February 13, 2013
By Gary Reynolds
Partner Engineering and Science, Inc.
SOP 50 57 Loan Liquidation – What SBA Lenders and CDCs Should Know
Each new SOP that comes out is written to provide a policy or an update of a policy, and then to provide guidance to assist in satisfying the requirements set forth in that policy. The new SOP 50 57 for Loan Liquidation, which takes effect on March 1st, starts off by following the same requirements for due diligence as found in the origination SOP 50 10 5 (e). SOP 50 57 further requires that you obtain, by working with a third-party environmental firm, the appropriate data pertaining to the property and establish an estimated net recovery. This information, which is submitted to the SBA, ensures that neither the lender nor the SBA is accepting liability for any contamination or cost of remedial actions.
SOP 50 57’s message is simply this: Dot your i’s and cross your t’s when it comes to loan liquidations. Know your property. Don’t assume. Gather facts and data by working with a reputable environmental firm that has a thorough understanding of SOP 50 57 BEFORE you take any action, or you could unknowingly be placing your lending institution and the SBA in a position of greater potential liability.
Evaluating and Valuating Environmental Concerns
The SBA realizes that there are numerous Federal, State and Local regulatory frameworks to ensure protection of human health and the environment. These regulations setup a system for assigning responsibility for the release of pollutants to the environment, management of hazardous waste, and remediation of contamination. Proper valuation of the collateral prior to foreclosure will provide the information necessary to allow the lender insight as to whether or not the collateral is marketable, whether contamination is likely to be present, and whether to assume some liability for cleanup or maintenance to protect the value of the property.
SOP 50 57 steers the lender through reasoning to insure that the lender and the SBA are not stepping into a role of liability for contamination or the costs of remediation as well as making sure the lender isn’t selling off a property for substantially less than it’s appraised value based on unsubstantiated allegations of contamination.
Work with a quality environmental firm prior to taking any loan action that could result in a loss, or increase the risk of loss, due to the actual or alleged presence of contamination. This step is critical and will provide you with a greater understanding of the subject property. You will know what you’re up against – if anything. For sites that are contaminated, an accurate Remedial Cost Estimate is an important factor you need to help determine the estimated net recovery.
What constitutes a “quality” environmental firm? As I mentioned before, working with a firm that has a thorough understanding of SOP 50 57 is critical. Additionally, if a site is contaminated and a Remedial Cost Estimate is necessary, you need to also make sure the firm has experience in actually conducting environmental remediation! Not all due diligence firms have substantial experience in remediating contaminated sites, and this experience is absolutely essential to draw on to calculate a cost estimate.
To assist with understanding the new SOP, a quick walk through refresher course in environmental due diligence might be of value at this point. We all are familiar with a Phase I Environmental Site Assessment and some are familiar with the Phase II Environmental Site Assessment. Basically a Phase I is a research-based, above ground study and Phase II is a subsurface investigation. Let’s use the all too common scenario: a gas station that has had tanks in the ground for 20 years. The onsite activities are high risk and are the reason for the Phase I to come back with the recommendation for a Phase II. To determine if the old tanks have leaked, the environmental firm has drilled 3 or 4 borings at the site (or more depending on the situation) and collected samples to determine if the soil and groundwater show contamination. If those samples come back clean – great! You have confirmation that the identified high risk property use has not impacted the site. If not, then the next step is to quantify the vertical and horizontal extent of the contamination. This delineation step is called either a Phase III or Site Characterization, and as you can easily imagine it can take a significant number of borings and potentially multiple trips back out to the site to get that information. The more holes you drill and the more samples you take, the more it’s going to cost. As a rule of thumb Phase III’s are substantially more expensive that Phase II’s, and Phase II’s are substantially more expensive than Phase I’s.
Now what? You have information that quantifies the extent of contamination and now you need to know how much it will cost, in time and money, to fix the situation. You are in need of a Remedial Cost Estimate to quantify the potential post-foreclosure clean up costs. Your Environmental Professional will develop a clean-up plan with cost and time line estimates (Remedial Cost Estimate) in order to allow you to make a more educated business decision on whether or not it makes sense to take the property back into your portfolio and sell it. By understanding the level of contamination and costs to remediate, you can now determine what the estimated net recovery is and then submit your findings to the SBA for their approval.
Quantifying the liability of a contaminated property allows you to make an educated cost versus benefit decision prior to foreclosure.
Partner Engineering and Science, Inc. has a team of Environmental Professionals that understand the SBA’s requirements for Loan Liquidations, as well as a robust remediation practice. We would be happy to answer any questions regarding the new SOP or Remedial Cost Estimates – feel free to reach out to our team at 800-419-4923 or SBAExperts@Partneresi.com, contacts: Marshall Stanclift, Chris Gregor, or Gary Reynolds.