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<br />~. <br /> <br />Discussion <br /> <br />. <br /> <br />Financial Policy #5 - Collateral for Construction Fund and Severance Tax Trust Fund <br />Perpetual Base Account Loans (attached) identifies suggested collateral requirements for both public <br />and private entities interested in CWCB water project loans. The Procedure section of the policy <br />states: "Collateral types will be evaluated and taken in priority until sufficient security is established <br />for a specific loan." From Board discussions at the March 2004 Board meeting, the Board is interested <br />in defining the term "sufficient security" for individual borrowers and new entities. <br /> <br />The policy revision (shown in bold on page 2 of Policy #5) suggests a value for sufficient <br />security for individual borrowers and new entities, as well as a definition of a new entity. These two <br />items will be the focus of the Board's discussion. <br /> <br />Note: The staff and Board have previously referred to collateral values in terms of Appraised <br />Value of the collateral divided by the Loan Amount (Appraised ValuefLoan). Financial institutions <br />typically refer to this ratio as Loan/Appraised Value. For comparison purposes, this memo will <br />include the typical financial institution format with the previously used CWCB format in parenthesis. <br /> <br />Staff has researched collateral practices and requirements with a randomly selected financial <br />institution (the Bank) that makes individual farm loans in the South Platte drainage basin. When <br />evaluating agricultural loan applications the Bank considers collateral with a Loan/Appraised Value of <br /><50% (>200%) to be low risk and a ratio of>65% (<154%) to be high risk. The Bank will consider. <br />ratios of up to 75% (as low as 133%) but only for the very best borrowers. Given the fact that the <br />CWCB consistently recognizes the importance of agriculture to the State's economy, and is committed <br />to sustaining the vitality of that economy through lower interest rates, it would be reasonable to <br />consider 75% (no less than 133%) as our standard Loan/Appraised Value ratio for individual <br />borrowers and new entities. <br /> <br />Relative to the definition of a new entity, we can refer to our Financial Policy #4 regarding a <br />borrower's creditworthiness. The policy requires that the borrower provide copies of the three most <br />recent audit reports or financial statements. Any borrower that does not have three years of financial <br />history could therefore be defined as a new entity and thus be subject to the same levels of collateral as <br />required for individuals. <br /> <br />Recommendation <br /> <br />Staff recommends that the Board adopt the attached revised version of Financial Policy #5. <br /> <br />. <br />