CUP Loan Requirements: Know Before You Apply

Are you seeking funding for an essential community facility in a rural area? The CUP Loan program offers affordable financing, but navigating the requirements can be daunting.

This comprehensive guide will give you everything you need to know about CUP loan requirements including:

• Eligibility criteria
• Eligible purposes
• Key requirements such as debt service and capital asset reserves
• Compliance requirements
• Required forms and documents

Eligibility Criteria

Eligibility Criteria	Terms & Conditions
Eligible Entities	Public bodies: local municipal governments, counties, special-purpose districts, etc.
	Community-based nonprofit corporations with significant ties to rural communities
	Federally-recognized Tribes
Eligible Areas	Rural areas including cities, villages, townships, and towns with ≤ 20,000 residents
	Census Designated Places (CDPs) with ≤ 20,000 residents
	Majority (>50%) of population served must be in eligible rural areas
	No population limit for unincorporated areas outside CDPs
	Facility must primarily serve rural residents and communities
	Must be within jurisdiction or service area of applicant entity
	Proximity to ineligible areas requires demonstration of rural service
Eligible Purposes	Healthcare Facilities
	Public Facilities
	Community Support Services
	Public Safety Services
	Educational Services
	Utility Services
	Local Food Systems
Ineligible Purposes	Recreational Facilities
	Commercial Enterprises
	On-site utility systems or buildings for industrial parks
	Television services and facilities
	Electric generation plants, transmission facilities, and telephone systems
	Projects not modest in size, type, and design for the area served
	Loan finder’s fees and broadband transmission infrastructure

Eligible Entities

The entity must provide an essential service or function that is typically carried out by a local government unit. The facility must be for public use, with a few exceptions like for certain nonprofit organizations (YMCA, Girl Scouts, etc.).

• Public bodies: This includes local municipal governments, counties, special-purpose districts, etc.

• Community-based nonprofit corporations: The nonprofit must have significant ties to the local rural community or region it serves. It must carry out a public purpose and continue to primarily serve rural areas. Evidence of ties can include close association with local government, broadly-based community ownership/control, substantial public funding, etc.

• Federally-recognized Tribes: Tribes must have the legal authority to own the project, borrow funds, pledge collateral, construct, operate, maintain, and manage the facility.

Eligible Areas

• Rural areas including cities, villages, townships, and towns with a population of no more than 20,000 residents according to the latest U.S. Census data.

• Census Designated Places (CDPs) with populations of 20,000 or less are eligible rural areas. CDPs are unincorporated areas identified by the Census Bureau as having a concentration of population, housing, and commercial structures.

• At least the majority (over 50%) of the population being served by the facility must be located in an eligible rural area.

• The facility must primarily serve and benefit rural residents and communities.

• The facility must be located within the jurisdiction or service area of the applicant entity.

• There is no population limit for unincorporated areas outside of CDPs when determining rural eligibility.

• If a project is near an ineligible (over 20,000 population) area, the applicant must demonstrate that the facility will primarily serve eligible rural residents.

Eligible Purposes

• Healthcare Facilities: Healthcare facilities such as hospitals, medical clinics, dental clinics, nursing homes, assisted living facilities, and facilities providing treatment and recovery services for substance abuse disorders are eligible for funding under this program.

• Public Facilities: Public facilities like town halls, courthouses, airport hangars, bridges, port authorities, and street improvement projects can utilize the CF Direct Loan for construction, enlargement or improvement.

• Community Support Services: The loan can fund community support services including child care centers, adult day care facilities, homeless shelters, community centers, and transitional housing units.

• Public Safety Services: For public safety, eligible projects include fire departments, police stations, prisons, and the purchase of fire trucks, police vehicles, public works vehicles and equipment.

• Educational Services: Educational services such as schools, colleges, universities, vocational and technical institutions, dormitories, museums, and libraries qualify as eligible uses of the CF Direct Loan.

• Utility Services: Utility services that can be funded include gas distribution systems, hydroelectric systems, telemedicine equipment, distance learning technology, health information technology, internal wiring, and publicly available WiFi within an eligible facility.

• Local Food Systems: The loan can also support local food systems by financing community gardens, food pantries, community kitchens, food banks, food hubs, and greenhouse facilities.

Ineligible Purposes

• Facilities used primarily for recreational purposes are ineligible. However, the loan can fund recreational aspects if the main purpose is educational or healthcare-related, such as a playground at a daycare center, a hospital swimming pool for physical therapy, or athletic facilities as part of a school curriculum.

• Commercial enterprises that are typically operated by private businesses for the purpose of generating profits cannot be funded through this program. Nonprofit organizations providing services like childcare, geriatric care, and healthcare to rural communities are allowed.

• No more than 25 percent of the total floor space of the funded facility can be used for ineligible purposes. For instance, leasing space to a commercial business would be ineligible beyond that 25 percent threshold.

