FINANCIAL RESOURCES

Like most organizations involved in economic development, The DTC and The Partnership are routinely approached by individuals seeking a grant to use for a business development project. Like most organizations involved in economic development, to our knowledge, there is no such thing.

Under some circumstances, a few of the various loan programs outlined below can be structured as forgivable loans, but the terms and conditions required to qualify for loan forgiveness will always have some compliance costs associated with them. Some individuals perceive Tax Increment Financing ("TIF") to be a grant of sorts, but even this is flawed thinking, since a business project which involves TIF will receive, at most, the amount of new taxes which have to be paid for a given number of years as a result of executing the project in the first place.

The financial resources outlined in this guide are, almost exclusively, programs which provide second-mortgage loans for projects which involve commercial lenders but which, for whatever reason, cannot be completely financed by them. (This gives rise to the term "Gap Financing," since the borrower is seeking access to one or more of these resources in order to close a gap in the finances available to cover their project costs.)

The financial resources described herein differ in one very important way: each of them has a different protocol for its use. Some of these sources can be tapped directly by the business owner, but most require the active involvement of a commercial lender, a local economic development staff person, or both.

The appropriate channel for pursuing these resources is indicated for each individual program. Additional questions about the appropriate uses for these funds, eligibility, and application processes, may be directed to The DTC or The Partnership.

COMMERCIAL LENDERS

Commercial lenders are the most important financing source for any project, and must be consulted before any pursuit of other financing sources outlined in this manual can be expected to yield results. There are several reasons why this is so:

• Most financing sources described in this guide take a second mortgage behind a commercial lender as collateral for their loans.

• Many of these sources deal exclusively with commercial lenders as their applicants and do not accept inquiries directly from potential borrowers.

• The majority of these sources follow the principle of "gap financing," meaning that they are need-based financing tools designed to be used when the availability of straight bank financing has been exhausted.

• The appearance of attractive interest rates from some of these sources is often offset by fees and compliance costs, making commercial lenders, often, the least expensive source of debt financing.

• The preliminary requirements set forth by commercial lenders are almost always adopted by the other sources described in the manual, so that the most sensible first inquiry is with a commercial lender in terms of identifying the task list for obtaining a loan.

For all of these reasons, persons using this guide to determine potential sources of public and quasi-public financing are strongly encouraged to make their initial inquiry through the commercial lender of their choice. A partial listing of commercial lenders in the area appears on the following page.

A Partial List of Commercial Lenders in the St. Cloud Area:

* designates an SBA Preferred Lender

LOCAL ECONOMIC DEVELOPMENT PROFESSIONALS

Because many of the financial resources outlined in this guide require either the explicit or implicit involvement of the economic development staff person in the project’s jurisdiction, entrepreneurs are strongly encouraged to consider these individuals to be their obvious second avenue of inquiry, after their commercial lender. Among other services, the appropriate economic development contact can identify the various steps necessary to obtain certain types of financing, provide basic counseling as to the appropriate mix of financing sources, and assist the entrepreneur in navigating the local-level compliance issues which need to be addressed.

The economic development professionals in the St. Cloud area are:
     Benton County: Nancy Hoffman, (320) 968-5071
     City of St. Cloud : Bruce Thielman, (320) 252-0880
     Stearns County : Bob Swanberg, (320) 685-7771

Individuals who are uncertain as to the appropriate economic development staff person to contact are encouraged to inquire with the Downtown Council (320) 259-8700 or The Partnership (320) 656-3816 or The HRA (320) 252-0880.

SBA LOAN PROGRAMS

7(a) Program

The SBA 7(a) Program is the primary business loan program which guarantees loans to small businesses that cannot obtain financing on reasonable terms through other channels. This program generally is used to meet the varied short- and long-term needs of small businesses. Lenders, not the SBA approve and service the loans and request SBA guaranty. The guaranty reduces the risks to the lenders, expanding their ability to make small business loans.

