USDA Rural Business and Cooperative Programs: Supporting Rural Economic Development

1. Thanks for Joining Us! Karen Rich, Business & Cooperatives Program Director for California karen.rich@ca.usda.gov | (530) 792-5825 www.usda.gov

2. U.S. Dept of Agriculture/USDARural Business-Cooperative ServiceRural DevelopmentWhat we do: Offer programs to support business development and job opportunities for rural residents.Why? To support the nation’s long-term prosperity by ensuring that rural communities are self-sustaining, repopulating and thriving economically. www.usda.gov

3. 4 KEY TAKEAWAYS • Local food projects are eligible in urban areas • No owner-occupancy requirements • Premium income on secondary market • $10 million maximum loan amount within California’s lending authority www.usda.gov

4. Rural Development’s Flagship Lending Program: Business and Industry (B&I) • Rural Development = Economic Development • B&I is not for primary ag production projects: Farm Service Agency (FSA) • Similar to SBA 7a GP as it is a lender-driven guarantee loan program, but are definitely not the same. Let’s compare the programs… www.usda.gov

5. B&I Similarities to SBA • B&I loan program is not intended for marginal or substandard loans or relief to lenders having such loans – prudent lending • Loans must be fully amortized; no balloons • Multiple use of loan proceeds ok; blend term • 20% or more owners of the borrower must guarantee • One-time guarantee fee paid at time of closing • Ongoing annual fee (B&I’s due annually) www.usda.gov

6. B&I Similarities to SBA cont. • B&I Conditional Commitment (similar to SBA Loan Authorization) is issued to the lender as a guide to closing your loan • Guaranteed portion can be sold on active secondary market - no USDA premium split • Help lenders with capital reserve requirements & legal lending limits • Help lenders meet CRA requirements www.usda.gov

7. B&I Differences from SBA • B&I targets rural businesses – one exception • No central processing or servicing centers: Lenders work closely with RBS staff • Usually one B&I specialist in project State works together with lender and borrower throughout the entire process. • No “Credit Available Elsewhere” required • No Small Business Size Standard www.usda.gov

8. B&I Differences from SBAcont. • Interest rates are negotiated between the lender and borrower; may be fixed, variable, or combination of fixed and variable • USDA has no prepayment penalty – bank ok • No borrower minimum occupancy required • No Franchise Registry; should be transferrable • Loan limits & eligible loan terms are different • Guarantee percentages are different www.usda.gov

9. B&I Differences from SBA cont. • All loans must have full Collateral coverage • Tangible Balance Sheet? Sounds scary! Don’t worry, your B&I Specialist will help you! • B&I Loan Note Guarantee issued post-close www.usda.gov

10. B&I Differences from SBA cont. • All loan requests are scored: this is important when budget funds are tight • Each state has their own loan committee to review each loan request; if a loan amount is higher than that state’s lending authority the project must also be reviewed and approved by RD National Office lending staff www.usda.gov

11. Answers to Common Questions • Over the past few years, B&I has generally been funded nationwide at $1.3+ Billion. • Average B&I loan size about $3 Million • Not all RD State Offices operate exactly alike. All operate under the same regulations and even though we all strive for consistency, processing & servicing approval authority does vary from State to State. Think of it as being similar to your own bank’s written lending policy and then how it’s administered. www.usda.gov

12. Rural America & RBS Applicants must be locreas with popula less than 50,000.* *Local food excepti www.usda.gov

13. What is Rural? • Basically, less than 50,000 in population per the last U.S. census (2010) • Don’t worry, we have an easy-to-use map website that’s available to the public with no fancy passwords! www.usda.gov

14. EASY GOOGLE-BASED MAPPINGhttp://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do www.usda.gov

15. Rural Exemption-Local Foods • Local or Regional ag products for human consumption from within 400 miles OR within the State’s borders • Project that Processes, Distributes, Stores, Markets, or Aggregates a “SIGNIFICANT” amount of the local ag product(s) • Note! “Significant” NOT currently DEFINED • Underserved areas get higher points, but not required for this exemption www.usda.gov