• On-site utility systems or buildings specifically associated with industrial parks are ineligible for CF loan funds. Television services and facilities also cannot be funded.

• Electric generation plants, transmission facilities, and telephone systems are excluded as ineligible purposes under this program. Additionally, funds cannot go towards projects that are not considered modest in their size, type, and design for the area being served.

• Finally, the use of CF loan funds for paying loan finder’s fees or funding broadband transmission infrastructure is prohibited under the program rules.

Debt Service Reserve Requirement

A debt service reserve (DSR) account is required for CUP Loans. Specifically:

• The DSR must be accumulated at the rate of 10% of the annual debt payments until a sum equal to no less than one annual installment is reached.
• For some transactions, full funding of the DSR account with one year’s worth of debt service payments may be required at the time of loan closing.

The purpose of the DSR is to have funds readily available to cover any shortfalls in making the annual loan payments when they come due. Having this reserve helps ensure timely debt repayment.

Maintaining a debt service reserve provides an extra level of security for the lender (USDA Rural Development) in the event the borrower faces temporary cashflow issues or other financial difficulties that could impair their ability to make timely loan payments from operational revenues alone. It is a prudent risk management practice for both the borrower and lender.

Capital Asset Reserve Requirement

A capital asset replacement reserve account must be established in an amount adequate to replace long-lived assets associated with the funded project. Specifically:

• The amount required to be held in the capital reserve will be based on the condition of the existing facility (if applicable) and the expected economic life of the improvements being made with the CF loan funds.
• The reserve analysis takes into account the major capital assets like buildings, equipment, systems, etc.
• Adequate funds must be set aside on an annual basis into this reserve account to cover future capital needs and maintain the project facilities/assets.

The capital reserve requirement ensures the borrower has a plan and dedicated funding source to repair/replace depreciating assets when needed, rather than deferring maintenance or letting assets deteriorate. This protects the value and usefulness of the facilities over their full economic lifespan.

Security Requirements by Entity Type

The security requirements for the Community Facilities Direct Loan Program vary based on the type of eligible entity applying for the loan.

For public bodies, the following security instruments may be required:

• General Obligation (GO) Bonds: These are bonds backed by the full faith and credit of the public body, usually requiring approval by a voter majority. State statutes may limit the amount of outstanding GO bonds at any time.
• Revenue Bonds: Unlike GO bonds, revenue bonds are payable from specific revenue sources like fees, taxes or assessments rather than the general fund. They typically don’t require voter approval.
• Promissory Notes
• Real Estate Mortgages or Deeds of Trust
• Financing Statements
• Security Agreements

For nonprofit corporations, the required security may include:

• Promissory Notes (Form RD 440-22)
• Real Estate Mortgages or Deeds of Trust
• Financing Statements (Form UCC-1)
• Security Agreements (Form RD 1942-9)
• Deposit Agreements
• Unconditional Guarantees

For Federally-recognized Tribes, acceptable security can be:

• Allocating the collective earnings of the Tribal community through a formal Tribal Resolution.
• Lien on a specific revenue source generated by the Tribe (e.g. sales tax, fuel tax, gaming revenue)
• Tribal General Obligation Bonds

The specific security instruments are reviewed and approved by USDA’s Office of General Counsel. Adequate security is critical for the loan application to proceed in the underwriting process.

Other Requirements

• Test for Other Credit: Applicants must demonstrate that they cannot obtain commercial credit at reasonable rates and terms from other sources to fully finance the project. They need to provide letters from commercial lenders stating the rates and terms the lenders would offer.

• Interim Financing: For construction projects over $50,000, the applicant must obtain interim financing from a commercial lender for the construction period. The interim financing agreement needs to be submitted to USDA for review and concurrence.

• Environmental Review: All projects require an environmental review in compliance with USDA’s environmental regulations. This may involve hiring an independent consultant to produce an environmental assessment or report. Applicants should allow 3-6 months for this process.

• Historic Preservation: Projects must meet all requirements of the Advisory Council on Historic Preservation’s Section 106 process regarding historic properties.

• Financial Feasibility: A financial feasibility report is required for projects over $500,000, prepared by an independent CPA firm. The level of report (analysis, compilation, or examination opinion) depends on the loan amount and applicant’s financial history.

• Appraisals: If real estate is taken as loan security, an appraisal showing the property value exceeds the loan amount is needed.

• Evidence of Community Support: Applicants must provide evidence of significant community support, such as a resolution from local government bodies.

• Procurement: All procurement transactions must follow an open and free competitive process without any conflicts of interest.

• Successful Operating History: Applicants must have been in existence and operating successfully for at least 5 years prior to applying, unless an exception is granted. This demonstrates their ability to manage the proposed facility.

• Substantial Community Support: There is a statutory requirement to provide evidence of significant community support for the project, typically through a certification from any affected local government body.

• Architectural/Engineering Report: A preliminary architectural/engineering report is required describing factors like the proposed facility operation, service area, funding sources etc.

