Rural business expansion tripped up by lack of comparable sales that banks need to justify loans on balance sheets

The proposed Maine Grains expansion would include spaces for
local startups. (Photo of artist's rendering by Ryan David Brown, WSJ)

Rural towns often lack valuable real estate, which has a widespread impact on their ability to grow, reports Ruth Simon of The Wall Street Journal. Simon's prime example is Maine entrepreneur Amber Lambke, who launched Maine Grains in Skowhegan, pop. 8,700. Maine Grains' success helped invigorate Skowhegan's economy, but it has hit a financial and uniquely rural economic block, Simon reports: "Lambke wants to construct a new building on the empty lot next door but has run into a problem impeding economic development in rural communities across the U.S.: The new building would cost $7.4 million to erect. When completed, it would be worth $2.4 million, according to an appraiser brought in from Boston by a local bank."

Skowhegan (Wikipedia map)

Ines Polonius, chief executive of Communities Unlimited, a nonprofit lender and development organization in the rural South, told Simon that real-estate collateral "is the number-one barrier to any rural business," because there are few if any comparable sales to determine value, which a lender would put on its balance sheet as an asset to support the debt.

"One problem with the appraisal gap is that it doesn't account for a project's potential impact, said Rob Riley, president of the nonprofit Northern Forest Center, which recently launched an impact investing fund in part to overcome the appraisal gap hindering rural residential-property redevelopment," Simon reports. "Appraisals don't determine whether a business can repay a loan, but they give banks comfort that they will be protected if things don't work out as planned. In valuing the Maine Grains project, the appraiser cited its location 'in a tertiary market' as a reason not to move forward. Other concerns were economic: rising interest rates, inflation and worries about a slowdown."

To fill the gap of comparable sales and potential customers, "Some developers have used state and federal tax credits to revitalize old mill buildings and create housing for people moving from big cities, creating momentum for other economic development, said Dave Eldridge, regional vice president for Kennebec Savings Bank, which is trying to help Maine Grains secure financing," Simon explains. "But Lambke's project is new construction. It is also smaller than many of these types of developments; Skowhegan is nearly an hour from Bangor and even farther from Portland. Commenting on rural financing, Eldridge told Simon, "It's almost impossible to take the 'build it and they will come' sentiment. It really has to be: Get them to come, and then you can build it."

Anne Ball, program director of the Maine Development Foundation, told Simon that such challenges will grow as inflation widens "the gap between the cost of new projects and the value of existing properties," Simon writes.