Loan proceeds from the 7(a) Program may be used for business start-ups, expansion, equipment purchases, working capital, inventory or real estate acquisition. Generally, the SBA can guaranty up to $750,000 of a private-sector loan; up to 80% of loans under $100,000 and 75% of loans over $100,000. Interest rate may not exceed 2.75 percent over prime on loans over $50,000. Maturities can extend to 10 years for working capital and 25 years for fixed assets.

Restrictions on use of 7(a) Program generally track with the over-arching restrictions of SBA’s mission:

• Borrower must qualify as "small business"
• No passive investment projects
• Must be independently owned & operated

For more information please call (320) 255-4842, SBA’s Minneapolis offices: (612) 370-2324, or one of the SBA preferred lenders.

The 504 program

This loan program is economic development financing specifically designed to stimulate private sector investment in long-term fixed assets to increase productivity, create new jobs and increase the local tax base.  This is done by providing long-term, low down payment, reasonably priced fixed-rate loans to businesses that have the highest probability of successfully creating new jobs and competing in the world marketplace.  Public policy goals are as follows: 

• Business district revitalization
• Expansion of minority business development
• Enhanced economic competition
• Restructuring because of federally mandated standards or policies
• Expansion of small business concerns owned and controlled by veterans
• Expansion of small business concerns owned and controlled by women

The 504 program has larger borrowing amounts and can have a more significant impact on the borrower.  To qualify for a SBA 504 Loan, a business is required to have the following:

• A net worth of less than $7 million
• A net profit after taxes averaging $2.5 million over the previous two years
• Operate as a for-profit business entity
• A private-sector lender commitment for up to 50% of project cost
• Provide an equity injection of 10%-20% of project cost
• Create/retain jobs to meet community development or public policy objectives 

Biggest advantage to commercial lender: SBA funds are in second-mortgage position, collateral exposure greatly reduced.

For more information please call Alexandra Blum, Executive Director,
Minnesota Business Finance Corporation (MBFC): (320) 258-5005.

(MBFC is the certified development company for SBA 504 loans for most of greater Minnesota.)

LowDoc Loan Guaranty Program.

Once a small business borrower meets the lender’s requirements for credit, the lender may request a LowDoc guaranty from the SBA. It is quick and allows lenders to take advantage of electronic loan processing.

• Further streamlines the making of small business loans
• Increases maximum loan amount to $150,000
• 80% guaranteed loan up to 100,000, 75% guaranteed between $100,000 and $150,000
• Response from the SBA within 36 hours of completed application, guaranteed

Note: The $150,000 limit applies to all outstanding SBA debt. This means that a firm with an outstanding balance of $65,000 on an SBA 7(a) guaranteed loan may only borrow an additional $85,000 under the LowDoc program.

• One page application
• Interest rates can be negotiated between borrower and lender
• Interest rates not to exceed 2.25% over prime for loans under 7 years and 2.75% over prime for loans 7 years and over

The purpose of the loan is to start or grow businesses, which must qualify as a "small business," meaning sales for the preceding three years can not exceed $5 million, and may not employ more than 100 people.

For more information please call (320) 255-4842.

MN DEPARTMENT OF EMPLOYMENT AND ECONOMIC DEVELOPMENT (DEED)

The programs offered by the state are designed in such a way that inquiries regarding their use should be channeled through the appropriate local-level economic development staff person.

Funding for these programs is limited and subject to large fluctuations with the changing political climate at the state legislature. As a general rule, use of DEED funds is highly competitive. Stringent criteria for job-creation and other forms of compliance will apply under each program. In addition, the state recently adopted a directive by which DEED funds may no longer be used for projects which do not pay a "living wage," currently defined as $8.00/hour with benefits or $8.71 if no benefit package is provided.

The advantage of DEED is that it has traditionally been very concerned about the viability of existing Minnesota businesses. DEED has worked very hard to maintain a strong industrial base in the state through a combination of aggressive pricing of their loan funds, close cooperation with conventional lenders, and thorough follow-up activities.

