Rural Development Loans Benefit Businesses, Communities throughout Alaska
Industries, individuals rely on loans to improve rural life
By Tracy Barbour
Southeast Alaska fishing vessel facilitated by USDA-RD Alaska loan.
Image courtesy of USDA-RD Alaska
Rural development loans are an important type of funding designed to help improve the economy and quality of life for Alaskans in small communities around the state.
In Alaska, the concept of rural development loans is broadly applied to projects based on the location or population of a community. And often the term is loosely used to describe rural-oriented deals that don’t necessarily involve development. Regardless of how rural development loans are defined, they involve all regions of the state and are having a positive impact on Alaska.
Rural development loans are available from a variety of sources, including entities such as the US Department of Agriculture Office of Rural Development Alaska (USDA-RD Alaska), Alaska Housing Finance Corporation (AHFC), the Small Business Administration (SBA) and financial institutions: Wells Fargo and First National Bank Alaska, for example.
USDA Committed to Enhancing Rural Communities
USDA Rural Development Alaska is a key facilitator of commercial financing and other funding that enhances living conditions in rural Alaska. In fact, from 2009 to 2016, the agency invested $2.16 billion in 236 rural Alaska communities, according to USDA-RD Alaska’s “Eight Year Progress Report”. During those eight years, the office supported manifold projects. It brought water and sanitation to villages still on ‘honey buckets’; provided ambulances and public safety equipment to communities on and off the road system; financed the construction of critical access hospitals; helped families build, purchase, and repair their homes; invested in wind and other renewable energy systems; connected communities to broadband and high-speed Internet; and helped small businesses create and retain jobs in rural communities.
The USDA-RD Alaska office provides guaranteed loans, direct loans, grants, and subsidies in five designated areas: the West, Interior, Central, Gulf and Southeast. Most of the funding from 2009 to 2016 went to the Interior and West, with direct and guaranteed loans for housing and business comprising the bulk of investment in Alaska.
A key USDA-RD resource for business owners in Alaska is the Business and Industry Guaranteed Loans program. The program guarantees a significant portion of the loan amount for any legally-organized rural business entity. Borrowers can use the funds for land, buildings, machinery, equipment, infrastructure, and working capital. And the loan term can be up to thirty years for real estate, fifteen years for machinery, and seven years for working capital.
Lenders typically use this program to finance loans for seasonal industries, such as commercial fishing and tourism, and start-up businesses. The program mitigates risk for lenders, enhances their comfort level, and gives them incentive to provide loans to rural Alaska, according to Renee Johnson, business programs director, USDA-RD Alaska. “Since we provide a unique niche for the lenders, they’ll approach us when they feel a guarantee is warranted,” she says.
The loan guarantee was a key factor in the financing for Bering Air Inc.’s project. USDA-RD Alaska in partnership with Alaska Growth Capital provided Bering Air with a $10.5 million Business and Industry guaranteed loan. The vital funding was used to purchase six new Cessna Caravan aircraft and helped thirty-two remote communities in Western Alaska gain reliable access to food, fuel, medical supplies, and other necessities.
Photo by Jessie Huff
Aspen Suites Hotel, a USDA Business and Industry Guaranteed Loans project located in Haines.
Businesses can also capitalize on USDA-RD Alaska’s Intermediary Relending Program and Rural Energy for American Program (REAP) Loan Guarantees. The Intermediary Relending Program involves loans made to “middle men” who then provide revolving loans to borrowers financing rural business facilities and community development projects. Borrowers can use the financing for land, buildings, machinery, equipment, and working capital. Intermediaries for the program are Haa Aani Community Development Fund Inc. and the Juneau Economic Development Corporation.
REAP loan guarantees can be used by small businesses and agricultural producers for energy efficiency improvements, renewable energy systems, land acquisition, and working capital. Loan guarantees are provided for up to 75 percent of project costs, not to exceed $25 million. While population limits don’t apply to the agricultural producer, REAP loans are designed for locations with fewer than 50,000 residents. Johnson says USDA’s business loan programs are essential because they help to sustain rural areas throughout Alaska. “The business programs provide access to capital to stimulate the community and jobs,” she says.
USDA-RD Alaska also offers financial assistance for building and rehabilitating multi-family housing. The Rental Housing Loans program, for instance, offers direct loans or loan guarantees to developers of rental housing for low- to moderate-income individuals in areas with populations of up to 35,000. Often, multi-family housing projects in rural Alaska are supported by a combination of loans, guarantees, and tax credits, according to Deborah Davis, Multi-Family Housing Program Director, USDA-RD Alaska.
