TABLE OF CONTENTS Introduction. 1. (a) Content. 1 (b) Purpose. 1 (c) Documents. 1 (d) Early Agency review. 1

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1 Table of Contents Page 1 (Revision 4) PART GUARANTEED LOANMAKING Subpart B - Business and Industry Loans TABLE OF CONTENTS Sec. Page Introduction. 1 (a) Content. 1 (b) Purpose. 1 (c) Documents. 1 (d) Early Agency review Definitions Exception Authority Appeals [Reserved] Guarantee fees. 2 (a) Initial guarantee fee. 2 (b) Annual renewal fee Eligible borrowers. 4 (a) Type of entity. 4 (b) Citizenship. 4 (c) Rural area. 5 (d) Loans to cooperative organizations. 5B (e) Other credit [Reserved] Eligible loan purposes Ineligible purposes Prohibition under Agency programs. 10A [Reserved] 10A Loan guarantee limits. 10A (a) Loan amount. (b) Percent of guarantee. 10A 10B Fees and charges. 11 ( ) PN 381 (a) Routine lender fees. 11 (b) Professional services. 11 (c) Fee review. 11

2 Table of Contents Page 2 (Revision 4) Sec. Page [Reserved] Interest rates Loan terms [Reserved] Credit quality. 13 (a) Cash flow. 14 (b) Collateral. 14 (c) Industry. 14A (d) Equity. 14A (e) Lien priorities. 15 (f) Management [Reserved] Financial statements [Reserved] Insurance. 16 (a) Hazard. 16 (b) Life. 16 (c) Worker compensation. 16 (d) Flood. 16 (e) Other Appraisals [Reserved] Personal and corporate guarantees Feasibility studies. 18A [Reserved] 18A Loan priorities. 18A Planning and performing development. 21 (a) Design policy. 21 (b) Project control. 21 (c) Equal opportunity. 22 (d) Americans with Disabilities Act (ADA). 22 (e) Agency role. 22A [Reserved] 22A Filing preapplications and applications. 22A (a) Preapplications. 22A (b) Applications. 23 (c) Applications of $600,000 and less [Reserved] 26

3 Table of Contents Page 3 (Revision 2) Sec. Page Preapplication processing. 26 (a) Nonrelocation. 26A (b) Privacy. 26A (c) Decision. 27 (d) Identification numbers. 27 (e) Rural Community Facilities Tracking System 28 (RCFTS) Evaluation of application. 28 (a) General review. 28 (b) Environmental requirements. 29 (c) State loan committee. 29 (d) Concurrence. 29 (e) National Office Loan Committees Timeframe for processing applications [Reserved] Loan approval and obligating funds Transfer of lenders Domestic lamb industry adjustment assistance program set aside [Reserved] Changes in borrower Conditions precedent to issuance of Loan Note Guarantee [Reserved] Issuance of the guarantee Refusal to execute Loan Note Guarantee [Reserved] OMB control number. 35 Appendix A - Guide for Completion of Feasibility Studies. Appendix B - Guide for Sale/Structure of Guaranteed Loans. Appendix C - Business and Industry Application Priority Points Scoring. Appendix D - Business and Industry Loan Processing Checklist. Appendix E Credit Evaluation Guidance ooo ( ) PN 381

4 PART Guaranteed Loanmaking Subpart B - Business and Industry Loans Introduction. (a) Content. This subpart contains loan processing regulations for the Business and Industry (B&I) Guaranteed Loan Program. It is supplemented by subpart A of this part, which contains general guaranteed loan regulations, and subpart B of part 4287 of this chapter, which contains loan servicing regulations. (b) Purpose. The purpose of the B&I Guaranteed Loan Program is to improve, develop, or finance business, industry, and employment and improve the economic and environmental climate in rural communities. This purpose is achieved by bolstering the existing private credit structure through the guarantee of quality loans which will provide lasting community benefits. It is not intended that the guarantee authority will be used for marginal or substandard loans or for relief of lenders having such loans. (c) Documents. Copies of all forms, regulations, and Instructions referenced in this subpart are available in any Agency office. Whenever a form is designated in this subpart, that designation includes predecessor and successor forms, if applicable, as specified by the field or National Office. Any portion of this Instruction appearing in italicized type is considered by the Agency to be administrative procedure and has not been published as part of the regulation in the Federal Register. (d) Early Agency review. All B&I inquiries, preapplications, or applications should be reviewed by loan officers at the first contact with the Agency to determine that the proposal fits into the overall purpose of the program. The purpose of the early review is to advise the lender as soon as possible when eligibility problems are likely or when there are concerns about whether the project meets the intent of the program. This early communication can prevent unnecessary expense and frustration in the preparation of a full B&I application. Credit quality and collateral should be scrutinized closely early in the process. Loan officers should likewise initiate the environmental review process early in the planning stage and should be alert for projects which may have a significant impact on the environment. As soon as an application is received, make a priority ranking using the worksheet provided in appendix C of this subpart. Document the action by filing the completed worksheet in the project case file. DISTRIBUTION: WSAL Guaranteed Loanmaking ( ) SPECIAL PN 1 (Revision 1)