For more information about DEED or the programs they provide, call the East Central Regional Representative, Steve Sussman (651) 297-1164 or (800) 657-3858.

     Department of Employment and Economic Development   
    1st National Bank Building
    332 Minnesota Street, Suite E200
    St. Paul, MN  55101-1351

The Minnesota Investment Fund

The purpose of MIF is to create and retain high quality jobs with a focus on industrial, manufacturing and technology related industries.  All projects must meet minimum criteria for private investment (owners' equity); number of jobs created or retained and wage thresholds.  Loans for land, buildings, equipment and training are eligible.  Funds may also be used for infrastructure improvements.  The maximum award is $500,000 in one fiscal year. 

These funds are administered as grants to local governments which are then issued as loans to businesses. The funds are kept in a local revolving loan fund for subsequent projects. The principal advantage to the borrower is the below-market interest rate. The principal advantage to the economic developer is that the program capitalizes a pool of funds they can use more flexibly for local projects later.

• APPLICANT IS CITY OR COUNTY, NOT BUSINESS RECIPIENT
• Local Economic Developer negotiates and tracks job creation and wage goals.
• Program capped at $500,000 or 50% of project
• DEED usually packages deals larger than $100,000
• Terms and rates negotiated, always attractive
• Recipient reports job creation and wages semi-annually

For more information please call Carol Presley-Olsen at (651) 296-3898, or Steve Sussman at (651) 297-1164.

Small Cities Development Block Grant

This program is the state’s method of administering the US Dept. of Housing & Urban Development’s (HUD) Community Development Block Grant (CDBG) funds.

• APPLICANT IS CITY OR COUNTY, NOT BUSINESS
• Must meet one or more of three "Federal Objectives":

1. removal of slum and blight
2. "imminent threat" (e.g. flood damage)
3. benefit low & moderate income persons

There are four broad classes of application:

• Housing rehab
• Commercial rehab
• storefronts
• code violations, a.d.a. compliance
• energy efficiency
• Improvements to public infrastructure
• e.g., new water towers, sewer improvements
• typically funded under "imminent threat"
• Comprehensive rehabilitation of "target area"
• Area must meet 70% low & moderate income residents
• Commercial and residential properties and infrastructure projects within target area

Applications for this program are highly competitive.

• Use a seasoned grant writer
• The comprehensive applications seem to do better than the single-purpose grant applications
• Show use of leveraging to improve your chances

For more information please call Steve Sussman at (651) 297-1164 or (800) 657-3858.

Tourism Loans

• Loans to existing tourism-related business which provide overnight lodging
• Loans are made at below-market rates
• No working capital is financed
• No start-ups
• Term dependent on asset financed
• Capped at 50% of project cost, up to $65,000
• Exception: septic system replacements are eligible for an additional $65,000 in loan funds

The rates for Tourism loans are below-market and are fixed for the term of the loan, which makes them attractive to borrowers. The program works by purchasing a 50% participation from a commercial lender. The interest rate charged by the commercial lender for its portion is unrestricted. Terms are 10 years for building and real estate, including septic; 5 years for machinery and equipment; or a weighted average of the two when appropriate. All Tourism loans must additionally be secured by a personal guarantee.

For more information please call Brad Simenson: (651) 296-1145, or Steve Sussman (651) 297-1164.

The Capital Access Program

This program provides for the creation by commercial lenders of a supplemental loss reserve, augmented with DEED funds, for loans to small and medium-sized businesses. The program is accessed by the commercial lender involved in the project.

The lender and the recipient negotiate a percentage between 3% and 7% of the total loan value, which they contribute to the reserve in equal shares. Subject to DEED approval, the reserve is matched with state funds at 150% of the contribution made by the lender and recipient, up to $2 million in enrolled loans overall.

All industrial, commercial, and agricultural loans are eligible, including refinancing of existing debt. All terms are negotiated between the lender and the recipient. The lender must enroll the loan in the program within ten days of loan origination.

