When you’re buying commercial real estate for your small business with an SBA loan, you’ll need an environmental site assessment of the property.
In this overview, you’ll learn what the environmental site assessment is, why it’s required, and the steps involved in this piece of the SBA loan application.
What’s an environmental site assessment?
As its name implies, an environmental site assessment is an evaluation of the environmental risks that may come with the property you purchase, as well as those that surround the property.
Lenders, including banks and the SBA, use varying degrees of environmental site assessments, just as different commercial properties have different levels of inherent risk. For example, a storefront that’s always been used as a retail venue likely poses less of an environmental health and safety risk than a property that was used as a gas station or a scrap yard.
The environmental site assessmentevaluates how likely it is that the property is currently contaminated with substances like lead, oil, radon, mercury, asbestos, mold, and other toxic chemicals. It also assesses the future potential for environmental contamination. The SBA requires that properties undergo an environmental site assessment as part of the application process to give you, your lender, and the SBA some protection against current or future health and safety risks and liabilities.
How is an environmental site assessment performed?
Environmental site assessment reports are usually requested by buyers or lenders as part of the due diligence for commercial real estate transactions.
For SBA-funded deals, there are two primary types of environmental site assessments, Phase I and Phase II:
- Phase I: The Phase I environmental site assessment includes a questionnaire that’s filled out and filed by your lender or their representative environmental professional. The assessment attests that the property itself, and its neighboring properties, present a low environmental-safety hazard. This is the case for many SBA deals to purchase restaurants, retail, professional-services offices, and similar types of low-risk businesses.
In Phase I, the environmental professional will search for, identify, and record potential recognized environmental conditions (REC) in and near the property. This is done by reviewing public records, a visit to the site, and interviews of owners, past owners, occupants, and local government officials, among other methods. Then, a final report of any possible contamination is made and they’ll determine if there are any potential liabilities. If any contaminants, hazardous materials, or other RECs are located or suspected, a Phase II inspection will be arranged. - Phase II: There are many commercial properties that will require a more comprehensive study, which is called a Phase II environmental site assessment. These include, but aren’t limited to, properties that were or will be used for, businesses that fall within these NAICS codes, such as gas stations, manufacturing facilities, food production facilities, recycling plants, and others. It can also include properties that aren’t within these NAICS codes but may have the hazards mentioned above.
Phase II inspection will further investigate potential RECs by doing “intrusive” testing. Typically, holes are drilled into the soil, either outside the building or through the foundation to the soil underneath. It might also include soil and groundwater sampling and indoor air-quality testing.
The samples are then submitted to a lab for analysis, and the results will determine whether there is actual contamination. If hazards are found, a mitigation plan or other actions may be necessary before you can buy the property.
Why do lenders care about the environmental condition of a property?
Liability and costs associated with environmental clean-up or remediation can be extensive and lead to more significant problems. This could include large-scale mitigation projects or remediation to protect the health of your employees, your customers, and yourself.
These issues could cause significant financial hardship to your business, impacting your cash flow, reserves, and your ability to pay back your business loans. Not only that, it can also have a significant negative effect on the value of the property, which would impact the real estate’s collateral and resale values. Because of this, banks and the SBA won’t close on a loan until the appropriate level of ESA has been performed, and if needed, remediation.
How much will an environmental site assessment cost?
The cost of the environmental site assessment depends on the property’s location, size, and the potential for contamination. A typical Phase I assessment will cost between $1,500 to $5,000 while Phase II reports can cost $5,000 to $10,000 or more. While they aren’t included in every deal, costs for environmental site assessments can be rolled into your SBA loan as soft/closing costs.
When will the environmental site assessment be performed?
When considering buying a commercial property, you should talk with your attorney to see if the purchase agreement contains certain environmental duediligence-timing requirements (for example, within 45 days of an executed contract). This may determine when you’ll need to order the report. The environmental site assessment is performed either during your loan underwriting or immediately after approval.
Lenders will typically arrange for the assessment to be done and will hire the environmental consultant. but some lender will allow you to hire the environmental reviewer yourself. In those cases, you’ll need to know the specific requirements for the report, like if it needs to be completed in accordance with ASTM standards and by a qualified and experienced environmental professional. In addition, a lender must be able to review the reports before they’re finalized, including the right to review these reports before a consultant recommends a Phase II or other actions.
Most reports are completed and delivered to the buyer/borrower within three to four weeks.
Pursuit is ready to help throughout the process
Environmental site assessments don’t just protect your lender. As a business owner and property owner, these are also important investments in your property’s safety and protection.
Pursuit’s expert team has helped thousands of small business owners get the financing they need to thrive, including SBA financing to purchase commercial real estate. We know the environmental site assessment process and can help with this and every step as you continue to grow your business. Contact us today to learn more about how we can help.
