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Partner Engineering and Science

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Partner Engineering and Science

has prepared this guide to provide you with information that explains;

• Why SBA requires Environmental Due Diligence

• How SBA determined the report type required for various property types

• What is included in a Phase I Report

• What protections come with a Phase I Report

• What is included in a Transaction Screen Report (TSA)

• What is included in a Records Search with Risk Assessment Report (RSRA)

• What the lenders responsibilities are when ordering a RSRA Report

• When Reliance Letters are required by SBA

• Scope of work for Phase II investigations

• Asbestos, lead, radon, costs, turnaround times and other misc information

Why SBA Requires Environmental Due Diligence

In order to qualify for SBA’s guaranty for 7a and 504 loans, the SBA requires certain levels of environmental due diligence be performed to provide assurance that the property site value is not hampered by previous contamination or environmental degradation.

Reasons for this would include:

• The costs of remediation could impair the borrower’s ability to repay the loan and/or continue to operate the business

• The value and marketability of the property could be diminished

• Lender or SBA could be liable for environmental clean-up costs and third-party damage claims arising from contamination

With certain property types being - or having been - used by Environmentally Sensitive Industries, SBA requires the engagement of federal protection against CERCLA (Comprehensive Environmental Response, Compensation and Liability Act) liability. They also require the engagement of an Environmental Firm’s Errors & Omissions Insurance to help protect the buyer, the lender, and the SBA.

How SBA Determines the Report Type

SBA requires an Environmental Investigation of all commercial property upon which a security interest such as a mortgage, deed or trust, or leasehold deed of trust is offered as security for a loan or debenture. The type and depth of an Environmental Investigation to be performed varies with the risks of contamination. The higher the risk for contamination the more in-depth study will be required. (See flowchart back page)

Scope of Work for AAI Compliant Phase I ESA

The Phase I ESA is a non-intrusive study of the environmental condition of a property site. The goal of the study is to identify any Recognized Environmental Conditions (RECs) in connection with the property – if any exist.

The American Society for Testing and Materials (ASTM) has created a standardized scope of work describing the preparation of a Phase I ESA (ASTM 1527 05). The requirements for a Phase I may include:

• A Regulatory Agency Records Review

• Fire department records

• Dept of Toxic Substances Control

• Regional Water Quality Control Board

• Environmental Health Services Dept

• Site History Survey

• Historical aerial photographs

• Building & planning department records

• Sanborn Maps

• Historical business directories

• Interviews with past and present owners/occupants of property & surrounding properties

• Regulatory Agency List Review

• State & Federal regulatory agency review of properties within one mile that may affect subject property due to spills or releases of hazardous substances and/or petroleum products

• Site Reconnaissance

• Visual inspection of subject property

• Visual inspection of surrounding properties

• Finalized Report

• A summary that includes SBA’s verbiage that no further investigation is warranted, or, that there are suspect environmental conditions or REC’s connected with the property and further investigation (usually Phase II) is required by the U.S. SBA.

Protections Afforded Through ASTM 1527 05 Phase I

The AAI protections allow buyers to be free of potential liability if and when all parts of the AAI are met. Performing the AAI provides expanded CERCLA landowner liability protections that include:

• Bona Fide Prospective Purchaser: where a purchaser may knowingly acquire contaminated property while limiting future CERCLA liability.

• Contiguous Property Owner: a new defense category which provides protection for contamination caused by a neighbor’s actions, and

• Innocent Landowner Protection: to those who have performed an AAI and at a later date discover that they have unknowingly acquired contaminated property.

Scope of Work for Transaction Screen

• A site reconnaissance

• The completion of the ASTM 1528 06 Transaction Screen Environmental Questionnaire

• Obtaining and reviewing environmental databases for the subject property and nearby surrounding areas/properties

• Review of reasonable ascertainable historic Sanborn Fire Insurance maps and local city/street directories.

(note: Transaction Screens afford no Federal Liability Protection)

Records Search with Risk Assessment (RSRA)

Record Search with Risk Assessment means and includes:

• A search of the government databases identified in 40 CFR § 312.265 for an AAI compliant Phase I as well as a search of historical use records (for example, aerial photography, city


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