Policy 1805: Internal Loans: Construction and Major Renovation Projects

ubject Area: Debt Financing
Responsible Office: Financial Services/Budget Office
Sponsor: Chief Financial Officer
Originally Issued: November 1986
Revised: May 1999, August 2000, October 2006, January 2008, January 2010, October 2022
Refer Questions To: Capital Budget, capital-budget-request@uchicago.edu  

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Purpose: To establish procedures for obtaining internal loans for certain purchases of construction, and major renovations projects.

Introduction

The University from time to time may provide resources for internal financing of construction, and major renovation projects.

Policy

1. Reason for Internal Borrowing– Internal lending will be considered when the availability of current-year unit resources are not sufficient for a) construction, and b) major renovation projects.

2. Limitations on the University’s Ability to Make Internal Loans– Internal loans are subject to the availability of University capital capacity, as determined by the Chief Financial Officer.

3. Project Criteria – Internal loans will be considered for projects that meet the following criteria:

– minimum project amount of $3 million

– minimum asset useful life of 10 years (see Policy 1004.2 Depreciation of Land Improvements, Buildings, Equipment, and Books https://policies.uchicago.edu/financial-policies/1004-2-depreciation-of-land-improvements-buildings-equipment-and-books/)

               – credible business plan supporting repayment of principal and interest   

4. Principal and Interest – Amortization of internal loans will commence upon project completion. Principal will include any interest capitalized on the project prior to completion. Amortization of principal will be monthly over a term equaling the lesser of:

– the useful life of the asset or

– 30 years.

Interest will be charged monthly, commencing the first month-end period in which the project account has a net cash overdraft, at a rate equaling:

– 1.50%, plus

– the 10-Year US Treasury Rate at the date of loan approval.

5. Review Process and Criteria for Obtaining an Internal Loan– Each unit seeking an internal loan must submit the following information on the “Internal Loan Request Form” application to the Budget Office detailing:

– Project budget

– Project funding sources other than the internal loan (if applicable) and net internal loan amount requested

– Project cash flow monthly schedule and completion date

– Strategic rationale for project

– Business plan for repayment of incremental costs within operating budget

The borrower’s request will be submitted for initial review and underwriting by the Budget Office and, if warranted, will be then forwarded to the Chief Financial Officer for final approval.

6. Internal Loan Administration– Once an internal loan has been approved, Financial Services will establish a separate account for expenses associated with the project. The borrower will be allowed to spend up to the amount approved for the internal loan. Internal interest will be computed and charged on the net cash overdraft in the project account as of month end. The borrower will be expected to pay the monthly interest charge plus a portion of the principal due each month as determined by the payment schedule set as part of the authorized loan.

7. Note on Grant Compliance – Internal interest cannot be charged to federal grants and contracts or to accounts that recharge their cost to federal grants and contracts.

Exceptions

Exceptions to this policy are discouraged and can only be approved by the Associate Vice President for Finance.