16. Sample Local Foods Exemptions www.usda.gov

17. #2 GROCER; #3 FOOD DISTRIBUTER www.usda.gov

18. Eligible B&I Borrowers • Any legal entity, Federally recognized tribal groups, public bodies, cooperative organizations, and individuals, and some nonprofits (check with RD*) • Individual borrowers must be U.S. citizens or legal permanent residents. Private entity borrowers must demonstrate loan funds will remain in the U.S. and the project will primarily create/retain jobs for rural US residents. www.usda.gov

19. Eligible Purposes – Blend OK • Purchase and development of land, buildings, etc. • Purchase of equipment, leasehold improvements, machinery, supplies, inventory, PIP, working capital • Debt refinancing must improve cash flow and create or save jobs • Business or industrial acquisition when the loan will create or save jobs www.usda.gov

20. Other Eligible Purposes • Projects supported by New Market Tax Credits (NMTC) • Conversion of businesses to either cooperatives or Employee Stock Ownership Plans (ESOP) within 5 years from the date of initial transfer of stock. • Certain criteria applies to these examples www.usda.gov

21. B&I Loan Limits • No minimum B&I loan amount • Each State has loan maximum approval authority; California’s is $10 million • All loans over $10-$25M max are considered an exception and must meet “High Priority” scoring. • Check with RD for projects owned by a cooperative that provide value-added processing www.usda.gov

22. Loan Terms • Real estate up to 30 years • Machinery & Equipment up to 15 years, or useful life, whichever is less • Working capital up to 7 years • Interest only payments may be possible up to the first 36 months (e.g., construction) • Must be fully amortized; no balloons www.usda.gov

23. Guarantee to Lender • 80% for loans up to $5.0 million • 70% for loans from $5.0 to $10.0 million • 60% for loans over $10.0 million www.usda.gov

24. Guarantee & Other Fees • Not tiered: 3% of the guaranteed portion • “High Impact” scored projects up to $5.0 million may be eligible for a reduced 1% guarantee fee • Your B&I specialist scores the project • Other reasonable and customary fees are negotiated between lender and borrower • Fees are eligible loan proceeds www.usda.gov

25. Collateral & Advance Rates • Collateral on a discounted basis must be at least equal to the loan amount (1:1) • 80% max for real estate; special purpose must be less • 70% max for Machinery & Equipment • 60% max for book value of Inventory • Lender cannot secure unguaranteed portion with separate, additional collateral www.usda.gov

26. Tangible Balance Sheet Equity • Current Balance Sheet of the borrower(s) used. Must be prepared per GAAP (at application CPA prepared is not typically a requirement) • Minimum equity requirements: • 10% for existing* businesses • 20% for new businesses • 25-40% for energy projects, depending on certain criteria. • Don’t worry, your B&I Specialist will help you! www.usda.gov

27. Business Plan & Projections • Business Plan required for business start-ups, business acquisition, or significant changes either to business or property • Business Plan for debt refi only projects no longer required, unless making changes to biz • At least 2 years of Projections and Assumptions required for ALL projects www.usda.gov

28. Feasibility Study • NEARLY ALWAYS REQUIRED for a start-up; projections based repayment; changing market, etc. • Rules similar to appraisal: must be 3rd party/arms- length and not ordered by the borrower • Lender orders the Feasibility Study – USDA does not have a list of approved consultants www.usda.gov

29. Appraisals – May be Conditioned • Real estate appraisals – at least a State Certified general appraiser and USPAP standards. • Equipment appraisals may also be required, depending on project • Lender is to submit copies of their appraisal report technical reviews to RD www.usda.gov

30. Environmental • Generally, all RE secured collateral over $100,000 should have a minimum Phase I. • USDA required to follow National Environmental Policy Act (NEPA) in addition to State rules • Another reason to discuss proposed B&I projects with RD Specialist early! www.usda.gov

