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Management memo: strategies in packaging a zero interest loan for REA's rural economic development financing program.

Strategies in Packaging a Zero Interest Loan for REA's Rural Economic Development Financing Program

Some time back REA began to make available zero interest loans for rural development projects within the service areas of our systems. The intent of the loan program was to provide resources for electric cooperatives to serve as facilitators in encouraging economic development in the more rural parts of the country. Unilec, United Electric Cooperative, Inc., in Dubois, Pennsylvania has now been successful in securing three of these loans for three very different projects--a crafts center, a furniture manufacturing enterprise and the renovation of the local airport restaurant. This article is the story of how they constructed their application in order to receive the funding and of how in so doing they helped to create three marvelous win/win situations in a part of the state hard hit by an adverse economy.

John Lacny's article is designed to inspire similar efforts in other cooperatives, as well as to give our readers some sound advice about how to put together a successful loan application.

Our cooperatives and the REA have been partners in rural electric loan packaging for a long time. The REA program has been the single greatest rural economic development program in U.S. history. Its positive developmental impact on rural America is unquestioned. Only recently has a small, specific economic development financing program been available for economic development project financing. It is still new to the REA and its new to all of us in rural electric cooperatives. It is the first new REA program since the inception of the telephone program in 1949.

Since 1989 our cooperative has won approval of three zero interest loan applications for projects in its service area. This article describes the strategies Unilec used in preparing a credible application as a full participant in the REA's Rural Economic Development Loan and Grant Program.(1)

Economic Development We Decided We Could Be "Activist"

The U.S. Census revealed that Unilec's service area has experienced a decrease in population since 1980. Only one of the counties that Unilec serves gained population. Of 20 counties in the Northeastern United States "with big population drops," 19 were in Pennsylvania.(2) With this came a decline in key industries, and the traditional employment base of our region. It is not uncommon for Unilec counties to experience 13% unemployment levels.

As the 1980s ended we asked ourselves and our members just what the cooperative might do to deal with this trend: What role should we play in areawide economic development? The Unilec board carefully surveyed members as to what Unilec's role should be. The results of the member survey indicated that the cooperative could safely assume an "activist" role. A full 68 percent of Unilec members believe that the cooperative should do something to promote business growth and jobs creation.(3)

Unilec pursues economic development within the limits of its own resources. There is a large list of things that we would like to do but a much smaller list of things that we can do. We probably won't attract a new automobile plant that will hire thousands of new employees. As yet Unilec doesn't have it's own trade representative to Japan. In fact we really can't justify a full time Economic Development Professional on staff.(4) But like so many co-ops, we do what we can.

On February 15, 1989 the REA published its final rules for the Rural Economic Development Loan and Grant Program also known as the Cushion of Credit Payments Program. It was created to promote rural economic development and job creation projects using zero interest loans up to $100,00 per project. This includes project feasibility studies, start up costs, incubator projects and other reasonable expenses.(5)

Our board and general manager viewed this program and the zero interest loan incentives as a safe and effective vehicle for economic development projects. Unlike so many other programs Unilec would govern the selection of projects and the shaping of economic development loan activities.

"Crafting" Our First Zero Interest Loan

Mrs. Verna Lieth is one of those local entrepreneurs who, even at retirement age, has assembled a formidable nonprofits arts organization. The Sawmill Center for the Arts is located in Cook Forest State Park. As its director, Verna presides over a thriving crafts and performing arts center. A theater, named in her honor, offers a full schedule of musicals and plays during the summer. The growing array of arts and entertainment has helped bring a million visitors to our "magic forests" each year.(6)

Verna Lieth is truly adept at finding grants, loans and human resources for the Sawmill Center. In 1989 she learned about a new program for rural development from the REA. It would assist worthy projects if they get the support of the local rural electric cooperative.

Verna contacted our general manager Donald A. Widder. She explained that the Sawmill Center needed funds to retrofit a building for crafts production and marketing. The building was located on cooperative lines. The Sawmill Center was a tenant in state owned facilities. This meant that expansion possibilities for the center were limited by the Commonwealth (the landlord). A new facility, owned by the center, would enable the expansion and development of crafts production, job training, arts and education.

Since this loan program and application process were new to our co-op, Mr. Widder telephoned managers of cooperatives that had succeeded in the first round REA loans. He asked them for copies of their final applications. He also contacted REA and kept loan reviewers informed of our intentions even before Unilec's made its formal application.

