For SBA lenders
Short answer
A Phase II ESA is typically required when a Phase I ESA identifies Recognized Environmental Conditions (RECs) or other potential environmental contamination that warrants further investigation to quantify the risk.
SBA environmental policies mandate appropriate due diligence for real estate collateral to protect the government's interest. A Phase I ESA is generally the first step. If the Phase I report identifies RECs, the lender must determine if those RECs present a sufficient environmental risk to require a Phase II ESA to sample and analyze potential contaminants.
A Phase I ESA for a property previously used as a dry cleaner identifies the historical use as a REC due to potential soil and groundwater contamination. The lender's environmental risk analysis determines a Phase II ESA is necessary to test for perchloroethylene (PCE) in the soil and water to assess remediation costs.
Insider move
Lenders must properly evaluate environmental risks and follow SBA's environmental procedures to avoid potential liability for cleanup costs or a repair to the SBA guaranty. Failure to address identified RECs can be a significant issue.
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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