Internal Loan Policy for Capital Construction and Renovation Projects - Capital Lending Program FIN-TRE-VI-130
All University departments and operating units.
This policy describes the procedures for authorizing, granting and administering the Capital Lending Program, where such loans are made from the University’s internal cash liquidity resources, for qualifying projects. Qualifying projects include capital construction or renovation projects including, but not limited to, capital projects for which statutory authorization for external financing is not available and emergency repair and rehabilitation (“R & R”) projects.
Reason for Policy
This policy governs the extension of internal loans from the University’s working capital for the purpose of financing capital construction or renovation projects. As of the effective policy date, all financed capital projects will be subject to this policy, whether the project will be ultimately externally financed or not. All existing internal loans as of the policy date will be grandfathered and the terms of those loans will not be altered.
The objectives of the Capital Lending Program include the following:
- Provide a source of funding when campuses, schools, or departments cannot self-fund projects.
- Provide an alternate source of funding when the timing of receipt of gifts and grants would impede the progress of a strategic initiative.
- Promote efficient working capital management by generating a higher rate of return on University liquidity balances.
- Provide a source of funds for emergency R & R projects when state funding is not available.
- Ensure that internal loans will not be authorized without the borrowing unit and any campus guarantor submitting a fiscally responsible and achievable business plan in support of a timely repayment plan.
- Eliminate inequities in the cost of capital between University schools, units, and departments.
- Reduce interest rate risk taken on by schools, units, and departments.
A. Memorandum of Agreement
A Memorandum of Agreement (MOA) is required for all loan requests. Loans over two years in duration must be at least $750,000. Loans less than two years in duration should be for at least $250,000. This MOA will include a high level summary of the business plan, the terms of the loan (including loan repayment guarantees), and any other pertinent information relative to the project financing. The MOA will be executed by senior executives of both the Campus and University Administration.
B. Internal Loan Application Requests
Loan requests should be directed to the Office of the Treasurer and should be approved by the Campus Vice Chancellor/Vice Provost for Administration and Finance before submission. Formal requests will include the Loan Application (see Forms below) and Loan Agreement.
C. Maximum Amount Eligible for Internal Loans
The total amount of internal loans outstanding at any time shall not exceed 5% - 7% of the trailing twelve-month average balance of the University’s operating fund investment pool. Any variance from this guideline requires approval of the Treasurer.
D. Individual Loan Amount
See Appendix for amounts.
E. Maximum Loan Term
The maximum loan term is 25 years. All interest and principal must be paid back within this timeframe. Borrowers will repay loan principal and interest over a predetermined period of time through regular and recurring fixed charges to the borrower’s operating account. Each project will be analyzed to determine the most appropriate loan structure and term. The loan repayment term will not exceed the anticipated useful life of the asset being financed.
F. Interest Charges
Interest will be calculated on the loan balance beginning on the date on which the funds are deposited into the appropriate construction/project fund general ledger account. Interest will be calculated quarterly based on the weighted average quarterly outstanding loan balance.
-Loans 2 years or less: Variable Rate + 100 basis points*
-0-10 years: 4.25%#
-Over 10 years: 4.75%#
*Variable Rate will be based on Office of the Treasurer cost of borrowing at time of execution of the loan.
#Fixed interest rate. Once a loan is finalized, the rate on the loan will not change for the life of the loan.
The interest rate schedule for new loans will be evaluated for changes as changes in the external debt markets deem appropriate.
G. Debt Service Reserve
The borrower will maintain a Debt Service Reserve to 25% of maximum annual debt service (MADS) over the term of the loan. The Office of the Treasurer will also maintain liquidity balances so that the Capital Lending Program has a total Debt Service Reserve of at least 100% of MADS.
H. Loan Application Process and Agreement
All loan requests will include the following information:
- Detailed project description
- Amount of the loan being requested
- Source of funds available for repayment, specifically cash in hand if gifts or bequests
- Please provide a copy of last fiscal year end's Statement of Account, including those of IUF, if applicable, to show sources for repayment.
- Repayment period requested
- Billing/deposit account number
- Name of the Dean/Department Chair accepting terms of the loan
- Name of the Fiscal Officer to contact regarding accounting entries
- Bid dates for the construction project
- Date the construction project is estimated to be placed in service
- The estimated useful life of the project
- Preliminary approval of request by Campus Vice Chancellor for Administration and Finance or Vice Provost.
- Repayment source - source(s) of funds for principal repayment should be included in a pro forma cash flow/budget projection over the term of the loan. Such pro forma projections will be in a format prescribed and/or approved by the TREASURER and will include, but not be limited to, information required in the Project Credit Review and Financial Performance Requirements section of the University's Institutional Credit Guidelines (see Related Information).
I. Limitations on Use of Gifts and Grants
When a capital project will require the use of gift and/or grant funding, legally enforceable gift or grant agreements maturing in five years or less must be in hand prior to the approval and authorization of the project and related external financing or internal loans. Bequests or other deferred gift instruments, for which the receipt of gifts funds by the University are predicated on the occurrence of future events for which the dates of occurrence are uncertain or subject to change, cannot be counted toward the project financing cash flow requirements for the project being financed.
J. Early Repayment
Loans may be prepaid at any time without penalty.
K. Status Reports
A loan portfolio status report will be provided to the Board of Trustees on an annual basis as part of the fiscal year-end closing reports.
L. Capital Lending Program
An overview of the Capital Lending Program will be maintained as an appendix to this policy and will be updated as needed. The paper includes more detail as to the mechanics and strategy of the Capital Lending Program.
|Policy Interpretation||Donald Lukesfirstname.lastname@example.org|
|Policy Interpretation||MaryFrances McCourtemail@example.com|
|Policy Compliance||Gail Bourklandfirstname.lastname@example.org|
|Policy Compliance||Beth Hoffmanemail@example.com|
This policy was established on June 1, 2006 and updated in March 2016.