).

Special Use Facilities:

Additional environmental assessment may be required for “Child Occupied Facilities” and gasoline stations. In addition, current or historical dry cleaning operations including the use of chlorinated and or petroleum-based solvents, require a Phase I ESA, likely followed by a Phase II ESA.

Final Thoughts:

Proper environmental due diligence protects both the lender and the borrower from unforeseen liabilities. By adhering to SBA guidelines and understanding when different environmental assessments are necessary, lenders can make informed decisions that balance risk and due diligence.

For further guidance, refer here for a SBA Flowchart created by LCS.

This blog is a starting point. Always refer to the latest SBA SOP and guidelines and your institution’s policies for specific procedures and thresholds.

To learn more, reach out to Liz Mahoney, Director of Sales & Business Development today.

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