For SBA lenders
Short answer
If a Phase I ESA identifies a REC, the lender must typically require a Phase II ESA to determine the nature and extent of contamination and assess the potential financial impact.
A Recognized Environmental Condition (REC) indicates a potential for hazardous substance contamination. If a REC is identified, the SBA requires the lender to conduct a Phase II Environmental Site Assessment, which involves physical sampling and testing. This is crucial for evaluating environmental risk and determining if remediation is necessary.
A Phase I ESA for a property collateralizing a 7(a) loan identifies a former dry cleaner on an adjacent parcel as a REC. The lender then requires a Phase II ESA, including soil and groundwater testing, to determine if contamination from the dry cleaner has migrated to the subject property.
Insider move
Failure to address identified RECs can expose the lender and SBA to significant environmental liability and costs, potentially jeopardizing the collateral and loan repayment. Proper due diligence protects the guaranty.
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.
More on environmental
Terms in this answer
Pre-qualify your SBA 7(a) deal
Tell us the business, the price, and where you are — we'll point you to the lenders most likely to fund a deal like yours and flag anything that trips up approval.
Free · No documents · Usually same-day