It must include a review of the following information:

• Borrower-completed environmental questionnaire
• Environmental database
• Available historical reverse telephone directories
• Sanborn fire insurance maps
• Historical tenant NAICS codes and a risk assessment from an environmental professional with errors-and-omissions insurance

Can a bank's in-house environmental professional do the review? Not always. This is one of the controversial parts of the standard. In-house environmental professionals typically do not have errors-and-omissions insurance, which the new SOP requires. A strict interpretation would require that only third-party consultants could complete these reviews.

Lenders must order these reports from environmental consultants instead of directly from database companies. This will probably increase the cost by roughly $100, but the lender gets a professional opinion in return.

Remedial-cost estimates

The SBA offers guidelines on preparing remedial-cost estimates (RCE) and underwriting real estate with known subsurface contamination. The SBA puts forward a thorough and reasonably conservative standard that allows lenders to finance contaminated real estate that historically has been hard to finance.

A qualified engineer can prepare an RCE if the plume is reasonably well-characterized and regulatory requirements are known.

The SBA requires lenders to hold back and escrow 150 percent of the estimate the consultant provides. These requirements are in line with what most sophisticated lenders are doing to underwrite contaminated property.

Third-party indemnity

Another tool in financing contaminated property is for the liability to be borne by a third-party indemnifier.

This story is common: A building is built over an old gas station, and a major oil company is handling the cleanup. The site is pretty close to closure but not there yet, and the borrower has indemnity from a financial giant. The SBA's allowance of the use of this indemnity makes the contaminated property more financeable.

The rub is that the SBA is specific on the language of the indemnity agreement, and major oil companies use substantially different language. A borrower likely cannot ask the oil company to rewrite its indemnity letter in a way that creates more exposure for the company.

Reliance letter

The SBA provides a specific reliance letter that the environmental professional must complete for limited products, such as the risk assessment and records search, as well as the Phase I environmental site assessment.

Joe Derhake, a registered civil engineer, serves as the president of Partner Engineering and Science, an environmental and engineering consulting firm. His clientele includes national lenders as well as regional banks and developers. Derhake's practice focuses on environmental due diligence, participating in more than 10,000 Phase I and Phase II environmental site assessments, in addition to property-condition assessments and soil-gas surveys. Reach him at (310) 615-4500.

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