# The building was a dry cleaner in 2004. Now your $540K SBA loan starts with a Phase I. > SBA checks every known past use of the building you pledge. If one matches its list of environmentally sensitive industries, the review starts with a Phase I, whatever the loan size. Here's how a made-up bakery's $540,000 loan hit that rule. By Elie Mendlow · Published November 1, 2026 Section: Business Funding › SBA & Government-Backed · Series: SBA 7(a) Playbook (https://mcafax.com/notebook/category/sba) Canonical: https://mcafax.com/notebook/sba-7a-environmental-phase-i-prior-use Source: MCAFax, The Broker's Notebook (https://mcafax.com/notebook). MCAFax is not a lender or a law firm. --- "It's a bakery. Why does the bank care about chemicals?" Priya (a made-up founder, 26) runs Halfmoon Bake Shop (a made-up bakery in Tucson, Arizona). She found a small standalone building for $600,000 and asked for a $540,000 SBA 7(a) loan to buy it. Then the lender pulled the property's history. From 1998 to 2009, the building was a dry cleaner. Her loan file just got a new first step. This is general information, not legal or financial advice. Confirm every rule with your lender and the current SOP before you apply. ## The one tip SBA doesn't only look at your business. It looks at every known past use of the property you pledge. If any current or known prior use matches SBA's list of environmentally sensitive industries, the environmental review must begin with a Phase I Environmental Site Assessment, no matter how small the loan is. Under SBA SOP 50 10 8.1 (effective October 1, 2026), Section A, Chapter 5, Paragraph E, and Appendix 6: - SBA requires an environmental investigation on all commercial property offered as security, such as a mortgage or deed of trust. - The lender must make a good faith effort to find the NAICS codes (industry codes) for the property's current and known prior uses and compare them to Appendix 6. - A match means the investigation begins with a Phase I. Dry cleaning (NAICS 8123) is on the list if dry cleaning ever happened on site. So are gas stations, auto repair and printing. - No match? Loans up to $250,000 can start with a simple Environmental Questionnaire. Loans over $250,000 need the questionnaire plus a Records Search with Risk Assessment. - Reports must be dated within one year of the date SBA issues the loan number, done by an Environmental Professional, and come with SBA's Reliance Letter. - If the professional recommends more work, usually a Phase II, SBA requires the lender to follow every recommendation, down to sealing floor drains. Skip a step and SBA can deny its guaranty. That's why no lender will wave this through. ## Worked example All numbers are made up. Report costs are assumptions, not SBA figures. - Building price: $600,000. Loan: $540,000. Priya's cash: $60,000. - With no dry cleaner in the history, a $540,000 loan would start with a questionnaire and a records search, assumed at about $500. - The 1998 to 2009 dry cleaner is an Appendix 6 match, so the file starts with a Phase I, assumed at $3,200. - The seller hands over a Phase I from 14 months ago. It's more than one year old when the loan number is issued, so it can't be the report in the file. - The new Phase I finds a former solvent storage area and recommends a Phase II, assumed at $9,500. Priya's purchase contract gave her 30 days of due diligence and put $20,000 of earnest money at risk. Two environmental reports in a row don't fit in 30 days. If she hadn't negotiated an extension, she could have lost $20,000 waiting for paperwork. If the Phase II finds contamination, the loan can't be approved or disbursed until the risks are minimized to SBA's satisfaction. That means cleanup estimates, government letters and a written case from the lender. SBA's guaranty on this loan is 75%, or $405,000. That's the money the lender protects by following every step. ## Do this week 1. Before you make an offer, ask the seller and the listing broker for every past tenant and use of the building, back as far as they know. 2. Compare each past use to Appendix 6 in the SOP. Watch for dry cleaners, gas stations, auto repair, print shops and anything that stored fuel. 3. Ask the seller for any existing Phase I or Phase II. Check its date against the one-year rule. 4. Write a due diligence period into your purchase agreement that's long enough for a Phase I and a possible Phase II, with your earnest money refundable until the reports are back. 5. Budget for at least two reports before you commit cash, and ask your lender which costs come out of your pocket at closing. 6. Ask your lender which environmental steps are SBA rules and which are bank overlays. Leasing a unit instead of buying? The rules for a unit in a multi-unit building are lighter. Buying a business that comes with a building? Read our post on [owner-occupancy and the 51% rule](https://mcafax.com/notebook/sba-7a-owner-occupancy-51-percent) too. Sources: SBA SOP 50 10 8.1, Section A, Ch. 5, Paragraph E (Environmental Policies and Procedures: investigations, one-year report dating, Reliance Letter, investigation steps, contamination and remediation); Appendix 6 (NAICS codes of environmentally sensitive industries); Appendix 7 (gas station loans); Appendix 16 (guaranty percentages), on [SBA's SOP 50 10 page](https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs); [13 CFR Part 120 on eCFR](https://www.ecfr.gov/current/title-13/chapter-I/part-120). More in the series: [SBA 7(a) Playbook](https://mcafax.com/notebook/series/sba-7a-playbook) Verified against SOP 50 10 8.1 text: November 1, 2026. ## Questions readers ask **Does every SBA loan secured by a building need an environmental review?** Yes. SBA requires an environmental investigation on all commercial property offered as security, and how deep it goes depends on the risk. **What triggers a Phase I?** A match between the property's current or known prior uses and SBA's list of environmentally sensitive industries in Appendix 6 of the SOP, regardless of loan size. **Can I use the seller's old Phase I?** Only if it's dated within one year of the date SBA issues the loan number and meets SBA's other requirements, including the Reliance Letter.