For SBA lenders
Short answer
A Phase II Environmental Site Assessment (ESA) is typically required if a Phase I ESA identifies Recognized Environmental Conditions (RECs) that warrant further investigation into the presence or absence of hazardous substances.
A Phase I ESA is conducted to identify potential environmental liabilities. If the Phase I report identifies RECs, such as historical spills, underground storage tanks, or adjacent contaminated properties, a Phase II ESA is necessary. The Phase II involves intrusive testing (e.g., soil, groundwater samples) to quantify contamination and assess remediation costs.
A lender is underwriting a 7(a) loan for a property previously used as an auto repair shop. The Phase I ESA identifies a REC due to an abandoned underground storage tank and staining on the concrete floor. The lender then requires a Phase II ESA to determine if soil and groundwater contamination exists and estimate remediation costs.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
7(a) Loan Program — Terms, Conditions, and Eligibility
U.S. Small Business Administration · Official SBA source
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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