5 Definitions. The definitions and abbreviations in of subpart A of this part are applicable to this subpart Exception Authority. Section of subpart A of this part applies to this subpart Appeals. Section of subpart A of this part applies to this subpart [Reserved] Guarantee fees. (Revised , SPECIAL PN.) For all new loans there are two types of non-refundable guarantee fees to be paid by the lender. The fees may be passed on to the borrower. The fees may be forwarded to the Agency through an electronic funds transfer system or, at the Agency s discretion, by a check payable to USDA using a USDA-approved form. (a) Initial guarantee fee. The initial fee is paid at the time the Loan Note Guarantee is issued. The fee may be included as an eligible loan purpose in the guaranteed loan. The fee will be the rate (a specified percentage not to exceed 2 percent) multiplied by the principal loan amount, multiplied by the percent of guarantee. Subject to specified annual limits set by the Agency, the initial guarantee fee may be reduced to 1 percent if the borrower's business supports value-added agriculture and results in farmers benefiting financially, or (1) is a high impact business development investment in accordance with (b)(5), and (2) is located in a rural community that: (i) is experiencing long-term population decline and job deterioration, or (ii) has remained persistently poor over the last 60 years, or 2 (Revision 1)

6 (a)(2) (Con.) RD Instruction 4279-B (iii) is experiencing trauma as a result of natural disaster, or (iv) is experiencing fundamental structural changes in its economic base. (3) Written requests for approval of a guaranteed loan with the reduced guarantee fee must be forwarded to the National Office, Attn: Director, Business Programs Processing Division, for review and consideration prior to obligation of the guaranteed loan. The Administrator will provide a written response to the State Director concerning the request confirming approval or disapproval of the request to approve the guaranteed loan with the reduced guarantee fee. After the guaranteed authority has been exhausted, the National Office will provide guidance to the State Directors. (b) Annual renewal fee. The annual renewal fee is paid once a year and is required to maintain the enforceability of the guarantee as to the lender. (1) The rate of the annual renewal fee (a specified percentage) is established by Rural Development in an annual notice published in the Federal Register, multiplied by the outstanding principal loan balance as of December 31 of each year, multiplied by the percent of guarantee. The rate is the rate in effect at the time the loan is obligated, and will remain in effect for the life of the loan. (2) Annual renewal fees are due on January 31. Payments not received by April 1 are considered delinquent and, at the Agency s discretion, may result in cancellation of the guarantee to the lender. Holders rights will continue in effect as specified in the Loan Note Guarantee and Assignment Guarantee Agreement. Any delinquent annual renewal fees will bear interest at the note rate and will be deducted from any loss payment due the lender. For loans where the Loan Note Guarantee is issued between October 1 and December 31, the first annual renewal fee payment will be due January 31 of the second year following the date the Loan Note Guarantee was issued. ( ) SPECIAL PN 3 (Revision 4)

7 Eligible borrowers. (a) Type of entity. A borrower may be a cooperative organization, corporation, partnership, or other legal entity organized and operated on a profit or nonprofit basis; an Indian tribe on a Federal or State reservation or other Federally recognized tribal group; a public body; or an individual. A cooperative organization is a cooperative or an entity, not chartered as a cooperative, that operates as a cooperative in that it is owned and operated for the benefit of its members, including the manner in which it distributes its dividends and assets. A borrower must be engaged in or proposing to engage in a business. Business may include manufacturing, wholesaling, retailing, providing services, or other activities that will: (Revised , PN 381.) (1) Provide employment; (2) Improve the economic or environmental climate; (3) Promote the conservation, development, and use of water for aquaculture; or (4) Reduce reliance on nonrenewable energy resources by encouraging the development and construction of solar energy systems and other renewable energy systems (including wind energy systems, geothermal energy systems, and anaerobic digesters for the purpose of energy generation). (Revised , PN 381.) (b) Citizenship. Individual borrowers must be citizens of the United States (U.S.) or reside in the U.S. after being legally admitted for permanent residence. Citizens and residents of the Republic of Palau, the Federated States of Micronesia, and the Republic of the Marshall Islands shall be considered U.S. citizens. Corporations or other nonpublic body organization-type borrowers must be at least 51 percent owned by persons who are either citizens of the U.S. or reside in the U.S. after being legally admitted for permanent residence. (1) For individuals that reside in the U.S. after being legally admitted for permanent residence, the Agency should require a permanent green card as evidence of eligibility. Temporary or conditional green cards or any type of visa, regardless of whether they may ultimately lead to acquiring a permanent green card, do not meet this requirement, e.g., E-2 or E-5 immigrant visas. (Revised , PN 466.) (2) The Agency may not approve applications subject to meeting citizenship requirements. (Revised , PN 466.) 4 (Revision 4)