For more information please call Paul Moe at (651) 297-1391, or Steve Sussman: (651) 297-1164.

THE INITIATIVE FOUNDATION

The Initiative Foundation is a non-profit organization serving the fourteen county Central Minnesota region. Its territory includes Benton, Cass, Chisago, Crow Wing, Isanti, Kanabec, Mille Lacs, Morrison, Pine, Sherburne, Stearns, Todd, Wadena, and Wright Counties. The Partnership service area is contained within the territory served by the Foundation.

The organization maintains two different economic development loan programs, each of which are funded in part by the MacKnight Foundation. Inquiries regarding eligible borrowers, uses of funds, collateral, etc. are most easily facilitated when they originate from the borrower’s local-level economic development staff person (list provided in the technical assistance section of this guide.)  Check the following programs to see what might be applicable for you:

Direct Business Loan Program                                                   Technology Business Loans                                                              Small Business Loan Guarantees                                                       Seed Investments      

For more information please call (877) 632-9255.

PUBLIC UTILITIES

Great River Energy

The Great River Energy Business Financing Program (BFP) has three interrelated options for financing your business:

1) Direct Loans and Loan Participation
2) Linked Deposits
3) Custom Cooperative Finance Packaging

Direct and Participation Loans are investments made by Great River Energy and its member electric cooperatives from the general funds. The loans generally have terms, conditions and interest rates similar to the project’s lead lender. Direct Loans are aimed at increasing the availability of capital for businesses.

The Linked Deposit financing is available to businesses demonstrating a need for lower cost financing. BFP dollars are invested in a bank certificate of deposit at below market interest rates. Since the investment is linked to the project, the financing can be offered at a lower interest rate.

Great River Energy Business Development Staff will assist its member cooperatives in preparing other appropriate federal, state and local project financing resources. GRE Staff is also available to assist businesses seeking alternative funding sources. The purpose is to enhance employment and business opportunities within the GRE member cooperatives service area.

Eligibility

• Applicant must be a Great River Energy customer
• Loans range from $5,000 to $200,000
• Limited to 50%, or less of debt financed eligible costs
• Minimum of 10% owner equity injection is required

Uses

• Land and building acquisition
• Land improvements
• New building construction
• Building renovation
• Machinery and equipment financing
• Working capital (as part of total loan package

For more information please call Tom Lambrecht at (888) 539-5265.

XCEL ENERGY, CONNEXUS ENERGY, EAST CENTRAL ENERGY, STEARNS ELECTRIC

XCEL ENERGY offers financial assistance to assist businesses in purchasing or upgrading equipment or lighting that is more energy efficient.

Energy Financing Program

This program is offered continuously, but features periodic interest-rate reductions. Business owners who are interested in this program are encouraged to obtain a current rate quote from XCEL ENERGY, using the telephone number listed below.

The program offers direct financing for the acquisition of energy-efficient machinery and equipment, with loan payments capitalized into the firm’s XCEL ENERGY utilities bill. Eligible projects include lighting retrofits, new energy-efficient equipment, and equipment upgrades.

For more information about these programs please call:

XCEL Energy: Ken Stabler (612) 330-5834

East Central Energy: Larry Breth (320) 982-4008

Connexus Energy: Jim Gromberg, (763) 323-2785

Stearns Electric: Dave Gruenes, (320) 259-6601

MINNESOTA TECHNOLOGY EQUITY FUND

Equity Fund

As the name might suggest, the financial assistance offered by Minnesota Technology is in the form of equity- rather than debt-financing. The Equity Fund is used to enhance the skill-level of Minnesota workers by assisting small and medium sized businesses with the acquisition of new technology for their processes. Funds are available either to start-ups or existing companies, and the areas of emphasis for the program have traditionally been manufacturing firms in Greater Minnesota.

Eligibility:

• small and medium-sized
• manufacturer or manufacturing-related
• or value-added ag, natural resource processors

Minimum Investment: $50,000

Maximum Investment:

• $250,000 at once,
• $350,000 total

For more information please call Sandy Voigt at (320) 654-5201.