Mr. Widder also tapped NRECA's Manager of Economic Development Dan Kamerman for help with an early assessment of the project. Dan made a preliminary visit to Sawmill Center and the project site. Later Mr. Kammerman returned heading a special project resource team. The resource team included NRECA business development staff and consultants, representatives from the Pennsylvania Rural Electric Association and Unilec staff. The team's meetings with Sawmill Center officials and its subsequent report helped us sharpen project objectives. We met with Sawmill board members and staff in follow-up work sessions. This culminated in the filing of a full application on August 14, 1989.

Some months later the notice of approval from REA caused excitement and anticipation among Sawmill board members and crafters. It also prompted press/media attention to Unilec's new and "unusual loan program." More importantly Unilec engendered a productive working relationship with the Sawmill Center as a co-op member. Last year Mr. Widder was invited to join their board of directors.

Since its inception, the Sawmill Center was dormant during the winter months. This year was the first year that the Sawmill Center conducted year round operations.

The Business Plan Lights the Way

So far Unilec has packaged three approved projects under the zero interest loan program. We assembled quite a bit of material for each loan package. In the end we developed an approach that we think "covers the bases."

Our application document has two main parts:

The first part contains a narrative description of the project plus all of the required REA forms and certifications. The cooperative prepared these documents.

The second part is a formal business plan. The Small Business Development Center (SBDC) at Clarion University of Pennsylvania prepared business plans for each of the three projects we submitted to REA.(7)

The Clarion University SBDC worked closely with us on each project. Several of their graduate students "burned the midnight oil" with us as we prepared each project package. They made it possible for us to send along the complete business plan as an attachment to our formal application.

Each of these business plans was developed with the project in mind. This helped us to define and understand the project for ourselves and the REA. This strategy not only bolstered our chances of approval of the project but it also helped us clarify in our own minds the worthiness of the project activities and financing arrangements.

Here is a summary of the other two approved Rural Economic Development loan projects developed by Unilec:

The Timber Line. In February of 1990 we applied for a loan on behalf of small hardwood furniture manufacturing company. The company wanted to move to a larger plant facility and expand its operations. The site they had selected was an abandoned factory building on Unilec lines ideally suited to their expansion plan. We worked closely with The Timber Line, the Clarion University SBDC and the local banks to package this application.

The Aviator. In December of 1990 we sought a loan for the regional airport authority. The authority needed funds to remodel and reopen the airport restaurant called The Aviator. The entire airport facility is located on cooperative lines and the airport is a major generator of economic activity in the region.

The Key to Making It Fly

Here is what we thought we needed to do in order to prepare a credible loan application "package."

1. We described the cooperative's place in the communities it serves. We are active on community and economic development planning boards and projects. Our projects are often the outgrowth of our community involvement. We believe that the best projects are presented as being a part of, or tied to, a comprehensive effort in the community. Here the cooperative is viewed as "getting the community in a condition" to attract new enterprise.(8) Examples: The Aviator's application stressed the importance of commercial aviation and the airport to the region's development. The Timber Line's application emphasized our participation in the regional hardwoods development group.

2. We offered a complete statement of cooperative and project objectives and the resources that both cooperative and recipient will bring to the project.

3. We required that a business plan with financials be produced for the project (the ultimate recipient) and reflecting proposed REA financial participation.

4. We demonstrated meaningful participation by the Unilec board in the selection and packaging process.

5. We insisted upon realistic expectations for the project. Economic development in our region is by the rural standard. Most often our expectation for jobs creation is in multiples of ten rather than hundreds.(9)

6. We determined exactly what our "risk participation" would be in each project. We made certain that sufficient fixed assets were secured as collateral to protect the cooperative in the event of default by the ultimate recipient.

We Let the CFR Be Our Guide.(10)

Just recently the REA rewrote and expanded the Code of Federal Regulations (CFR) which governs the application process. It published them for comment on July 30, 1991. The proposed changes reflect the REA's experiences with the program in its first two years of operation. The revised rules will not take effect until the comment period has expired and the REA has published the final rules.