8 (Con.) RD Instruction 4279-B (c) Rural area. The business financed with a B&I Guaranteed Loan must be located in a rural area, except for cooperative organizations financed in accordance with paragraph (d)(3) of this section. Loans to borrowers with facilities located in both rural and non-rural areas will be limited to the amount necessary to finance the facility located in the eligible rural area, except for cooperative organizations financed in accordance with paragraph (d)(3) of this section. Rural areas are any areas other than: (Revised , PN 381.) (1) A city or town that has a population of greater than 50,000 inhabitants; and (2) The urbanized area contiguous and adjacent to such a city or town, as defined by the U.S. Bureau of the Census using the latest decennial census of the United States. (3) The Agency should ensure that cities and towns are incorporated population centers with definite boundaries, local self government, and legal powers set forth in a charter granted by the State. (Added , PN 466.) (4) The Administrator, on behalf of the Secretary, has separately decided that for the Commonwealth of Puerto Rico, the island is considered rural, except for the San Juan Census Designated Place (CDP) and any other CDP with greater than 50,000 inhabitants. However, the Agency may consider eligibility for CDPs with greater than 50,000 inhabitants, other than the San Juan CDP, if they are determined to be not urban in character. Requests, with supporting documentation as to why the area is not urban in character, must be forwarded to the National Office B&I Division for review, analysis, and decision by the Administrator. (Added , PN 466.) (5) The Administrator, on behalf of the Secretary, has separately decided that for the State of Hawaii, all areas within the State are considered rural, except for the Honolulu CDP within the County of Honolulu. (Added , PN 466.) (6) For the Republic of Palau, the Federated States of Micronesia, American Samoa, and the Republic of the Marshall Islands, the Agency will determine what constitutes a rural area based on available population data. (Added , PN 466.) ( ) SPECIAL PN 4A (Revision 2)

9 (c) (Con.) (7) Notwithstanding any other provision of this definition, in determining which census blocks in an urbanized area are not in a rural area, the Agency will exclude any cluster of census blocks that would otherwise be considered not in a rural area only because the cluster is adjacent to not more than two census blocks that are otherwise considered not in a rural area under this definition. This applies to areas that are currently considered not a rural area because they are attached to the urbanized area of a city or town of greater than 50,000 inhabitants by a string area that is two census blocks wide or less (which are typically interstates or major highways). As long as the string area is two census blocks wide or less, the area outside of the urbanized area, beginning with the string area, may be considered rural. Requests to verify exclusions must be submitted to the National Office B&I Division, with supporting documentation, for review and verification. (Added , PN 466.) (8) The Under Secretary, whose authority may not be redelegated, may determine that an area is rural in character. Any determination made by the Under Secretary under this provision will be to areas that are determined to be rural in character and are within: (1) an urbanized area that has two points on its boundary that are at least 40 miles apart, which is not contiguous or adjacent to a city or town that has a population of greater than 150,000 inhabitants or the urbanized area of such city or town; or (2) an area within an urbanized area contiguous and adjacent to a city or town of greater than 50,000 inhabitants that is within ¼ mile of a rural area. (Added , PN 466.) (i) Units of local government may petition the Under Secretary for a rural in character designation. Any requests received by the Rural Development State Director or the Administrator on behalf of the Under Secretary should be submitted to the National Office B&I Division. The State Office should ensure there is documentation to show how the area meets the requirements of paragraph (c)(8) of this section and why the area is rural in character, including, but not limited to, the area s population density; demographics; topography; and how the local economy is tied to a rural economic base. Upon receiving a petition, the Under Secretary will consult with the applicable Governor and Rural Development State Director, unless those comments were 4B (Added , PN 466)

10 (c)(8)(i) (Con.) RD Instruction 4279-B submitted with the petition. The Under Secretary will release to the public a notice of a petition filed by a unit of local government not later than 30 days after receipt of the petition. The State Office should publish a notice in a local newspaper and on the applicable Rural Development State Office Web site. The Under Secretary will make a determination not less than 15 days, but no more than 60 days, after the release of the notice. The public notice should appear for at least 3 consecutive days if published in a daily newspaper or otherwise in two consecutive publications. Upon a negative determination, the Under Secretary will provide to the petitioner an opportunity to appeal a determination to the Under Secretary for reconsideration and provide further information for consideration. (Added , PN 466.) (ii) Rural Development State Directors may also initiate a request to the Under Secretary to determine if an area is rural in character. A written recommendation should be sent to the Administrator, on behalf of the Under Secretary, that documents how the area meets the statutory requirements of paragraph (c)(8) of this section and discusses why the State Director believes the area is rural in character, including, but not limited to, the area s population density; demographics; topography; and how the local economy is tied to a rural economic base. Upon receipt of such a request, the Administrator will review the request for compliance with the rural in character provisions and make a recommendation to the Under Secretary. Provided a favorable determination is made, the Under Secretary will consult with the applicable Governor, unless gubernatorial comments were submitted with the request. A public notice will be published by the State Office in accordance with paragraph (c)(8)(i) of this section. There is no appeal process for requests made on the initiative of the State Director. (Added , PN 466.) (9) The Agency may neither approve applications nor issue a Conditional Commitment subject to meeting rural area requirements. (Added , PN 466.) ( ) SPECIAL PN 4C (Added , PN 466)