SEED-Fund:

The SEED Investment Fund was implemented to promote the entrepreneurial culture within Central Minnesota and promote the capacity of manufacturing or technology related companies to grow.  The fund accomplishes this by providing financial assistances up to $50,000 for research and development projects targeted to high technology and technology-based manufacturing ventures.  The investment must be matched dollar for dollar with owner equity. Qualified uses of funds include prototype development, market research, marketing and sales development and startup working capital.

For more information please call John Kaliszewski at (320) 632-9255.

LOCAL DEVELOPMENT TOOLS

In some cases, what is meant by the term "local development tools," will be those sources of financing which are only available in a particular jurisdiction within the St. Cloud Area. In other cases, the term will be used to describe programs which are available by statute in all of Minnesota, but which are administered by the local jurisdictions. In each case, borrowers are encouraged to contact their local Economic Development staff person.

In the St. Cloud area, there are three counties and several cities, all offering different forms of assistance to an expanding or relocating business. Several cities have financial incentives available. The city of St. Cloud has economic development staff through an HRA (Housing and Redevelopment Authority). The three counties, Stearns, Benton and Sherburne, also offer technical and financial assistance. The financial incentives are offered through below-market rate loans to businesses. The following pages describe each of these programs.

If you are unsure of which county (Stearns or Benton for Downtown) to contact, or you have yet to make a location decision, you are encouraged to call the Downtown Council at (320)257-8600: contact Pegg A.K. Gustafson, Executive Director.

Benton County’s Revolving Loan Fund

...is administered by Benton County’s Economic Development Director, Nancy Hoffman. The program is designed to provide second-mortgage financing for real estate, construction, machinery, and equipment at below-market rates. Loans are subject to the approval of the Benton County Economic Development Authority.

• Maximum loan amount is $150,000 - job creation is a requirement for application, and under certain circumstances, job retention will be considered. 
• Participation typically limited to 35% of the total project
• A financial institution must be involved in the loan package
• Loan terms are structured based on the size of the loan and the asset being financed
• Job Creation criteria: 1 job per $20,000
• Rates are foxed below market rate
• Full collateral coverage in required on loans.  Personal guarantees are required from borrowers.

For more information please call (320) 968-5071.

Stearns County Revolving Loan Fund

...is administered by Stearns County’s Housing and Redevelopment Director, Bob Swanberg. Funds are available to existing businesses in manufacturing and wholesale distribution, with an emphasis on reinvestment and investment in technology.

• Loan amounts between $10,000 and $50,000
• Preference given to employers paying "living wages"
• Lower interest rates based on security position and creditworthiness
• Term: typically 5-7 years

For more information please call (320) 685-7771.

The St. Cloud Downtown Council

Our mission is to be the driving force for the economic and aesthetic vitality of Downtown St. Cloud through advocacy with government, public awareness and bringing resources to economic development. The Downtown Council is the lead agency in a joint venture with the St. Cloud Housing & Redevelopment Authority called the "Downtown Improvement Loan Program," which works with several area commercial banks.

Eligible uses of Downtown Improvement Program Funds:

• Exterior facade improvements
• Interior leasehold improvements within public’s view
• Rental housing improvements

* Note that removable fixtures and roofing are not eligible

Other information:

• Loans capped at $40,000 with 5 year term
• Interest rate buy down is 300 basis points
• One use of program funds per property owner per year
• Maximum eligibility reduced by previous years’ balances

For more information: Pegg Gustafson (320) 257-8600

Tax Increment Financing ("TIF") (by the St. Cloud HRA)

TIF is the premier tool for economic development in Minnesota’s. Developers receive a partial refund of the property taxes they pay over a series of years following completion of a project involving new real estate. Eligibility for TIF is first determined locally, through the establishment of specific areas in the municipality called "Tax Increment Districts".

TIF districts come in 3 varieties:

• Housing districts (15 yr. life span)
• Re-development districts (25 years)
• Economic Development districts (8 years)

Different types of projects are eligible for TIF in these different types of districts.

