Environmental Considerations for Real Estate

We see a lot of requests from financial institutions for environmental assessments for Small Business Administration (SBA) guaranteed loans. The SBA's environmental policy is outlined in its Standard Operation Procedures (SOP 50-10-5(D)). The first step of the environmental investigation is to determine if the site operations have a North American Industry Classification System (NAICS) code that matches one of the SBA's published list of environmentally sensitive NAICS codes. If so, a Phase I ESA is required. If not, then only a Records Search with Risk Assessment (RSRA) is required. Seems simple enough, right?

Well recently, while conducting a Records Search with Risk Assessment (RSRA) for an SBA guaranteed loan, we discovered that the on-site bakery wasn't always a bakery; it used to operate as a metal fabricating facility and had a former release from an Underground Storage Tank (UST). The release was effectively mitigated and acheived a regulatory status of No Further Action (NFA) from the state regulatory agency, so we assigned the site a "low risk" rating.

However, upon further review of the SBA's environmental policy, we discovered that the "lender must begin my making a good faith effort to determine the NAICS code(s) for the property's current and known prior uses and compare the NAICS code(s) to the list of environmentally senstivie industries in Appendix 4." So the NAICS code match requisite not only applies to the current use of the site, but prior uses as well. Furthermore, the following statement is included at the end of the SBA's published list of NAICS codes of environmentally sensitive industries: "A Phase I should always be obtained if the business sells, supplies, or dispenses fuel, gasoline, or heating oil, even if the the NAICS code for the business is not identified on this list of environmentally sensitive industries."

Based on these requirements and a former UST being operated on the site, a Phase I ESA for the bakery was appropriate from the beginning. Unfortunately, the former uses of the site weren't known until after we were engaged to conduct the RSRA. The good news is that the database report and historical sources used for the RSRA can be used for the Phase I ESA, so it's not a total loss. It's just going to take a little longer and cost a little more than originally anticipated. Takeaway: current property use doesn't tell the whole story; as much as can be learned in the very early stages of a property transaction will provide for quicker turnaround time for your environmental investigation.