11 (Con.) (d) Loans to cooperative organizations. (Added , PN 381.) (1) B&I loans to eligible cooperative organizations 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 loans exceeding $25 million does not exceed 10 percent of the funds available for the fiscal year. (2) Cooperative organizations that are headquartered in a non-rural area may be eligible for a B&I loan if the loan is used for a project or venture that is located in a rural area. (3) B&I loans to eligible cooperative organizations may also be made in non-rural areas provided: (i) The primary purpose of the loan is for a facility to provide value-added processing for agricultural producers that are located within 80 miles of the facility; 4D (Added , PN 466)

12 (d)(3) (Con.) (ii) The applicant satisfactorily demonstrates that the primary benefit of the loan will be to provide employment for rural residents; (iii) The principal amount of the loan does not exceed $25 million; and (iv) The total amount of loans guaranteed under this section does not exceed 10 percent of the funds available for the fiscal year. (4) An eligible cooperative organization may refinance an existing B&I loan provided that the existing loan is current and performing, the existing loan is not and has not been in payment default (more than 30 days late) or the collateral of which has not been converted, and there is adequate security or full collateral for the new B&I loan. (e) Other Credit. All applications for assistance will be accepted and processed without regard to the availability of credit from any other source. Applicants are to be advised of other potential sources of credit but are not encouraged or required to pursue financing from any of these sources in lieu of assistance from the Agency. (Renumbered , PN 381.) [Reserved] Eligible loan purposes. Loan purposes must be consistent with the general purpose contained in of this subpart. They include but are not limited to the following: (a) Business and industrial acquisitions when the loan will keep the business from closing, prevent the loss of employment opportunities, or provide expanded job opportunities. (b) Business conversion, enlargement, repair, modernization, or development. (c) Purchase and development of land, easements, rights-of-way, buildings, or facilities. (d) Purchase of equipment, leasehold improvements, machinery, supplies, or inventory. ( ) SPECIAL PN 5 (Revision 1)

13 (Con.) (e) Pollution control and abatement. (f) Transportation services incidental to industrial development. (g) Startup costs and working capital. (h) Agricultural production, when not eligible for Farm Service Agency (FSA) farmer program assistance and when it is part of an integrated business also involved in the processing of agricultural products. (1) Examples of potentially eligible 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. Any agricultural production considered for B&I financing must be owned, operated, and maintained by the business receiving the loan for which a guarantee is provided. Independent agricultural production operations, even if not eligible for FSA farmer programs assistance, are not eligible for the B&I program. (2) The agricultural-production portion of any loan will not exceed 50 percent of the total loan or $1 million, whichever is less. (i) Purchase of membership, stocks, bonds, or debentures necessary to obtain a loan from Farm Credit System institutions and other lenders provided that the purchase is required for all of their borrowers. (Revised , PN 381.) (j) Purchase of cooperative stock by individual farmers or ranchers in a farmer or rancher cooperative established for the purpose of processing an agricultural commodity. (Added , PN 381.) (1) The cooperative may contract for services to process agricultural commodities or otherwise process value-added agricultural products during the 5-year period beginning on the operation startup date of the cooperative in order to provide adequate time for the planning and construction of the processing facility of the cooperative. (2) Notwithstanding (d) and , the individual farmer or rancher may provide financial information in the manner that is generally required by commercial agricultural lenders in order to obtain a loan. 6 (Revision 1)

14 (Con.) RD Instruction 4279-B (k) Aquaculture, including conservation, development, and utilization of water for aquaculture. (Renumbered , PN 381.) (l) Commercial fishing. (Renumbered , PN 381.) (m) Commercial nurseries engaged in the production of ornamental plants and 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. (Renumbered , PN 381.) (n) Forestry, which includes businesses primarily engaged in the operation of timber tracts, tree farms, and forest nurseries and related activities such as reforestation. (Renumbered , PN 381.) (o) The growing of mushrooms or hydroponics. (Renumbered , PN 381.) (p) Interest (including interest on interim financing) during the period before the first principal payment becomes due or when the facility becomes income producing, whichever is earlier. (Renumbered , PN 381.) (q) Feasibility studies. (Renumbered , PN 381.) (r) To refinance outstanding debt when it is determined that the project is viable and refinancing is necessary to improve cash flow and create new or save existing jobs. Except as provided for in (d)(4) of this subpart, existing lender debt may be included provided that, at the time of application, the loan has been closed and current for at least the past 12 months (unless such status is achieved by the lender forgiving the borrower's debt) and the lender is providing better rates or terms. Subordinated owner debt is not eligible under this paragraph. Unless the amount to be refinanced is owed directly to the Federal government or is Federally guaranteed, the existing lender debt refinancing must be a secondary part (less than 50 percent) of the overall loan. The Agency should ensure that debt being refinanced is reflected on the borrower s balance sheet, and the debt being refinanced was for an eligible loan purpose under this subpart. The Agency should consider lenders with different tax ID numbers as different lenders. (Revised , PN 466.) ( ) SPECIAL PN 7 (Revision 4)

