For a B&I project to be eligible for a loan guarantee under this part, it must meet the criteria specified in
§ 5001.102, be for a borrower eligible to submit an application for the project in accordance with
§ 5001.126, and the uses of loan funds include, but are not limited to, the following:
(a)
Purpose. The purpose of the project must be to improve, develop, or finance business, industry, and employment and improve the economic and environmental climate in rural communities; the conservation, development, and use of water for aquaculture purposes; and reducing reliance on nonrenewable energy resources through development and construction of solar energy and other renewable energy systems.
(b)
Type of project. The project must be for one or more of the uses described in
paragraphs (b)(1) through (22) of this section.
(1)
Purchase and development of land, buildings, or infrastructure for public or private commercial enterprises or industrial properties, including expansion or modernization.
(2)
Business acquisitions, start-ups, and expansions if jobs will be created or saved. A business acquisition is considered the acquisition of an entire business, not a partial stock acquisition in a business. However, acquisition or change of ownership between existing owners is an eligible project when the remaining owner(s) held their ownership and actively participated in the business operation for at least the past 24 months and the selling owner will not retain any ownership interest in the business directly or indirectly including through other entities or trusts or property rights.
(3)
Purchase and installation of machinery and equipment.
(4)
Startup costs, working capital, inventory, and supplies in the form of a permanent working capital term loan.
(5)
Pollution control and abatement.
(6)
Purchase of membership, stocks, bonds, or debentures necessary to obtain a loan from a member owned lending institution provided the purchase is required for all their borrowers and is the minimum amount required.
(7)
Agricultural production, when not eligible for Farm Service Agency (FSA) farm loan programs assistance and when it is part of an integrated business also involved in the processing of agricultural products. Any agricultural production considered for guaranteed loan financing must be owned, operated, and maintained by the business receiving the guaranteed loan. Examples of potentially eligible agricultural production include but are not limited to an apple orchard in conjunction with a food processing plant; poultry buildings linked to a meat processing operation; or sugar beet production coupled with storage and processing.
(i)
The agricultural production portion of any loan must not exceed 50 percent of the total loan or $5 million, whichever is less.
(ii)
The limitations in paragraph (b)(7)(i) do not apply to the following types of businesses—
(A)
Commercial nurseries engaged in the production of ornamental plants, trees, and other nursery products, such as bulbs, flowers, shrubbery, flower and vegetable seeds, sod, and the growing of plants from seed to the transplant stage;
(B)
Forestry, which includes businesses primarily engaged in the operation of timber tracts, tree farms, forest nurseries, harvesting of forest products, and related activities, such as reforestation;
(C)
The growing or harvesting of mushrooms;
(D)
The growing of hydroponics;
(E)
The boarding and/or training of animals;
(F)
Commercial fishing; and
(G)
Production of algae and aquaculture, including conservation, development, and utilization of water for aquaculture.
(8)
Tourist and recreation facilities, including hotels, motels, bed and breakfast establishments, and resort trailer parks and campgrounds operated as a public or private commercial enterprise. Owner-occupied housing, such as bed and breakfasts, hotels and motels are only allowed when the pro rata value of a direct owner's living quarters, based on square footage, is deducted from the use of loan proceeds.
(9)
Educational or training facilities including other CF projects when not eligible for financing through Rural Housing Service or Community Facilities programs.
(10)
Development and construction of broadband and telecommunication systems, including modification of existing systems, that are not otherwise eligible for funding in the RUS program or if funding is unavailable in the RUS program, subject to the public notice filing requirements of
7 CFR 1738.106(a) and the additional reporting requirements of
7 CFR 1738.107.
(11)
Industries undergoing adjustment from terminated Federal agricultural price and income support programs or increased competition from foreign trade.
(12)
Constructing or equipping facilities for lease to private businesses engaged in commercial or industrial operations.
(13)
Financing for mixed-use properties involving both commercial business and residential space is authorized, provided that not less than 50 percent of the business's projected revenue will be generated from business use.
(14)
Leasehold improvements when the lease contains no reverter clauses or restrictive clauses that would impair the use or value of the property as security for the loan. The term of the lease must be equal to or greater than the term of the loan. Leasehold improvements are physical enhancements made to property by or on behalf of the property's lessee. When improvements are made to real property and those improvements are permanently affixed to the property, the title to those improvements automatically transfers to the owner of the property upon termination of the lease.
(15)
Projects that process, distribute, aggregate, store, and/or market locally or regionally produced agricultural food products to support community development and farm and ranch income.
(i)
Subject to each of the following, projects may be located in non-rural areas as well as in rural areas if the project:
(A)
Expands or preserves the availability of staple food in underserved areas with moderate and low-income populations by maintaining or increasing the number of retail or institutional outlets that offer an assortment of healthy perishable foods and staple food items;
(B)
The project will create or retain quality jobs for low-income residents of the community;
(C)
A significant amount of the food is locally or regionally produced and sold; and
(D)
Includes an appropriate agreement with retail and institutional clients to inform consumers that they are purchasing or consuming locally or regionally produced agricultural food products. The agreement(s) must be in place prior to issuance of the loan note guarantee and stated as part of the lender's certification at loan closing.