We combed through the CFR very carefully to identify subject areas for the narrative and compliance areas for use of funds. The proposed new rules published in July 1991, offer a detailed framework for the application. The REA hopes to provide uniformity among the applications it will receive in the future. It will also introduce a point system to rank them.(11)

During its review of the application the REA considers specific selection factors:

1. Supplemental funds matched with loan project funds. Standard Form 424 sits atop every application for federal assistance. The form and the accompanying narrative should list the sources of supplemental grants, loans and project cash. It's our belief that an effective project, and the narrative that describes it, will show the role of REA loan funds as both supplemental and developmental.

Supplemental. It's clear now that the REA loans must be supplemented by other sources, i.e. the recipient, banks, other agencies etc. A basic question to address is: Will the REA loan funds be pivotal in making the project a reality?

Our application for the The Aviator showed the project in context. The airport authority had undertaken extensive renovations of the airport and runways. Funds for these projects and sources were identified. We also listed matching funds from the airport authority and the concession vendor which held the management contract for The Aviator.

Developmental. The question to address here is: "How does the project advance the overall economic development strategy of the cooperative and the region it serves?

In our application for The Timber Line, we described Unilec's long time involvement with the Allegheny Hardwoods Utilization Group (known affectionately as AHUG). Unilec is a member of AHUG. The co-op endorsed AHUG's efforts to promote end use manufacturing of hardwood products. Our region has a vast resource of quality hardwood. Our project is part of comprehensive effort to establish "value added" manufacturing of wood products in the region.

2. Unemployment rates. Unemployment data are available from your state employment office or bureau of labor statistics. In our narrative we compared the locality (site of the project) with the county, state and national unemployment averages. Our application also described the region's labor market in in relation to the project. We tried to match what we knew were local human resource needs to the developmental objectives of the project. Unemployment, sometimes difficult to quantify, should be discussed where relevant.

3. Per capita income levels. We obtained the latest per capita income levels for the project area through Pennsylvania's state data center in Harrisburg. It's called the Economic Development Information Network or EDIN. This is a useful resource for comparative income data. Other states operate such data centers. Unilec even has an computer E-mail address on EDIN. Our applications provide authoritative data on per capita income levels. When the data is organized, clearly presented and attributed to an authoritative source (i.e. census, data center) it lends well to meeting this selection factor.(12)

4. Jobs creation. We outlined "jobs creation" results of the project in a systematic way. We presented tables which outlined the number and types of new jobs that would be added by the project. We offered concrete measurable projections for one, two and three years including job titles and estimates of compensated hours.

5. Improve marketable skills of work force. Our applications offered several unique opportunities to describe the skill levels that would be enhanced by the project. In the case of the Sawmill Center we pointed to nearly a hundred participating crafters who were already marketing their products through the center. We included a training component in the proposal and a means to support start-up businesses in a variety of local crafts and skills.

6. Rural preference factor benefiting small communities. This has its origins in the Rural Electrification Act itself. The Act and subsequent regulations define "rural" as a community having 1,500 population. As it happened each of our projects were located on Unilec lines and in communities with comparable population levels.(13)

7. Endorsements or sponshorhips. We sought project endorsements from many individuals, businesses, customers, patrons, lending institutions, government agencies, chambers of commerce, economic development agencies. While we developed a "model letter of support" for associated organizations, we encouraged our supporters to describe their particular relationship with the recipient and the importance of the project from the supporter's perspective. Some 30-60 letters of support accompanied each of our applications.

8. Projects that are operated by not-for-profit or employee-owned enterprises. Two of our projects were with nonprofit entities. In rural communities nonprofit organizations can be among the major economic entities and employers.

9. Profitability or long term success of the project. The REA is looking for projects that have a solid likelihood of success. This will have continuing emphasis. The revised (proposed) rules state that "REA must select Projects that will result in long term economic development or job creation in rural areas. Second, REA as any other lending institution, must consider factors that relate to the ultimate recipient and indicate the likelihood of success. An example of such a factor is the ultimate recipient's business plan."(14)

Data supporting the "likelihood of success of the project" can be offered in a systematic way using the business plan.

10. REA borrower's cushion of credits payment record. If your cooperative has an active credits payment record, it's a positive selection factor. It may offer an advantage over other applications in the review period from co-ops that may not have a payment record.

11. Management capacity and financial situation of the REA borrower. If you have a question about the REA's view of your financial situation with respect to the rural development loan program, seek clarification from the REA reviewers prior to filing an application.(15)


The REA tells us that among the weaknesses in applications they receive are:

- Requesting loan but not including financial statements or showing a specific plan for use of funds.

