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Finding Greener Pastures for Agricultural Lenders

Finding Greener Pastures for Agricultural Lenders

As energy costs continue to rise and climate change remains a major topic in the public’s mind, agricultural producers are increasingly seeking ways to increase their production of renewable energy – a strategy that not only reduces their energy costs, but simultaneously supports America’s mission to achieve energy independence and develop clean energy sources.

To encourage this socially responsible activity in the agriculture sector, and to assist banks in lending to agricultural borrowers, the U.S. Department of Agriculture (USDA) created the Rural Energy for America Program (REAP).

The REAP is administered by the USDA and provides financial assistance in the form of guaranteed loan financing and grant funding to agriculture producers and rural small businesses to purchase, install, and construct renewable energy systems; make energy efficiency improvements to non-residential buildings; use renewable technologies that reduce energy consumption; and participate in energy audits and renewable energy development assistance.

Similar to other USDA loan programs, REAP loan guarantees and REAP grants protect lenders against potentially significant losses in the event of a borrower default.

Use of Funds

Funds from the REAP may be used to purchase, install and construct a multitude of renewable energy systems including: Biomass, geothermal for electric generation, hydropower below 30 megawatts, hydrogen, small and large wind and solar generation, and ocean generation (including tidal, current and thermal).

These funds may also be utilized for the purchase, installation and construction of energy-efficiency improvements, including: Insulation, lighting, cooling or refrigeration units, doors and windows, electric solar or gravity pumps for sprinkler pivots, and can help finance the transition from direct diesel to electric irrigation motors, and to replace energy-inefficient equipment.

Program Eligibility

  • Eligible borrowers include producers with at least 50 percent of their gross income being generated from agricultural operations, and
    • Small businesses in rural areas classified as eligible –
      • To be eligible, businesses must be located in an area other than a city or town with a population of greater than 50,000 citizens and the urbanized area of that city or town.
  • Agricultural producers may be in rural or non-rural areas.

Loan Sizes and Terms

Loan sizes under the REAP range from as low as $5,000 to as high as $25 million. Similar to other USDA loan programs, the interest rates and terms for these loans are negotiated between the borrower and the lender – however, the basic loan term guidelines are:

  • Real Estate Loans – maximum of 30 years
  • Machinery and Equipment Loans – maximum of 15 years (or the useful life of the equipment)
  • Real Estate and Equipment Combined – maximum of 30 years
  • Capital Loans – maximum of 7 years

REAP Loan Guarantees

As previously mentioned, a REAP loan guarantee protects the lender against a portion of the value of a loan in the event of a borrower default.

The amount of a REAP loan guarantee is limited to 75 percent of the total eligible project cost. Grants provide up to 25 percent of the total eligible project costs, with combined grant and loan guarantees funding of up to 75 percent of the total eligible project costs.

REAP Grants and Additional Qualifiers

Grants under the REAP vary according to grant classification. Renewable Energy System Grants range from $5,000 to $500,000.  Energy Efficiency Grants range from $1,500 to $250,000.

In all cases where the REAP is being utilized, there are some additional requirements: Applicants must provide a minimum of 75 percent of the project cost if applying for a grant; 25 percent of the project cost if applying for a loan or loan and grant combination; projects greater than $200,000 require a technical report; and energy efficiency projects require an energy audit or assessment.

Additionally, to be eligible for the REAP loan guarantees and grants, applicants must demonstrate sufficient revenue to cover operational and maintenance expenses, as well as the ability to service the debt associated with the project for the duration of the guaranteed loan or grant.

Work with the Experts

Since its inception, the REAP has provided hundreds of millions of dollars in loan guarantees and grants to fund thousands of renewable energy projects across the country.

For more information regarding the REAP, and to learn more about your bank clients’ eligibility for the program, contact the government guaranteed loan experts at Innovative Financing Solutions today!

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