15 (Con.) (s) Takeout of interim financing. Guaranteeing a loan after project completion to pay off a lender's interim loan will not be treated as debt refinancing provided that the lender submits a complete preapplication or application which proposes such interim financing prior to completing the interim loan. A lender that is considering an interim loan should be advised that the Agency assumes no responsibility or obligation for interim loans advanced prior to the Conditional Commitment being issued. The Agency should ensure that interim financing is used to pay construction and other costs associated with a planned project and is usually no longer than 2 years. Therefore, the takeout of interim financing is only eligible when a temporary or shortterm loan is being taken out by a permanent loan on which a guarantee will be placed and when the lender submits a complete preapplication or application that proposes the interim financing prior to closing the interim loan. If the interim financing does not meet these requirements, the Agency should consider it debt refinancing that must comply with paragraph (r) of this section. (Revised , PN 466.) (t) Fees and charges for professional services and routine lender fees. (Renumbered , PN 381.) (u) Agency guarantee fee. (Renumbered , PN 381.) (v) Tourist and recreation facilities, including hotels, motels, and bed and breakfast establishments, except as prohibited under ineligible purposes. (Renumbered , PN 381.) (1) Tourism and recreation projects can be a vital part of a rural area's economic development strategy. On the other hand, they are typically difficult credit decisions due to the risks involved. You may want to obtain an independent feasibility study to make sure that demand, utilization, and related cash flow issues are looked at closely. (2) Projects that are commonly not successful in the area normally should not be financed. This does not mean that new ventures should not be considered. It means, as a hypothetical example, that if 5 out of 10 ski areas without snowmaking capabilities in Vermont have failed, such a recreational proposal probably carries excessive risk. Similar examples might be hotels or motels in many rural areas, outdoor tennis or swimming pools, or water slides in northern climates. (3) Work closely with the lender, early in the process, on credit quality. Many requests will meet the "loan purpose" eligibility test but may not be credit worthy due to high risk. 8 (Revision 4)

16 (Con.) RD Instruction 4279-B (w) Educational or training facilities. (Renumbered , PN 381.) (x) Community facility projects which are not listed as an ineligible loan purpose such as convention centers. (Renumbered , PN 381.) (y) Constructing or equipping facilities for lease to private businesses engaged in commercial or industrial operations. (Renumbered , PN 381.) (z) The financing of housing development sites provided that the community demonstrates a need for additional housing to prevent a loss of jobs in the area or to house families moving to the area as a result of new employment opportunities. (Renumbered , PN 381.) (aa) Community antenna television services or facilities. (Renumbered , PN 381.) (bb) Provide loan guarantees to assist industries adjusting to terminated Federal agricultural programs or increased foreign competition. (Renumbered , PN 381.) (cc) To finance energy projects. Commercially available energy projects that produce biomass fuel or biogas as an output must have completed two operating cycles at design performance levels submitted to the Agency. Projects that produce steam or electricity as an output must have met or exceeded acceptance test performance criteria submitted to the Agency and be successfully interconnected with the purchaser of the output. Performance or acceptance test requirements for all other energy projects will be determined by the Agency on a case by case basis. Financing for energy projects will only be allowed when the facility has been constructed according to plans and specifications and is producing at the quality and quantity projected in the application. (Added , PN 400.) (dd) When the loan is being made with taxable corporate bonds, the Agency should ensure that the bonds are fully amortized and comply with all provisions of , and the bond holder (lender) retains 5 percent of the bond(s) in accordance with of subpart A of this part. The bonds must be fully secured with collateral in accordance with (b). 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. The Agency should not approve convertible bonds in accordance with (q). (Added , PN 466.) 8A (Revision 2) ( ) SPECIAL PN