- Providing little information on the nature of commitments of supplemental sources of funds for the project.

- Failing to define loan terms and agreements covering transactions between the borrower and the ultimate recipient (project).(16)


Quality and completeness still mean something. Whatever the merits of our project, we earned high marks from REA reviewers for the quality and completeness of our project narrative. It omitted few details. It followed a logical sequence which directly addressed the selection criteria described above.(17) Each of our applications was organized in a computer word processor and printed on a laser printer for readability and polish.

Here are some other strategies we employed to strengthen the project narrative we submitted to the REA.

1. The application cover sheet. The cover of our application contained a one paragraph summary of the entire project. The paragraph summarized the ultimate recipient's objectives in creating the project. It listed Unilec's objectives in sponsoring the project. It also summarized the project in the context of overall community objectives for economic development.

2. The board resolution of support. The text of the resolution reflects the board's understanding of the nature of the project and the cooperative's obligations. We also wanted the board resolution to demonstrate that the Unilec board of directors played an appropriate role in the selection and packaging process.

3. Economic and demographic data. We provided specific data about the township or municipality. The data we submitted went beyond the minimum requirements of the regulations. Our project for the local airport authority presented extensive economic and demographic data. We cited recent studies of aviation in Pennsylvania and a special study of the airport and its role in the future of the region's economy. Maps, tables, and illustrations can be far more effective than a straight narrative statement of economic and narrative information.

4. Risk participation. Our application defined the co-op's risk participation to assure the understanding of all participants in the project.

5. Borrower and Project Objectives. In bullet fashion we opened this section with the words "United Electric Cooperative has the following objectives with respect to this project:" We listed specific objectives. This was followed by a section headed by: "The Timber Line has the following objectives with respect to this project:"

6. Borrower and Project Resources. In bullet fashion we enumerated the resources identified for the project. We realized that we could develop quite a long list of resources committed. The first resource of course is cash. We listed in table form the various sources of supplemental funds in relationship to the REA request. However, we went further to identify additional resources, such as technical assistance, personnel, and in-kind contributions. We also gave a full accounting of what the ultimate recipient would bring to the project.

7. The Business Plan (Attachment). REA did not require the submission of a formal business plan with our three applications. Nevertheless, we submitted one for each project. The REA proposes to make this a required component of for future applications.(18)


The Rural Economic Development Financing Program is an excellent opportunity for small and medium size cooperatives to support economic development in their service area. We're convinced that these co-ops can have success in packaging zero interest loans if they know what is needed and where to get help with packaging.

You may be ensure about the packaging process or your co-op's capacity to do it. There are lots of folks in local development agencies and within the national and statewide rural electric associations that can help.

Don't be intimidated by the "the regulations." The guidelines are not as difficult to follow as you might think, and the new rules offer even more clarity and guidance as to what the REA expects.

The compilation and writing of the application can take considerable time and effort. In the end it may be a solitary task assigned to one person. The person(s) assigned to coordinate packaging needs the support of the general manager and full cooperation from the ultimate recipient in assembling all that is required.

A person ideally suited to this task might have some knowledge of loan packaging and economic development in the community. The job should be assigned to someone with requisite writing and organization skills. The financial and credit analysis should be handled by someone experienced in loan review.

We have found that it is helpful to develop a master checklist of application components and narrative sections. Each is checked of as it is completed. At a glance the coordinator can know the status of the application.

Once the word is out about the program you will be contacted by persons and companies interested in obtaining a zero interest loan. Some co-ops have created questionnaires and intake procedures to handle these requests. It's best to withhold a detailed questionnaire until you are certain that application is eligible under the rules and has a reasonable chance to advance in the process. Discourage ineligible or weak projects immediately.

Additional programs for direct cooperative economic development loan packaging are in the wings. More cooperatives will take a direct hand in filing or sponsoring applications for economic development. Co-ops will be involved in the creation of infrastructure in their service territories that includes but is not limited to electric service.

More co-ops are engendering "management capacity" in the area of economic development and loan packaging. The rural electric world even has it's own National Rural Economic Developers Association that rural electric co-ops can join.(19) With over 160 approved zero interest loan projects approved the rural electric utilities have demonstrated their organizational skill and resourcefulness. The program is a genuine opportunity to improve the economic future of our rural electric communities.

