Legal Perspectives

Financing Your Biodiesel Project: Complex Project? Wait Until You See the Loan Agreement
By Ron Vaske | October 13, 2006
Biodiesel plants may employ varying technologies, feedstocks and ownership structures, but all projects require one common and important input: money. Your biodiesel project will not succeed if you don't secure funding, both for financing initial start-up and construction costs, as well as ongoing working capital needs.

Your project-financing package will likely involve millions of dollars, and your lender's loan documents will reflect the size and complexity of this significant transaction. Typically, a loan agreement will govern the basic terms of the credit facilities, including conditions to funding, loan covenants, and your representations and warranties. You will need to engage legal counsel experienced in complex financial transactions to assist you with the negotiation of the loan documents and to provide the necessary legal opinions required by your lender.

Typical conditions to debt funding include:
--Delivery of a real estate title insurance commitment, ensuring your lender a first mortgage on all of your real estate

--Confirmation that no other party has a prior security interest in, or lien against, any of your assets

--Proof of authorization of the transaction by the appropriate people (usually your board of directors)

--Delivery of legal opinions regarding enforceability of the loan agreements, authorization of the transaction, conflicts with applicable law and other agreements, receipt of required permits and governmental authorizations, and other matters

--Payment of lender's fees and costs related to the transaction, including an origination fee and other lender fees, title insurance fees, uniform commercial code (UCC) search fees, your lender's legal fees, and other costs

--Delivery of a survey of the property; copies of required permits (assigned to the lender to the extent possible); copies of significant contracts, including the construction contracts; and proof of required insurance coverage

--Delivery of collateral assignments of each significant contract to the lender

In addition, construction loan advances will be further conditioned on disbursement through an acceptable disbursing agent (often the title insurance company) to ensure that no mechanic's liens attach to the project real estate. Revolving (or working capital) loan advances will typically be further conditioned on the satisfaction of a borrowing base formula that factors in the value of your working capital assets (inventory and accounts receivable).

Typical loan covenants include:

--Periodic delivery of financial information-usually quarterly or monthly interim financial statements and annually audited financial statements, as well as certain production and progress reports

--Satisfaction of certain financial requirements, such as an appropriate debt service coverage ratio, debt-to-equity ratio, tangible net worth ratio and others

Your lender will expect you to include certain representations in the loan covenant and warrant that these representations are true. These representations and warranties will involve your entity's legal status, authorization of the transaction, other agreements and obligations, and various other factual matters. You will want to carefully review these representations and warranties with your legal counsel.

Working through the financing process can be challenging, but nonetheless, it is an important component of your project's success.

Ron Vaske is a partner in the Financial Institutions and Commercial Lending Practice Group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy project finance throughout the country. He can be reached at (612) 371-3211.
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