USDA Financing 101

What is USDA Financing for Rural Development?

Developers and business owners in rural America often have a difficult time locating financing for their real estate project or business expansion.  Most mainstream lenders tend to focus on larger markets with dense employment drivers and employment diversity leaving many great real estate development opportunities unable to develop and build due to their rural location.  When a project hits our desk in a small town or rural community, we first look at the USDA Business and Industry Guaranteed Loan Program (B&I) as a potential source of financing.  This program allows for the development of real estate in rural areas where the population is less than 50,000 and not adjacent to a population center.  The USDA offers loan loss guarantees to lenders at 80% of any realized losses to induce lenders to lend in otherwise underserved communities.

Currently, USDA utilizes a points system to rank potential deals with 20 points as a minimum score to be eligible under current administrative guidelines.  The point system focuses on 5 key areas:

  1. Population Priority – projects with less than 25,000 population receive higher scoring.
  2. Location Priority – distressed communities, high poverty, high unemployment, or projects in federally recognized Tribal lands receive higher priority.
  3. Lower leverage, lower interest rates, or veteran owned – banks that lend at lower leverage (60% LTC or less) or interest rates below Prime + 1.50% receive higher priority as well as a project owned by a qualified military veteran.
  4. High Impact Business Development – new industries in a particular market, 20% of sales are international, local ownership & management, agricultural products to underserved communities, creates, or saves 5 jobs earning 150% of federal minimum wage, or businesses that offers healthcare all receive greater point values.
  5. Administrative Points – The state in which the project is in also may be awarded by points by a state level administrator.  Each state may have different areas of emphasis to award points such as projects located in natural disaster areas.  It is key to make contact with the state administrator to understand what areas they are emphasizing.

If eligible, the program has many financial highlights that are worth mentioning including:

  • $25,000,000 max loan amount
  • Up to 80% LTC for real estate collateral
  • Full-term loan (construction to perm loan for real estate development)
  • Interest rates based on prime rate or US treasuries of similar duration + risk premium
  • Lending in markets with 50,000 population or less based on last census – link to map: Eligibility (usda.gov)
  • Flexible Use of Proceeds:
    • Purchase and development of land, buildings, and associated infrastructure for commercial or industrial purposes
    • Business conversion, enlargement, repair, modernization, or development
    • Purchase and installation of machinery and equipment, supplies, or inventory,
    • Debt refinancing when it improves cash flow and creates jobs

Drawbacks of program:

  • Large prepayment penalties for early prepayment in earlier years but can be negotiated with lenders.
  • Recourse required for 20% or greater owners.
  • Community scoring system – must achieve 20 points in order to qualify for USDA B&I.
  • Long timeline between application and closing.
  • Higher transactional fees.
  • USDA required environmental studies.

Is my real estate development eligible?

It’s smart to first check the eligibility map to ascertain whether or not your property falls into the overall eligibility.  College towns where unemployment and poverty can be higher than the national average are a good candidate for the B&I program especially as it relates to hospitality financing.  There is usually transient demand for hotels in the college towns due to school sport activities as well as parents visiting their children.  In addition, hotels typically employ a larger staff than say multifamily so the points earned by creating new jobs also helps for USDA qualification purposes.  For multifamily, it is more challenging to find the right deal since rents can tend to be lower in the rural areas which mean that a deal is harder to underwrite.  Developers of multifamily may have to rely on other governmental programs such as Section 8 housing vouchers to make a deal feasible.

Keywords:

  • Rural financing
  • Rural development
  • Financing for small business
  • USDA Lending
  • How to finance my real estate development
  • Expand my business

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About Schelin Uldricks & Co.

www.schelinuldricks.com

Schelin Uldricks & Co. is a firm offering investment banking services with a focus on providing capital solutions to real estate companies and other mid-sized businesses.

Headquartered in Huntington Beach, CA, Schelin Uldricks & Co. embodies a progressive entrepreneurial culture focused on integrity, transparency, execution, and ingenuity. The founding partners bring over 35 years of collective capital markets experience in investment banking, private equity, and real estate finance. The company offers a broad array of services, including debt and equity placement, M&A, GP advisory, divestitures, and financial restructuring.

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