31. Examples of Eligible B&I Projects www.usda.gov

32. Non-owner Occupied Leased Properties are OK with B&I www.usda.gov

33. Investments in Eligible Rural Areas www.usda.gov

34. Occupancy Concern-Residential www.usda.gov

35. Working Together with SBA • Consider eligible project costs, loan fees, collateral, and minimum equity requirements when trying to differentiate • Easiest to work together when there is separate and identifiable collateral/use of loan proceeds • Some projects will prompt a Pari-Passu agreement and collateral www.usda.gov

36. Sample #1 B&I and SBA 7a Combo www.usda.gov

37. Sample #2 B&I Project with SBA • Refinance of a B&I gas station loan with Bank A by Bank B who re-amortized the loan term providing improved cash flow PLUS partner buyout • New B&I by Bank B loan covered facility refinance • New SBA 7a loan covered value attributed to buyout • Pari-Passu agreement/collateral for B&I & SBA – 1st • New partner carryback subordinated loan – 2nd www.usda.gov

38. HOW to START? • It is BEST to screen B&I loan with a USDA loan specialist and submit a pre-application before getting too far along in the process • Similar to how your bank considers any loan request: project, borrower, amount, collateral, basic financial review • Is your bank willing to do the deal? • Ag production (Schedule F) probably FSA www.usda.gov

39. RURAL ENERGY FOR AMERICA PROGRAM (REAP) Guaranteed loans/grants for Renewable Energy systems and Energy efficiency improvements www.usda.gov

40. REAP GL Funding Opportunities – • Renewable Energy Systems • Biomass (e.g. anaerobic digesters) • Small and large solar generation • Small and large wind generation • Energy Efficiency Improvements • e.g., HVAC, lighting, insulation, equipment upgrades, etc. (no vehicles) www.usda.gov

41. REAP GL BASICS • Applicants can be ag producers (Schedule F) or SBA-type small business in B&I rural area • Minimum $5,000/max $25 million loan • Maximum loan 75% of eligible project cost • No tangible balance sheet equity test! • Repayment from Power Purchase Agreement(s) for energy generation • Collateral required www.usda.gov

42. COMPARE B&I with REAP GL • BORROWER GUARANTEE FEE = 3% • LENDER ANNUAL FEE = 50bpp • EQUITY 25-40% FOR ENERGY PROJECTS • GUARANTEE PERCENTAGE MAX 80% • BORROWER GUARANTEE FEE = 1% • LENDER ANNUAL FEE = 25bpp • CASH minimum 25% • GUARANTEE PERCENTAGE 85% FOR LOANS <$600K, then % same as B&I www.usda.gov

43. Sample #1 Renewable Energy System GL www.usda.gov

44. Sample #2 Energy Efficiency Imp.Cold Storage www.usda.gov

45. OTHER USDA CONSIDERATIONS Processing and the B&I/REAP guarantee www.usda.gov

46. Loan Approval • Approval by RD typically takes 30-60 days, depending on the complexity of the project • RD Staff makes presentation to USDA- staffed loan committee members, usually via teleconference • Loan funding and issuance of Conditional Commitment upon approval and obligation of funds specifically for your project www.usda.gov

47. Loan Note Guarantee • Loan Note Guarantee is issued at or immediately after loan closing • Is lender expecting guarantee before any proposed development is completed? Case-by-case basis* • Guarantee issued after completion of any Energy projects: REAP or B&I www.usda.gov

48. Essential RBS Servicing • No Lender Unilateral Authority www.usda.gov

49. 4 KEY TAKEAWAYS • Local food projects are eligible in urban areas • No owner-occupancy requirements • Premium income on secondary market • $10 million maximum loan amount within California’s lending authority www.usda.gov

50. SOP/Regulation References • B&I General: RD Instruction 4279-A rev 8/9/16 • B&I Loan Making: RD Instr 4279-B rev 8/9/16 • B&I Loan Servicing: RD Instr 4287-A rev 8/9/16 • RD Environmental: RD Instruction 1970-B rev 4/1/2016 • ENERGY: RD Instruction 4280-B rev 6/2/2016 www.usda.gov