For SBA lenders
Short answer
If a Phase I ESA identifies RECs, the lender must typically require further investigation (e.g., a Phase II ESA) or remediation to assess and mitigate the environmental risk before loan approval.
The presence of RECs (Recognized Environmental Conditions) indicates potential environmental contamination. Lenders, as part of prudent lending, are expected to ensure such risks are thoroughly investigated and, if necessary, remediated to protect the collateral value and avoid potential liability. The SBA will not guaranty a loan where environmental contamination is not adequately addressed.
A Phase I ESA for a property shows historical industrial use with a REC for potential soil contamination. The lender requires a Phase II ESA, which confirms contamination, and then mandates an environmental remediation plan be implemented and verified before the loan can close.
Insider move
Lenders are highly concerned about environmental liability and protecting the value of collateral. Failure to properly address RECs can lead to the SBA denying guaranty purchase if the contamination results in a loss or impairs collateral.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
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