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North Bay Business Journal

Monday, March 24, 2014, 6:30 am

Underground fuel tank loan program gets boost from state

Special loans, grants for removal and modernization

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    NORTH BAY — California lawmakers have bolstered a state-sponsored program to finance the upgrade and removal of underground petroleum storage tanks and related systems, highlighting an ongoing need for that work in areas including the North Bay, according to the program’s regional administrator and others.

    Known as “RUST” — short for “Replacing, Removing or Upgrading Underground Storage Tanks” — the program offers low interest-rate loans and grants generally tailored for smaller, independent gas retailers who cannot otherwise afford those requirements.

    While RUST’s interest rates ticked upward when steps to support the fund’s long-term viability took effect on Jan. 1, the program continues to offer relatively low rates for smaller firms facing steep costs to upgrade their systems, said Mary Jo Dutra, chief executive of the program’s regional administrator, SAFE-BIDCO.

    “The reason this program is so great is that it allows you to continue your operation in a more competitive way. It gives them the ability to stay open, and it helps the environment,” said Ms. Dutra, whose Santa Rosa-based firm underwrites and administers a number of specialty financing programs throughout the state.

    Launched in 1989 and currently operated under the State Water Resources Control Board, the RUST loan program has funded 658 loans valued at more than $123.5 million across California through June 2012, according to the latest annual report from the water board. Borrowers in the six-county North Bay area have accounted for more than 6 percent of those loans by number, with further funding approved through smaller-value grant programs launched in 2000 and 2004.

    More than 78 percent of that borrowing by dollar volume was prior to 2004, when small gas retailers and similar businesses faced a significant expansion of regulation designed to fortify underground storage systems against leaks. The California State Legislature has expanded the program a total of four times, typically in step with the approval of new federal and state regulations concerning water and air quality.

    “The program had a real big value at the time the state was changing the rules for a lot of small tank owners,” said Hans Herb, whose Santa Rosa-based law practice specializes in fuel industry issues in California, Washington and Arizona.

    Consolidation throughout the industry, including the advent of large-scale “hypermarketers” purchasing and selling huge volumes of fuel at a discount, is among the factors that lowered the usage of RUST in recent years, Mr. Herb said. An independent analysis prepared on behalf of the water board in 2012 found lower borrowing levels versus grant awards to be steadily eroding the program’s capital reserve, projected to be fully depleted around the time of the planned sunset of the program in 2016.

    Yet the California Legislature and others argued that the program has demonstrated a continued usefulness, approving the shift of $8 million in funding to recapitalize the RUST fund and a tweak to prioritize loans over grants made effective on Jan. 1. The program will now sunset in 2022.

    One area where the program stands to make a continued impact is in California’s remote rural communities, where a gas station project could well represent the single largest construction effort in the region. Many of those facilities have put off those projects as new regulations loom, risking a shutdown, Mr. Herb said.

    “If you cut off fuel to these small towns because they can’t afford air quality and, in some cases, water regulations — it’s a big problem,” Mr. Herb said. “You may literally have to drive 100 miles to visit the nearest gas station.”

    For SAFE-BIDCO, which joins other “financial development corporations” around the state that administer RUST loans, that continuing usefulness was also made evident through program’s role in funding necessary work identified during a recent wave of gas station acquisitions, Ms. Dutra said.

    “There was an increase a couple years ago in its use, because a lot of operators sold to get out of the business,” said Ms. Dutra, whose firm did initial underwriting and packaging for a dozen loans across its service area in a single year. “All of those 12 needed work.”

    A single borrower is eligible for up to $750,000 in financing through RUST, offered at a fixed rate for either 10 or 20-year terms. Interest rates are now half of the state’s general obligation fund rate — around 2 percent — versus a previous rate that ranged from below half-a-percent to around 1 percent.

    Those with 20 or fewer employees and sales under 900,000 gallons are eligible for up to $50,000 in grant funding through RUST, with the recent changes reducing the total fund volume eligible for grants from 33 to 22 percent.

    “It covers just about everything from the storage of the fuel to out of the nozzle,” said J.T. Marcell, loan analyst with the state water board.

    It is no longer a necessity that borrowers fail to qualify for traditional bank financing, though Mr.Marcell said that the ability of a small operator to obtain a typical loan for underground storage tank-related work was already tenuous.

    “You’re dealing with something that nobody wants to deal with — chemicals. But it’s something we need on a daily basis,” he said. “That’s not the sort of loan you’d be able to get easily from BofA.”

    There are 1,235 permitted underground storage tanks in the six-county North Bay and 455 active cleanup sites, according to information from the water board. More than half of those cases are in Sonoma County, where the Department of Environmental Health and Safety oversees cases requiring cleanup.

    “They can cause a potential threat to water quality — groundwater is a huge resource for drinking water in Sonoma County,” said Christine Sosko, the county’s environmental health and safety director.

    Underground storage tanks were once a common practice for a variety of commercial uses, and discovery of old tanks by a new property owner is not uncommon. Borrowers — including residential property owners — are eligible for RUST loans to fund removal and remediation if those tanks were used to store petroleum products such as fuel or oil, Mr. Marcell said.

    Yet other uses can also be eligible for RUST financing or grants, including a case in which a printing company whose historic underground storage of non-petroleum ink was found to have a petroleum product elsewhere in the production process, he said.

    “The program is very accommodating,” he said. “It’s not just a loan for small business — it’s a way to protect our natural resources and the environment.”

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