The zero interest loan program is still shaping its delivery system to make it more responsive to rural telephone and electric systems. REA and rural electric borrowers feel that it is a small but very critical financing system directly accessible to them to use to strengthen their local economies.

If you would like more information about Unilec's economic development loan strategies we have placed our notes into a series of Hypercard stacks. These note stacks offer ideas on packaging from various periodicals, the REA rules, and our experiences in packaging loans. The stacks are offered as a companion to this edition of Management Quarterly. Contact Unilec for a disk with the these note stacks.(20)


(1)The REA plans to rename this initiative as "Rural Economic Development Financing Program" to distinguish it from several new programs created to provide economic development assistance to REA borrowers (Reference: 7 CFR 1703, Proposed Rules 7/30/91, page 36018). (2)"Pennsylvania, The east expands while the west languishes." USA Today, August 5, 1991. (3)Unilec Member Attitude Survey, AHP Associates, (Dr. Dennis Hein: April, 1989). (4)An Economic Development Professional or EDP is someone who specializes in packaging economic development loans among other things. (5)These regulations were previously numbered as 7 CFR 1709, Part B. However on September 27, 1990 the REA changed the designation of this rule from 7 CFR part 1709 to part 1703. (6)United Electric Cooperative's Sawmill Center project was featured in a special economic development video produced by NRECA: The Future Is Us, (Washington, D.C.: NRECA Communications Department) 1989, Phil McMartin, Audio Visual Production. (7)SBDC's may be found at a local college or university. They help small businesses with business plans, incubators, training, financial advice, and technical assistance with loan applications. Their services are usually free. (8)"Rural electric co-ops light industry's way--Utilities showcase rural advantages--An Interview with Dan Kamerman, NRECA" Plants, Sites and Parks, January-February 1991, p. 50. (9)op. cit. "Rural electric co-ops light industry's way--Utilities showcase rural advantages." (10)For the uninitiated (and there are a few) CFR is the acronym for "Code of Federal Regulations." (11)Federal Register, 7 CFR 1703.28 "Applications", Tuesday, July 30, 1991 Vol. 56 No. 146 (Washington, D.C. REA) p. 36021. (12)The REA in its latest proposed rules says that henceforth it will obtain county, state and national unemployment and per capita income figures from its own data sources. Merely indicate the county in which the project will be located. Federal Register, 7 CFR 1703.28, 7/30/91, p. 36025. (13)Section 13, Rural Electrification Act., also 7 CFR 1735.2, "Definitions" Also, "Definition of |rural' Is in the Eye of the Beholder" Plants, Sites and Parks, January-February 1991. (14)op. cit. Federal Register, 7/30/91, p. 36016. (15)One additional criteria has to do with "Demonstration Projects". Consult the CFR for more information. (16)REA Rural Economic Development Conference, Presentation given by Blaine Stockton, Jr. Assistant Administrator Management REA and Mark Wyatt Rural Economic Development Coordinator for REA (Denver, Colorado - Friday July 12, 1990) (17)op. cit. Federal Register, 7/30/91, p. 36021 "Quality and completeness" will earn an application up to 10 points if the new point rating system is adopted. (18)In proposed revisions to the application process the REA will require submission of a business plan (it will earn you up to 20 points) Reference: 7 CFR 1703.17 (C) (14) Federal Register, Tuesday July 30, 1991 Vol. 56 No. 146 (Washington, D.C.: REA) p. 36021 (19)Write to the National Rural Economic Development Association, Executive Office, 1007 Todd Street, Cameron, MO 64429 or phone (816) 632-1492 for membership and dues information. (20)Write to "Unilec Economic Development Stacks," c/o John Lacny, P.O. Box 688, DuBois, PA or call 814-371-8570. You will need an Apple Macintosh computer running Version 2 of Hypercard.

John F. Lacny, CREC is Manager of Member Services at United Electric Cooperative. He earned his bachelor's degree in political science at St. Francis College in Pennsylvania and a master's degree in government at the University of Maryland. John serves on many boards and committees such as the Management Quarterly Advisory Committee and the Council of Rural Electric Communicators, with which he has played a major leadership role.
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Title Annotation:Rural Electrification Administration
Author:Lacny, John F., Jr.
Publication:Management Quarterly
Date:Sep 22, 1991
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