17 (dd) (Con.) (1) Per (b), the Agency should not approve the bond issuer (borrower) issuing more than 11 bonds with no more than 10 of those bonds being guaranteed under this program. In the Conditional Commitment, the Agency should require that the bond issuer obtain the services and opinion of an experienced, recognized 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. (2) Further, the Agency in its Conditional Commitment, should require the bond holder to purchase all of the bonds and comply with all Agency regulations. The Agency in its Conditional Commitment should further require a bond purchase agreement between the issuer and the bond holder. The bond purchase agreement should contain similar language to what is required to be in a loan agreement in accordance with (b)(11) and must not be in conflict with subparts A or B of part 4279 or subpart B of part The bond holder is responsible for all servicing of the loan (bond), although the bond holder may contract for servicing assistance, including contracting with a trustee who remains under the lender s total control. Bond purchase agreements should be reviewed by the regional OGC for legal sufficiency. (ee) Locally or Regionally Produced Agricultural Food Products. Loan guarantees made to establish and facilitate entities that process, distribute, aggregate, store, and/or market locally or regionally produced agricultural food products to support community development and farm and ranch income. The term locally or regionally produced agricultural food product means any agricultural food product that is raised, produced, and distributed in the locality or region in which the final product is marketed, so that the total distance that the product is transported is less than 400 miles from the origin of the product, or in the State in which the product is produced. (Revised , PN 469.) (1) Projects that are eligible under the locally or regionally produced agricultural food products initiative may be located in urban areas as well as rural areas. (Revised , PN 469.) (2) The recipient of a loan or loan guarantee through this initiative must include in an appropriate agreement with retail and/or institutional facilities to which the recipient sells locally or regionally produced agricultural food products a requirement to inform consumers of the retail or institutional facilities that the consumers are purchasing or consuming locally or regionally produced agricultural food products. (Renumbered , PN 471.) 8B (Revision 2)

18 (ee) (Con.) RD Instruction 4279-B (3) Funding priority will be given to the financing of projects that provide a benefit to underserved communities. An underserved community is defined as a community (including an urban or rural community and an Indian tribal community) that has limited access to affordable, healthy foods, including fresh fruits and vegetables, in grocery retail stores or farmer to consumer direct markets AND has a high rate of hunger or food insecurity or a high poverty rate as determined by the Secretary. An eligible project does not have to be physically located in an underserved community, but its activities must provide a benefit to an underserved community. As an example, an aggregation and distribution center that is physically located in an urban area would be eligible for priority funding if a meaningful portion of the aggregated product is made available to consumers at grocery or other retail establishments located within an underserved community or to food banks, schools, or other institutions serving low-income populations, thus providing a benefit to the underserved community. An aggregation and distribution center in an urban area would not be eligible for priority funding under the provision if it distributes all of its food to high-end markets. When there is a tie in priority scoring, projects that serve underserved communities will be funded over those that do not serve underserved communities. (Renumbered , PN 471.) (4) The Food Access Research Atlas (formerly known as the Food Desert Locator) can be utilized to locate food deserts, which are low-income census tracts where either a substantial number or share of residents has low access to a supermarket or large grocery store. "Low income" tracts are defined as those where at least 20 percent of the people have income at or below the federal poverty levels for family size, or where median family income for the tract is at or below 80 percent of the surrounding area's median family income. Tracts qualify as "low access" tracts if at least 500 persons or 33 percent of their population live more than a mile from a supermarket or large grocery store (for rural census tracts, the distance is more than 10 miles). The Atlas can be found at the following Web site address: (Added , PN 471.) ( ) SPECIAL PN 8C (Revision 2)

19 (Con.) (ff) New Markets Tax Credit Program. The Agency may guarantee certain loans involving New Markets Tax Credits. By way of background, the New Markets Tax Credit Program was authorized by Congress as part of the Community Renewal Tax Relief Act of 2000 to attract investment capital to low-income communities by permitting investors to receive a tax credit against their Federal income tax returns in exchange for making equity investments in specialized financial institutions, called Community Development Entities (CDEs). The NMTC Program is implemented by the Department of Treasury s Community Development Financial Institution (CDFI) Fund. The CDFI Fund designates eligible Community Development Entities (CDEs) and allocates the tax credit through a competitive application process. The Internal Revenue Service (IRS) provides and monitors compliance with the NMTC Income Tax Regulations the rules under which the tax payer may receive the tax credit. Only CDFI Fund-certified CDEs are able to compete for and receive NMTC allocations. After receiving an allocation, the CDE has 5 years to raise Qualified Equity Investments (QEIs) from investors. The CDE has 12 months to place the QEIs into Qualified Low Income Community Investments (QLICIs) that include: (1) loans to, or investments in, qualified active low-income community businesses (QALICBs); (2) loans to, or investments in, other CDEs; (3) the purchase of qualifying loans originated by other CDEs; and (4) financial counseling and other services (FCOS) to low-income community businesses. The tax credits total 39 percent of the cash invested and is claimed over a 7-year credit allowance period. (Added , PN 466.) (1) The Agency has determined that the NMTC program may be used with B&I and REAP guaranteed loans using, but not limited to, one of two basic models: (1) the CDE purchasing or participating in a guaranteed loan (model #1); and (2) the CDE or its subsidiary becoming a non-traditional lender (model #2). The NMTC program may be used with BAP guaranteed loans by the CDE purchasing or participating in a guaranteed loan (model #1). (i) Holder/Participation Model - The CDE can become the holder/participating lender of the guarantee through: (1) a sale of the Loan Note Guarantee; (2) purchasing a participation in the loan; or (3) the purchase of the Loan Note Guarantee and participation in the non-guaranteed portion of the loan. All B&I and Energy program rules relating to participation or sale to a holder must be followed. This approach may provide more favorable interest rates to the borrower. 8D (Revision 2)