The recent rehabilitation of Mews Apartments in Cordova is a good example of this type of financial support. The project was a joint effort between USDA-RD Alaska and the low-income housing tax credit program administered by AHFC. The twenty-two unit complex offers one- to three-bedroom apartments and caters to families, seniors, and disabled tenants, many of whom are long-standing residents. “It’s a very good thing,” Davis says. “The property is always full.”
Davis says multi-family housing programs create positive partnerships between public and private sources. They also help create better-quality, affordable housing that’s critically needed in the community. “It pulls at my heart strings when I go out to an apartment that has been built and rehabbed and one of the residents will say ‘This is the best home I’ve ever had.’”
Business owners can take advantage of two main housing programs through USDA-RD Alaska: Rural Rental Housing Direct Loans and Rural Rental Housing Loan Guarantees. The Rural Rental Housing Direct Loans program offers up to 95 percent of the cost for new construction or substantial rehabilitation on a 30-year term with up to 50-year amortization. “They were the long-standing funding facility that allowed us to build properties since the early 70s,” Davis says. “It created many of the affordable housing units that are in our portfolio.”
Today, developers are increasingly using the Rural Rental Housing Loan Guarantees program to construct or renovate affordable apartments. Under the program, which guarantees up to 90 percent of the principal for lenders, borrowers can obtain loans with a fixed interest rate and at least a twenty-five year term. “It allows the lender to extend more capital because of the guarantee,” Davis says.
Over the past ten years, Davis has seen more rental housing turning over between developers. Often, the incoming buyer assumes the existing loan, updates the property, and continues to offer it as an affordable housing option. “Some developers may want to retire, so another developer may come in, purchase the property and rehab it,” Davis says. “The properties are typically managed by professional management firms.”
AHFC and SBA Facilitate Financing
Entities such as AHFC and the SBA also facilitate funding for businesses and individuals in small communities statewide. AHFC is a self-supporting public corporation with offices in sixteen communities in Alaska. AHFC doesn’t offer loans; instead it’s an investor much like Fannie Mae and Freddie Mac. “We purchase the loans from banks, mortgage companies, and credit unions,” says Mortgage Underwriting Manager Michelle Graves. “AHFC also partners with federal agencies to provide options of lower down payments for borrowers.”
In its role, AHFC offers various loan programs for single- and multi-family projects in urban and rural areas. The corporation doesn't provide rural development loans in the literal sense, but homeowners in rural areas comprise a substantial share of its portfolio. “AHFC offers rural loans to communities on the road system with a population less than 1,600 and communities off the road system with a population less than 6,500,” Graves says.
AHFC provides two options for rural communities: the Rural Non-Owner-Occupied Loan Program and the Rural Owner-Occupied Loan Program. Under the non-owner-occupied loan program, borrowers can include businesses, Alaska residents, and local government entities. They can purchase duplexes, triplexes, or fourplexes, and each unit must measure at least 600 square feet.
Image courtesy of USDA-RD Alaska
The New Stuyahok tower was facilitated by a USDA-RD Alaska loan.
The Owner-Occupied Loan Program provides financing to purchase or renovate properties with one to four units, including condos. The program also offers long-term financing for owner-built, newly-constructed homes. Mortgage insurance is required if the down payment is less than 10 percent.
Since 2008, AHFC has purchased 2,976 Rural Loan program loans (non-owner occupied and owner-occupied) totaling nearly $636 million. The average loan amount was $213,686, with the loan types being 15- and 30-year loan terms. “Loans in our rural areas are pretty steady and I believe always will be because we are able to offer financing in areas that would be difficult to finance with standard investor (Fannie Mae and Freddie Mac) loans,” Graves says.
The SBA also works with eligible lenders to provide loans to small businesses, including those in rural Alaska. It doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. The SBA guarantees the repayment of the loans that its partnering lenders make, eliminating some of the risk involved. In turn, participating lenders must pay the SBA an incremental guaranty fee on the guaranteed portion of the loan, as well as a monthly fee on the outstanding balance of the guaranteed portion.