State/Regional Specific Requirements

While the core requirements of the CUP Loan Program are set at the federal level by the USDA, it’s important to note that there may be additional state or regional-specific criteria that applicants need to comply with as well.

Consulting early with your state’s USDA Rural Development office is highly advisable to identify any extra hoops to jump through at that level to remain fully consistent with all governing laws and policies when pursuing a CUP loan.

Here are a few examples of potential extra requirements:

• State Environmental Laws: In addition to completing federal environmental reviews, some states have their own environmental policy acts that outline assessment processes for public projects using state funds or lands. CUP loan applicants may need to conduct additional state-level environmental studies.

• Permitting and Approvals: Depending on the type of facility being developed, there could be various permitting requirements at the state or local jurisdiction level for construction, operations, healthcare services, and more that have to be obtained.

• Regional Planning Consistency: Many states and regional planning commissions have comprehensive development plans that proposed CUP loan projects may need to demonstrate clear consistency and alignment with.

• State Procurement Rules: While the USDA mandates open and free competitive bidding for construction contracts, states often have their own specific procurement codes and processes that public entity applicants must follow.

• Professional Licensing: For architectural, engineering, legal and other contracted professional services, CUP loan applicants usually must source providers holding the appropriate licenses and certifications as required in that state.

• Indigenous Reviews: If projects are located on or near tribal lands, borrowed funds may trigger the need for additional review and consultation processes with local indigenous communities as per state protocols.

Compliance with Laws and Regulations

As a recipient of federal financial assistance through the CUP Loan program, borrowers must comply with all applicable federal, state, and local statutes, ordinances, regulations, and codes. These include:

• Environmental Laws: All projects require an environmental review process in accordance with USDA’s environmental regulations under 7 CFR Part 1970. Depending on the level of review required, this may involve hiring an independent environmental consultant to produce assessments or reports. Proper environmental mitigation measures identified must be implemented.

• Historic Preservation Requirements: Projects must meet all requirements of the Advisory Council on Historic Preservation’s Section 106 process regarding potential impacts on historic properties or archaeological resources. It’s essential to engage in dialogue with the State Historic Preservation Officer.

• Construction and Procurement Standards: Construction projects must follow federally-mandated open and free competitive bidding procurement processes. USDA must approve construction plans, specifications, bid documents, and ultimately concur with the selected bid award and contracts.

• Non-Discrimination Policies: Applicants must execute USDA’s standard forms related to equal opportunity, assurance of compliance with non-discrimination laws, and certifications like the HUD Affirmative Fair Housing Marketing Plan for housing projects.

• Other Key Compliance Areas mentioned include:
  
  • Policy provisions for consistent aid during relocation and acquisition of real estate.
  • Open public meeting and notice requirements
  • Auditing and financial reporting standards
  • Codes of conduct and conflict of interest provisions

No modifications or waivers of these regulatory compliance requirements are permitted. Applicants must diligently follow all applicable rules and procedures set forth by USDA, other federal agencies, and state/local authorities. Close coordination with USDA Rural Development staff is advisable to ensure comprehensive compliance.

Required Forms and Documents

Standard Forms

• SF 424 – Application for Federal Assistance
• SF 424A, 424B (non-construction) or SF 424C, 424D (construction)

USDA Rural Development Forms

• Form RD 442-3 – Balance Sheet
• Form RD 442-7 – Operating Budget (if revenues >$100k)
• Form RD 1942-52 – Cash Flow Projections (if revenues <$100k)
• Form RD 400-1 – Equal Opportunity Agreement
• Form RD 400-4 – Assurance Agreement
• Form RD 1942-46 – Letter of Intent to Meet Conditions
• Form RD 1940-1 – Request for Obligation of Funds
• Form RD 1910-11 – Applicant Certification Federal Collection Policies

Other Required Documents

• Organizational documents (articles, bylaws, charter, etc.)
• Financial statements for previous 5 years
• Copies of outstanding debt instruments
• Financial feasibility report
• Preliminary architectural/engineering report
• Professional service agreements (legal, architect, etc.)
• Evidence of efforts to get other credit
• Environmental review documents
• State historic preservation officer comments
• Public meeting notice and minutes
• Local government support letter
• Draft lease/management agreements
• Certifications (debarment, drug-free workplace, anti-lobbying, etc.)

Conclusion

Securing funding through the CUP Loan program involves navigating a comprehensive set of eligibility criteria, project requirements, and compliance obligations. However, by thoroughly understanding and properly addressing these requirements, rural communities can access affordable financing to develop essential facilities that foster orderly development and enhance quality of life.

Prospective applicants are strongly encouraged to consult early and often with their local USDA Rural Development offices. The Community Programs specialists in these offices provide invaluable guidance to help entities like public bodies, nonprofits, and Tribes successfully navigate the application process and ultimate goal of improving vital public services in America’s rural towns and villages.

Frequently Asked Questions