20 (ff)(1) (Con.) RD Instruction 4279-B (ii) Non-Traditional Lender Model - As background, the Agency can approve a lender s subsidiary applying for the B&I and REAP programs either by independently qualifying as a lender under RD Instruction 4279-A, section (b), or the subsidiary s parent qualifying accordingly and request the subsidiary, under its control, also be approved under the appropriate subsection. In the case of the latter, the subsidiary does not need to meet the requirements of RD Instruction 4279-A, section , separate from its parent. The Agency must ensure that the control structure is clearly defined in advance through a management agreement. The Agency should obtain and approve a copy of the agreement with the request for approval as a lender. Approved non-traditional lenders may subsequently request approval of their subsidiaries in accordance with RD Instruction 4279-A, section (b). In such cases, the Agency should request any necessary additional information such as the parent s current balance sheet (not more than 1 year old, an in-house financial statement is acceptable), commercial loan portfolio information in accordance with RD Instruction 4279-A, section (b)(2)(iii), any changes to its license or charter since its initial submission, changes to its staff since its initial submission and updates on their commercial lending experience, license or charter of the subsidiary or its evidence of authority to engage in the proposed loan making and servicing activities, in accordance with section (b)(2)(ii), and a copy of the control agreement. As long as a CDE is permitted to make loans, it can apply to become a non-traditional lender under the B&I and REAP guaranteed loan programs in accordance with RD Instruction 4279-A, section CDEs that have been previously approved as B&I and REAP non-traditional lenders may submit a request for approval of sub-cdes under their control. Normally, a CDE creates a special purpose sub-cde for each NMTC loan or set of loans. The NMTC investor usually owns the majority (99.99 percent) of the sub-cde through its Qualified Equity Investment (QEI). Typically, the CDE has a minority (0.01 percent) ownership interest in the sub-cde and is the managing member, managing partner, or controlling stockholder and controls the sub-cde through a management agreement. In this case, the Agency can approve the sub-cde applying to become a non-traditional lender in accordance with the subsidiary provisions just discussed. ( ) SPECIAL PN 8E (Revision 2)

21 (ff) (Con.) (2) Throughout the 7-year investment period, the CDE must ensure that substantially all (at least 85 percent during the first 6 years, reduced to 75 percent in year 7) of the QEI is deployed in one or more NMTC eligible loans or investments. CDEs that are NMTC lenders typically structure their loans with 7-year interest only terms, with a balloon payment at the end of the 7-year investment period. The Agency would not be able to approve this loan structure as it is not eligible under RD Instruction 4279-B, section (b) and (c), or Energy programs which cross-reference to section (c). However, note that the B&I program and BAP permit interest only payments for a period not to exceed 3 years, in compliance with RD Instruction 4279-B, section (b). Also note that the REAP program, RD Instruction 4280-B, section (b), requires the first installment of principal and interest will, if possible, be scheduled for payment after the project is operational and has begun to generate income. RD Instruction 4279-B, section (c), applies to B&I and Energy guaranteed loans and requires a periodic payment schedule which will retire the debt over the term of the loan without a balloon payment. The Agency must ensure that CDE payment schedules comply with these requirements to be eligible for the B&I or Energy programs. (3) NMTC QEI funds may be used by the CDE to make loans to qualifying businesses or to make equity investments in qualifying businesses. The Agency must consider NMTC loans to a qualifying business (QALICB) as debt on the borrower s balance sheet in accordance with Generally Accepted Accounting Principles. The NMTC Income Tax regulations do not allow the CDE, at the time of approving their loan(s), to commit to forgive a loan or convert loans to equity at a later date. NMTC project proposals may include a double-borrower model in which the CDE s NMTC funds are lent to the QALICB (e.g. a real estate holding company) and the QALICB provides the funds as equity into the project (e.g. an operating company). If the two entities are variable interest entities, their financial statements need to be consolidated or combined for Agency analysis. Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards 167, amendment to FASB Interpretation No. 46, provides guidance in accordance with accounting standards. (4) The Agency cannot approve the CDE using the NMTC funds to make an equity investment in the qualifying business (partial ownership). In this case, the CDE or sub-cde would be ineligible to directly partake in model #1. Further note that RD Instruction 4279-A, section , prohibits a B&I or Energy lender from selling or 8F (Revision 2)