(ii)
The Agency will give funding priority to projects that provide a benefit to underserved communities in accordance with
§ 5001.318(d)(5) of this part.
(16)
The purchase of cooperative stock by individual farmers or ranchers in a farmer or rancher cooperative or the purchase of transferable cooperative stock in accordance with §
5001.140(a) and
(b); or the purchase of stock in a business by employees forming an ESOP or worker cooperative in accordance with
§ 5001.140(d).
(17)
The purchase of preferred stock or similar equity issued by a cooperative or a loan to a fund that invests primarily in cooperatives in accordance with
§ 5001.140(c).
(18)
Loans to cooperatives—
(i)
Guaranteed loans to eligible cooperatives may be made in principal amounts up to $40 million if the project is located in a rural area, the cooperative facility being financed provides for the value-added processing of agricultural commodities, and the total amount of guaranteed loans exceeding $25 million does not exceed 10 percent of the funds available for the fiscal year. Guaranteed loans in excess of $25 million in accordance with this provision may only be approved by the Secretary, whose authority may not be redelegated.
(ii)
Guaranteed loans to eligible cooperatives may also be made in non-rural areas provided:
(A)
The primary purpose of the guaranteed loan is for a facility to provide value-added processing for agricultural producers that are located within 80 miles of the facility;
(B)
The borrower satisfactorily demonstrates that the primary benefit of the guaranteed loan will be to provide employment for rural residents;
(C)
The principal amount of the guaranteed loan does not exceed $25 million; and
(D)
The total amount of guaranteed loans guaranteed under this paragraph does not exceed 10 percent of the funds available for the fiscal year.
(iii)
An eligible cooperative may refinance an existing B&I guaranteed loan if the existing loan is current and performing, the existing loan is not and has not been in monetary default or the collateral has not been converted, and there is adequate security and collateral for the new guaranteed loan.
(19)
Taxable corporate bonds when the bonds are fully amortizing and comply with all provisions of this part, bond proceeds were used for an eligible purpose in this part, and the lender as bond holder retains the percent of the bond in accordance with
§ 5001.408(3)(i) of this part. The bonds must be fully secured with collateral in accordance with
§ 5001.202(b)(4) of this part. The bonds must only provide for a trustee when the trustee is totally under the control of the lender. The bonds must provide no rights to bond holders other than the right to receive the payments due under the bond. For instance, the bonds must not provide for bond holders replacing the trustee or directing the trustee to take servicing actions, such as accelerating the bonds. In accordance with
§ 5001.127(f), convertible bonds are not eligible under this paragraph due to the potential conflict of interest of a lender having an ownership interest in the borrower. An explanation of the type of bond and other bond stipulations must be attached to the bond.
(i)
The bond issuer must obtain the services and opinion of an experienced bond counsel, who must present a legal opinion stating that the bonds are legal, valid, and binding obligations of the issuer and that the issuer has adhered to all applicable laws.
(ii)
The bond holder (lender) must purchase all the bonds issued pursuant to the guaranteed and comply with all Agency regulations. There must be a bond purchase agreement between the issuer and the bond holder. The bond purchase agreement must contain similar language to that required in a loan agreement and must not conflict with this part. The bond holder is responsible for all servicing of the guaranteed loan evidenced by the bond, although the bond holder may contract for servicing assistance, including contracting with a trustee who remains under the lender's total control.
(20)
Nursing homes and assisted living facilities where constant medical care is provided and available onsite to the residents. Independent living facilities are not eligible in accordance with
§ 5001.118(a). Independent living facilities are considered residential property as they have many similarities to a multi-family housing complex, whereas nursing home and assisted living facility tenants rely on those entities to provide needed personal or medical care. Properties consisting of both assisted care facilities and independent senior living may be eligible if the availability of the on-site medical services is an optional service to the independent living residents, or if the predominant residents of the facility require assisted living care.
(21)
Development and construction of RES, including modification of existing systems that are commercially available and that are not otherwise eligible under REAP, or if funding is not available in the REAP program.
(22)
Integrated processing equipment and systems, such as biorefineries, renewable energy systems, and chemical manufacturing facilities, must utilize commercially available technology, equipment, and systems and demonstrate technical merit. The Agency will evaluate the following areas in making the technical merit determination:
(i)
Qualifications of the project team;
(ii)
Agreements and permits;
(iii)
Resource assessment;
(iv)
Design and engineering;
(vi)
Equipment procurement and installation; and
(vii)
Operations and maintenance. The demonstration of technical merit is the completion of two operating cycles at its designed production level. “Operating cycle” is the average time between the acquisition of materials or the providing of services and the final cash realization of that acquisition or provision of services.
