For SBA lenders
Short answer
A Phase II ESA is required when a Phase I ESA identifies Recognized Environmental Conditions (RECs) that indicate a high probability of contamination, warranting intrusive sampling and analysis to quantify the risk.
If a Phase I ESA reveals potential or confirmed environmental contamination (RECs) that cannot be fully evaluated without further testing, the SBA requires a Phase II ESA. This step involves collecting soil, water, or air samples to determine the presence, extent, and type of contaminants, assessing the full environmental risk.
A Phase I ESA on real estate collateral identifies historical dry-cleaning operations on an adjacent property and discolored soil on site, indicating a potential REC. The lender then requires a Phase II ESA to conduct soil and groundwater testing to determine if contamination is present.
Insider move
Lenders must ensure that a Phase II ESA is promptly performed when recommended, and that the findings are thoroughly reviewed. Unaddressed environmental contamination poses significant liability and can prevent a loan from closing or jeopardize 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.
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