For SBA lenders

If a Phase I ESA recommends a Phase II, what are the lender's options if remediation costs are unknown or prohibitive?

Short answer

The lender's options include requiring the borrower to complete the Phase II and, if needed, secure funding for remediation, or declining the loan if costs are prohibitive or risks unacceptable.

The rule

If a Phase I Environmental Site Assessment (ESA) identifies potential contamination and recommends a Phase II ESA, the lender must follow through to determine the extent and cost of remediation. If the costs are prohibitive or the risks too high, and cannot be mitigated, the property may be unacceptable as collateral, or the project infeasible, leading to a loan denial.

Facts that matter

Phase I ESA recommendation
Phase II ESA need
Unknown remediation costs
Prohibitive costs/risks

Example structure

A $1.5M 7(a) loan for a commercial property acquisition yields a Phase I ESA recommending a Phase II due to potential underground storage tanks. If the Phase II reveals extensive soil contamination with an estimated $300,000 remediation cost, the lender may require the borrower to fund remediation from equity or decline the loan if the cost makes the project unfeasible or the environmental risk too high.

If a Phase I ESA recommends a Phase II, what are the lender's options if remediation costs are unknown or prohibitive?

The rule

Facts that matter

Example structure

What lenders usually care about

Official sources