A Flood of Funding

Although it seems that the American economy may be on the road to recovery, lending markets are still tight. In the absence of traditional forms of financing, a variety of federal funding options may assist ethanol producers in moving their projects forward.
By Erin Voegele | November 11, 2009
In many ways, 2009 was a year in which unprecedented federal funding began to flow into all sectors of the U.S. economy. And, while a great deal of attention was focused on the funding initiatives included in the American Recovery and Reinvestment Act, 2009 also marked the commencement of the energy provisions of the 2008 Farm Bill.

In early May, President Barack Obama directed the USDA to expedite the biofuels provisions included under the energy title of the 2008 Farm Bill. While the USDA did meet its 30-day directive and began to award funding under some of these programs during the second half of the year, the bulk of the funding assigned will be awarded over the next several fiscal years.

Although a wide variety of these funding programs are applicable to those in the ethanol industry, many are oversubscribed. For this reason, it is important that potential applicants effectively match their project to the appropriate source of funding and work diligently to complete the application process in order to increase the chance of receiving an award.

Getting the Right People Involved
John Eustermann and Debra Frimerman, attorneys with Stoel Rives LLP, who have extensive experience with federal funding, programs, advise their clients to bring in third-party experts during the initial stages of the application process for federal grant and loan guarantee programs.

"Obviously, as lawyers, we like [our clients] to contact us early when considering a project," Frimerman says. When a client first approaches her with a project for which he or she wants to seek federal funding Frimerman says she is able to provide that client with a list of federal funding programs for which they may be eligible.

Law firms such as Stoel Rives are also able to help clients assess staffing needs in order to determine whether they have the ability, expertise and manpower needed to complete an application in-house, or if it is more appropriate to bring in a third-party consultant or grant writer. "I think getting the right people involved early makes sense," Frimerman says. "It doesn't make it any more expensive. In fact, it may save you money." Involving the correct people from the beginning makes it less likely that a potential applicant wastes time and money applying for a program that cannot be used to fund a project.
Eustermann agrees that a certain amount of expertise is helpful in navigating the application process. One significant benefit of adding experts to your application team is that these professionals often have an open line of communication with those who are administering the federal funding programs. "We talk to those people-and try to talk to them regularly," Eustermann continues. This regular communication makes it easier to more accurately gauge which types of projects are likely to be awarded funding under a particular funding program.

In addition to legal expertise, it may also be appropriate to bring in a grant writer to assist with data compilation. "A lot of times, when you are working to develop a project, it can be a bit disruptive to pull people out of your staff to have them work on applying for a new grant," Eustermann says. This is especially true of small start-up companies, where those staff members may already be working on vital off-take or action agreements. Meeting with a third party to lay out expectations and cost estimates is a good move for anyone looking to apply for a federal funding program, Eustermann says. "Then you can make a solid business decision as to whether you are going to employ those folks to assist you," he continues.

"It's also nice to have an objective third party to help ask questions-sometimes the tough questions-and help that dialog to get the right information into the application," Frimerman says. These third-party individuals can often be better at assessing exactly how a particular project fits the requirements of the program and how the different elements of that project should be presented in the application.

Grants Versus Loan Guarantees
The energy provisions of the 2008 Farm Bill include both loan guarantee programs and competitive grant programs. According to Eustermann and Frimerman, there can be different considerations that need to be made during the application process for each type of funding program.

From a grant perspective, you need to evaluate the likelihood of being awarded that grant, Eustermann says. Although grant funding generally does not need to be paid back, the application process can often be time-consuming and expensive. Potential applicants really need to look at their proposed project to see if it's a good fit for a specific program before beginning the application process, he continues.

One way to do this is to look at prior solicitations for a particular program and what types of projects resulted in a funding award. In the event funds are being awarded for the first time under a new program, it can also be possible to search for similar programs that existed in the past.