22 (ff)(4) (Con.) RD Instruction 4279-B participating in any amount of the guaranteed or unguaranteed portion of the loan to the borrower or members of the borrower's immediate families, officers, directors, stockholders, other owners, or a parent, subsidiary, or affiliate. Likewise you should be attentive to potential for or appearance of conflict of interest under model #2 because RD Instruction 4279-B, section (n), requires that the Loan Note Guarantee will not be issued until the lender certifies that none of the lender's officers, directors, stockholders, or other owners (except stockholders in an institution that has normal stock share requirements for participation) has a substantial financial interest in the borrower. Requirements of section (n) apply to B&I and REAP loan transactions that also include NMTC funds. This section does not prohibit the lender (that is, the CDE or sub-cde) from having a financial interest in the borrower. Appropriate measures must consider the potential for or appearance of a conflict interest, such as establishing appropriate loan covenants regarding limitations on dividends and distributions of earnings and other covenants in accordance with section (b)(11), limiting waivers of loan covenants, and limiting future modifications of loan documents. The Agency cannot approve a lender providing equity and take an ownership interest in the QALICB as part of their B&I or REAP/NMTC financing transaction prior to their B&I or REAP loan application. The Agency cannot approve the lender taking a controlling interest of the QALICB. Also be reminded that section requires personal or corporate guarantees from those owning at least 20 percent interest in the borrower. The Agency believes it is a conflict of interest for the lender to request an exception of itself from guaranteeing the loan. A lender cannot guarantee their loan; therefore, the lender cannot provide equity or take an ownership interest in a QALICB at a level that would result in owning 20 percent or greater interest in the QALICB. (5) The lender should address in its Application for Loan Guarantee to the Agency its exit strategy when the NMTC expire after the 7 th year. The exit strategy should include a general plan to address the lender s equity and if the lender will divest its equity interest how will this will be accomplished and the impact on the QALICB. ( ) SPECIAL PN 8G (Revision 1)

23 Ineligible purposes. (a) Distribution or payment to an individual owner, partner, stockholder, or beneficiary of the borrower or a close relative of such an individual when such individual will retain any portion of the ownership of the borrower. (b) Projects in excess of $1 million that would likely result in the transfer of jobs from one area to another and increase direct employment by more than 50 employees. (c) Projects in excess of $1 million that would increase direct employment by more than 50 employees, if the project would result in an increase in the production of goods for which there is not sufficient demand, or if the availability of services or facilities is insufficient to meet the needs of the business. (d) Charitable institutions, churches, or church-controlled or fraternal organizations. Businesses that derive more than 10 percent of annual gross revenue from tax deductible charitable donations, based on historical financial statements required by (b), are considered charitable institutions for the purpose of this paragraph. Fees for services rendered or that are otherwise ineligible for deduction under the Internal Revenue Code are not considered tax deductible charitable donations. To determine if the business is an organization subject to the 10 percent charitable donation maximum, you should check to see if the organization is listed as a charitable organization on the Internal Revenue Service s Web site: hmethod=selectsearch. (Revised , PN 477.) (e) Lending and investment institutions and insurance companies. (f) Assistance to Government employees and military personnel who are directors or officers or have a major ownership of 20 percent or more in the business. ( ) SPECIAL PN 9 (Revision 5)

24 (Con.) (g) Racetracks for the conduct of races by professional drivers, jockeys, etc., where individual prizes are awarded in the amount of $500 or more. (h) Any business that derives more than 10 percent of annual gross revenue from gambling activity. (i) Any illegal business activity. (j) Prostitution. (k) Any line of credit. (l) The guarantee of lease payments. (m) The guarantee of loans made by other Federal agencies. (n) Owner-occupied housing. Bed and breakfasts, storage facilities, et al, are allowed when the pro rata value of the owner s living quarters is deleted. (o) Projects that are eligible for the Rural Rental Housing and Rural Cooperative Housing loans under sections 515, 521, and 538 of the Housing Act of 1949, as amended. (p) Loans made with the proceeds of any obligation the interest on which is excludable from income under 26 U.S.C. 103 or a successor statute. Funds generated through the issuance of tax-exempt obligations may neither be used to purchase the guaranteed portion of any Agency guaranteed loan nor may an Agency guaranteed loan serve as collateral for a tax-exempt issue. The Agency may guarantee a loan for a project which involves tax-exempt financing only when the guaranteed loan funds are used to finance a part of the project that is separate and distinct from the part which is financed by the tax-exempt obligation, and the guaranteed loan has at least a parity security position with the taxexempt obligation. (q) The guarantee of loans where there may be, directly or indirectly, a conflict of interest or an appearance of a conflict of interest involving any action by the Agency. An example of a conflict of interest would be where guaranteed funds are used to finance a Federal office building where one of the tenants leasing the space is a USDA agency or organization. (r) Golf courses. 10 (Revision 5)