Rd instruction 1942-a table of Contents

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(Revision 1)

(2-6-85) PN 956

RD Instruction 1942-A

§1942.17 (g)(3)(iii)(A)(5) (Con.)
(iii) The State Director has determined that adequate and dependable revenues will be available to meet all operation expenses, debt repayment, and the required reserve.
(iv) Prior National Office review and concurrence is obtained.
(6) Additional security may be taken as determined necessary by the loan approval official.
(B) Real estate and chattel property taken as security:
(1) Ordinarily will include the property that is used in connection with the facility being financed; and
(2) Will have an as-developed present market value determined by a qualified appraiser equal to or exceeding the amount of the loan to be obtained plus any other indebtedness against the proposed security; and
(3) May have one of the lien requirements deleted when the loan approval official determines that the loan will be adequately secured with a lien on either the real estate or the chattel property.
(h) Economic feasibility requirements. All projects financed under the provisions of this section must be based on taxes, assessments, revenues, fees or other satisfactory sources of revenues in an amount sufficient to provide for facility operation and maintenance, a reasonable reserve, and debt payment. An overall review of the applicant's financial status, including a review of all assets and liabilities, will be a part of the docket review process by the Rural Development staff and approval official. If the primary use of the facility is by business and the success or failure of the facility is dependent on the business, then the economic viability of that business must be assessed. The number of users for a rural business will be based on equivalent dwelling units, which is the level of service provided to a typical rural residential dwelling. (Revised 05-19-92,
(1) Financial feasibility reports. All applicants will be expected to provide a financial feasibility report prepared by a qualified firm or individual. These financial feasibility reports will normally be:


(Revision 1)

§1942.17 (h)(1) (Con.) RD Instruction 1942-A

(i) Included as part of the preliminary engineer/ architectural report using Guides 6 through 10 as applicable; or

(ii) Prepared by a qualified firm or individual not having a direct interest in the management or construction of the facility using Guide 5 when:
(A) The project will significantly affect the applicant's financial operations and is not a utility-type facility but is dependent on revenues from the facility to repay the loan; or
(B) It is specifically requested by Rural Development.
(2) Applicants for loans for utility-type facilities dependent on users fees for debt payment shall base their income and expense forecast on realistic user estimates in accordance with the following:
(i) In estimating the number of users and establishing rates or fees on which the loan will be based for new systems and for extensions or improvements to existing systems, consideration should be given to the following:


(Added 05-19-92, SPECIAL PN)

(2-6-85) PN 956

§1942.17 (h) (2) (i) (Con.) RD Instruction 1942-A

(A) An estimated number of maximum initial users should not be used when setting user fees and rates since it may be several years before all residents in the community will need the services provided by the system. In establishing rates a realistic number of initial users should be employed.

(B) User agreements from individual vacant property owners will not be considered when determining project feasibility unless:
(1) The owner has plans to develop the property in a reasonable period of time and become a user of the facility; and
(2) The owner agrees in writing to make a monthly payment at least equal to the proportionate share of debt service attributable to the vacant property until the property is developed and the facility is utilized on a regular basis. A bond or escrowed security deposit must be provided to guarantee this monthly payment and to guarantee an amount at least equal to the owner's proportionate share of construction costs. If a bond is provided, it must be executed by a surety company that appears on the Treasury Department's most current list (Circular 570, as amended) and be authorized to transact business in the State where the project is located. The guarantee shall be payable jointly to the borrower and Rural Development; and
(3) Such guarantee will mature not later than 4 years from the date of execution and will be finally due and payable upon default of a monthly payment or at maturity, unless the property covered by the guarantee has been developed and the facility is being utilized on a regular basis.
(C) Income from other vacant property owners will be considered only as extra income.
(ii) Realistic user estimates will be established as follows:
(A) Meaningful potential user cash contributions. Potential user cash contributions are required except:


(2-6-85, PN 956)

RD Instruction 1942-A

§1942.17 (h)(2)(ii)(A) (Con.)

(1) For users presently receiving service, or

(2) Where Rural Development determines that the potential users as a whole in the applicant's service area cannot make cash contributions, or
(3) Where State statutes or local ordinances require mandatory use of the system and the applicant or legal entity having such authority agrees in writing to enforce such statutes, or ordinances.
(B) The amount of cash contributions required in paragraph (h)(2)(ii)(A) of this section will be set by the applicant and concurred in by Rural Development. Contributions should be an amount high enough to indicate sincere interest on the part of the potential user, but not so high as to preclude service to low income families. Contributions ordinarily should be an amount approximating one year's minimum user fee, and shall be paid in full before loan closing or commencement of construction, whichever occurs first. Once economic feasibility is ascertained based on a demonstration of meaningful potential user cash contributions, the contribution, membership fee or other fees that may be imposed are not a requirement of Rural Development under this section. However, borrowers do have an additional responsibility relating to generating sufficient revenues as set forth in paragraph (n)(2)(iii) of this section.
(C) Enforceable user agreement. Except for users presently receiving service, an enforceable user agreement with a penalty clause is required unless State statutes or local ordinances require mandatory use of the system and the applicant or legal entity having such authority agrees in writing to enforce such statutes or ordinances.
(iii) In those cases where all or part of the borrower's debt payment revenues will come from user fees, applicants must provide a positive program to encourage connection by all users as soon as service is available. The program will be available for review and approval by Rural Development before loan closing or commencement of construction, whichever occurs first. Such a program shall include:
(A) An aggressive information program to be carried out during the construction period. The borrower should send written notification to all signed users

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