"You can try to do a sort of apples-to-apples analysis to find out if you are even eligible," Eustermann says. "If so, then it's also a matter of doing a cost/benefit analysis of the costs associated for applying for a grant relative to the benefits of the grant-if you get it." This includes asking yourself if it's necessary to get the grant, or if you are just applying to ease cash flow burdens. "You need to make sure that as you layer up financing on your project, that you can justify why each layer is involved," Eustermann adds.

"People also need to look at where they are in their project, what they need, what's really feasible, and be realistic about whether they fit into [a specific] program," Frimerman says. "A lot of these programs have been very oversubscribed." This makes it even more important that applicants are realistic about how their project fits into a funding program, and if it's worth the time and expense to apply.
In the arena of loan guarantee programs, Eustermann says that most of his assistance has been in the form of preliminary work, such as reviewing application materials. "Essentially, evaluating what we think of [a client] applying as part of a mix to their overall strategy in bringing a project online."

When considering applying for a loan guarantee program, or any sort of federal funding, Eustermann says it's important that potential applicants understand that a project needs to "pencil out" any sort of loan guarantee or grant. This means the applicant needs to estimate whether a proposed project will be profitable, even in the absence of federal funding. "I think it's important for clients to run several scenarios; one without any sort of incentives and then several other scenarios that lay out, based on probability, if they are awarded a grant, loan guarantee or whatnot," he continues. He stresses that it is not a wise idea to create a project model that banks on getting any form of federal funding.

Frimerman notes that part of the criteria of loan guarantee programs is that the project must be expected to be profitable enough to pay back the loan. "The loan guarantee isn't free money from the government," she says. "They are making it financeable."

In a loan guarantee program, the federal government is essentially co-signing a loan. "The guarantee certainly makes the [financer] and the project more comfortable, but overall, it doesn't necessarily change the metric so much," Eustermann says. "In simple terms, the project has to pencil. It has got to be a workable model, like you would have worked it 10 years ago, or like you would work it 10 years in the future."

Although there are many potential benefits of a loan guarantee program, including the likelihood that the borrower can secure a lower interest rate, there may also be more restrictions that must be met when compared to traditional forms of financing. These potential benefits and challenges must be considered before the application process begins.

Application Mistakes
Frimerman says that a common application mistake she sees is when entities try to pursue funding before they are really ready. "People have been-and are-eager to apply for these programs right now," she says. "However, they may just not be ready for the loan guarantee. You need to be ready to go get financing, just like you would be ready to get debt financing from a bank." Although many people may be eager to meet submission deadlines, they may not have a project that is developed to the point it would qualify. "It's better, I think, to wait to be ready for that, and make one good go at it as opposed to going through all the expense and time required to complete an application when you really just need to wait a bit longer."

"It's not like there are a ton of banks out there that are lending money at this point," Eustermann says. "So, [potential applicants] tend to get a little bit out over their skis and want to start work on the application when they may not be fully ready." This can be problematic because it will be much more difficult to find a primary lender that agrees to provide a loan for the project, and that lender needs to be onboard before the application is filed.

Frimerman also says she commonly sees confusion over application deadlines for the 2008 Farm Bill energy programs. "One thing people are getting confused about is that there needs to be an open solicitation to apply," she says. However, the deadlines also tend to be rather tight. "People need to keep their eyes out, because they are quick deadlines," Frimerman says. "If somebody knows that they want to apply for a program, they should look at last year's solicitation and try to gather the necessary materials so they can be ready."

To do it right, Eustermann cautions that compiling the paperwork and necessary materials takes a minimum of about 100 hours of work. It's also a good idea to study instructions that were included in a prior solicitation and compile your data and information accordingly, he says. Although there may be minor changes in application requirements year-to-year, the basic information required of applicants is likely to be similar. EP

Erin Voegele is an Ethanol Producer Magazine associate editor. Reach her at evoegele@bbiinternational.com or (701) 373-8040.