(d)
Capital and equity. Borrowers are required to have sufficient capital or equity to mitigate the ongoing financial and operational risks of the business. The capital/equity requirement must be met in the form of either cash or earning assets contributed to the business and reflected on the borrower's balance sheet. Transfers of assets at fair market value between related parties, which are not arm's length transactions, must be in accordance with GAAP and require evidence that the transaction was entered into at market terms. Equity cannot include appraisal surplus or bargain purchase gains. Subordinated debt may be included when the subordinated debt is in exchange for cash injected into the business that remains in the business for the life of the guaranteed loan. The note or other form of evidence must be submitted to the Agency in order for subordinated debt to count towards meeting the balance sheet equity requirement. Balance sheet equity will be determined based upon current and projected borrower financial statements. A balance sheet as of loan closing is required and should reflect the new debt and use of proceeds. If there are multiple borrowers, consolidated financial statements should be presented. The following capital and equity requirements must be met at the time of lender's closing of the guaranteed loan.
(1)
Existing businesses must meet one of the following requirements:
(i)
A minimum of 10 percent balance sheet equity (including subordinated debt when subject to a standstill agreement for the life of the loan), or a maximum debt-to-balance sheet equity ratio of 9 to 1, at loan closing;
(ii)
A 10 percent or more of total eligible project costs, borrower investment of equity or other funds into the project including grants or subordinated debt when subject to a standstill agreement for the life of the loan;
(iii)
Owner contributed capital, as reflected in the equity section of the balance sheet, that is equal to or greater than 10 percent of net total fixed assets plus depreciation.
(2)
New businesses with sales contract(s) with proceeds in an amount adequate to meet debt service and the term of the sales contract(s) are at least equal to the term of the guaranteed loan, and subject to Agency acceptance of the credit worthiness of the counterparty, the borrower must meet one of the following requirements:
(i)
A minimum of 10 percent balance sheet equity (including subordinated debt when subject to a standstill agreement for the life of the loan), or a maximum debt-to-balance sheet equity ratio of 9 to 1 at loan closing; or
(ii)
Borrower investment of equity or other funds (including subordinated debt when subject to a standstill agreement for the life of the loan and grants) into the project in an amount of 10 percent or more of total eligible project cost;
(3)
New businesses with a project involving construction and when the lender will request the loan note guarantee prior to completion of construction must meet one of the following requirements:
(i)
A minimum of 25 percent balance sheet equity (including subordinated debt when subject to a standstill agreement for the life of the loan), or a maximum debt-to-equity ratio of 3 to 1, at guaranteed loan closing; or
(ii)
Borrower investment of equity or other funds (including subordinated debt when subject to a standstill agreement for the life of the loan and grants) into the project in an amount of 25 percent or more of total eligible project cost;
(4)
All other borrowers that are new businesses must meet one of the following requirements:
(i)
A minimum of 20 percent balance sheet equity (including subordinated debt when subject to a standstill agreement for the life of the loan), or a maximum debt-to-equity ratio of 4 to 1, at guaranteed loan closing, or;
(ii)
Borrower investment of equity or other funds (including subordinated debt when subject to a standstill agreement for the life of the loan and grants) into the project in an amount of 25 percent or more of total eligible project cost;
(5)
Variances in capital and equity requirements—
(i)
Increases. The Agency may increase the capital or equity requirement specified under
paragraphs (d)(1) through (4) of this section for guaranteed loans the Agency determines carry a higher risk. In determining whether a project or guaranteed loan carries a higher risk, the Agency will consider the current status of the industry, concentration of the industry in the Agency's portfolio, collateral coverage, value of personal or corporate guarantees, cash flow, and contractual relationships with suppliers and buyers; credit rating of the borrower; and the strength of the feasibility study and experience of management. The Agency may also increase the capital or equity requirement for new businesses using integrated processing equipment and systems such as biorefineries, renewable energy systems, chemical manufacturing facilities, and businesses producing new products to sell into new and emerging markets.
(ii)
Reductions. The Agency may reduce the minimum equity requirement for an existing business when personal or corporate guarantees are obtained in accordance with
§ 5001.204 of this part; and all pro forma statements indicate the business to be financed meets or exceeds the median quartile (as identified in the Risk Management Association's Annual Statement Studies or similar publication) for the current ratio, quick ratio, debt-to-worth ratio, and debt service coverage ratio.
(6)
Certification— The lender must certify that, as of the date the guaranteed Loan was closed, its credit analysis indicated that the borrower had sufficient capital or equity to mitigate the financial and operational risks of the business, and that the borrower met the minimum equity required by the Agency in its conditional commitment, or that the minimum borrower capital contribution toward project costs, as applicable and required by the Agency, was met. A copy of the borrower's loan closing balance sheet must be included with the lender's certification.