SBA lending programs include 7(a), CDC (Certified Development Company)/504, and Microloan options. The 7(a) loan program allows businesses to borrow $50,000 to $5 million for a wide variety of purposes, including starting and acquiring a business; purchasing machinery, equipment supplies, and fixtures; acquiring land and a building location; and working capital and refinancing existing debt. Loan terms can include five to seven years for working capital, up to ten years for business acquisition and equipment, and up to twenty-five years for real estate.
Under the CDC/504 loan program, borrowers deal directly with a CDC, which is a nonprofit corporation set up to contribute to the economic development of its community. Certified and regulated by the SBA, CDCs work with the SBA and private-sector lenders to provide growing businesses with long-term, fixed-rate financing for major fixed assets, such as land, buildings, machinery, and equipment. The loan amount can range from $25,000 to $5.5 million, with a twenty-year term for real estate and a ten-year term for equipment.
The Microloan program provides small businesses with small, short-term loans—up to $50,000—for working capital or to buy inventory, supplies, furniture, fixtures, machinery, and equipment. The SBA makes funds available to specially designated intermediary lenders, which are nonprofit organizations with experience lending and offering technical assistance. These intermediaries then issue loans to eligible borrowers.
Financial Institutions Support Rural Projects
Borrowers are able to secure rural development and rural program loans directly from lenders including Wells Fargo and First National Bank Alaska. Wells Fargo, for example, primarily uses SBA 7(a) and 504 loans to meet the financing needs of its rural customers, according to Alaska Regional Business Banking Manager Darren Franz.
Alaska is a different kind of place—especially rural Alaska, Franz says. That’s why the bank constantly strives to ensure it offers financial expertise and resources that cater to small Alaskan communities. “Our bank has become very good over the years with having more people out there who understand what the needs are in rural communities,” Franz says. “We’re the biggest lender in the state and rural Alaska.”
As is common with commercial financing, Wells Fargo considers the project and strength of the borrower when providing rural loans. Having a guarantee of repayment from an entity like the SBA can also be a determining factor for loan approval. Such a guarantee encourages the bank to be more open to a given project. “We try to mitigate the risk as best as we can…We’re lending out little old ladies’ deposits,” Franz says.
Outside Anchorage, Wells Fargo developed $87 million worth of business loans in 2015, $80 million in 2016, and $65 million in 2017 (as of late October).
Although Wells Fargo has experienced a decline in rural Alaska loans, Franz has noticed some positive developments taking place. “We’re starting to see families and individuals [beginning to] invest and upgrade their boats, and I think that trend will continue.”
Larger companies and organizations such as Trident Seafoods Corporation and Community Development Quota groups are also investing money into the fisheries. In mid-November, Trident and the Aleutian Pribilof Island Community Development Association (APICDA) announced an agreement in principle for Trident to make an investment in APICDA’s processing facility and fuel farm in False Pass and in Cannon Fish Company of Kent, Washington. APICDA and Trident will have joint-venture ownership in all three operations.
Franz says he also sees more business owners make investments in tourism and healthcare. And in spite of the economic recession, Wells Fargo is still positive on Alaska. “The longer the recession goes, the bigger the bounce back is going to be,” he says.
First National Bank Alaska, as an AHFC-approved lender, offers a wide array of loan programs, including conventional, Federal Housing Administration (FHA), Veterans Administration (VA), Housing and Urban Development (HUD) 184, and rural development.
The bank offers many different types of commercial loans that work well in rural areas. It works with many partners, including the state of Alaska, Alaska Industrial Development & Export Authority, USDA, SBA, and HUD loans, according to Vice President and Regional Manager Julie Woodworth.
Different loan programs possess unique aspects and benefits. Some offer loan guarantees or participation, while others come with lower interest rates or a lower down payment. Sometimes the benefit is the difference between an approval or not. “When we get an application in, we look at all the options and see what the best fit for that project is,” Woodworth says. “Then we would look for a partner that would reduce the risk to the bank and make the deal feasible.”
Homer-based Woodworth says First National has a good presence in rural communities and is well-versed in the many programs available to meet the needs of Alaskans. The bank uses a diverse range of programs to finance fishing vessel upgrades, housing, transportation, commercial facilities, retail stores, and hotels.
Financing rural development projects, Woodworth says, is not only good for businesses and communities, but it’s also good for Alaska. “Having these rural development programs available helps all of Alaska because all of our economies are so interconnected,” she says.
Freelance writer Tracy Barbour is a former Alaskan.