The maximum reimbursement amount is determined by the greater of: the amount of public infrastructure improvements required for the project; and the amount of funds spent "at ground level or below" on the project, called "eligible costs."

Examples of eligible costs:

• Land acquisition
• Landscaping
• Site work
• Labor associated with these activities
• The pro rata percentage of loan fees, A&E fees, etc., based on the percentage of hard construction costs which are eligible, plus land acquisition

There are two ways to reimburse TIF recipients for taxes paid: bonding and "pay as you go"

Municipalities typically "stair-step" the pay as you go option, reimbursing a larger percentage at the beginning of the agreement than at the end. The municipality gets to keep the difference.

Banks will sometimes accept projected future TIF proceeds as equity for a project, in which case an assignment of the proceeds is given to the bank.

For more information, please call Bruce Thielman at (320) 252-0880.

Essential Function Bonds

Certain types of economic development activities are characterized by the State of Minnesota as "essential functions" of a municipality, allowing them to issue bonds under special (favorable) terms.

Most common are Essential Function Revenue Bonds for Housing, sometimes called "housing revenue bonds":

• These are Revenue Bonds - meaning they are not backed by the municipality’s general fund
• Revenues generated by the project pay the bond
• Rate is slightly higher than for G.O. bonds
• Several bond underwriting firms in the Twin Cities provide the services of issuance and pooling of these bonds; side-benefit is the lower rate
• Can be used for market rate apartments, low income apartments, elderly housing, etc.

For more information please contact The Partnership at (320) 656-3816 or the HRA (320) 252-0880.

Industrial Revenue Bonds

This once popular and now infrequently-used bonding mechanism allows municipalities to issue tax-exempt bonds to finance fixed assets.

Typical structure:

• municipality issues the bonds
• municipality becomes the legal owner of the asset
• then leases back or sells to company
• firm’s repayment coincides with bond payback

Strict limits on maximum participation:

• Real estate: max. 25% financed with the bond
• Machinery and equipment: no more than 10%

Restaurants, automobile sales and service, and virtually all firms in recreational fields are expressly prohibited.

Term and Rate negotiated between municipality and firm.

For more information (accessing funds) contact The Partnership at (320) 656-3816 or the HRA (320) 252-0880.

Another possible source of information on this subject is Paul Moe or Brad Simenson of DEED: (651) 296-1145.

UNITED STATES ECONOMIC DEVELOPMENT ADMINISTRATION

The US EDA is the dominant source of financing for those public infrastructure improvements which will result directly in an increase in a community’s employment capacity.

• GRANT up to 50% of total project cost
• Sewer, water, streets storm sewer, lift stations, treatment plants, wastewater ponds
• Job-creation requirements
• Forecast impact in application
• Compete with other projects in the region
• Typical project: industrial park formation /expansion

These are highly political and highly competitive awards. In recent years, the appropriation for this program has been repeatedly threatened by congress. The waiting list for new projects is now approximately two years.

Note also that, because this is a Federal Grant program, there are compliance issues which will affect the "direct beneficiaries" of the award, such as industrial park tenants

• Job counts and projections
• Reports on ethnic, cultural, and gender diversity
• Davis-Bacon wages for expansion projects resulting from the award

For more information please call Jack Arnold, EDA Field Rep., (218) 720-5326.

VENTURE CAPITAL

Venture capital differs from the other financing sources described in this manual because it is equity rather than debt. Organizations which provide venture capital review the financial statements of applying companies, make a decision about the future potential of those companies to make a profit, then invest in them as minority, or in a few cases, majority owners.

The principal advantage of venture capital financing is that it improves, rather than aggravating, a company’s ratio of debt to equity. This is beneficial not only in the general sense but also because conventional lenders are often sensitive to the acquisition of additional debt on top of their loan.

Please consider these issues when soliciting venture capital financing:

• It can be difficult to obtain
• Venture Capital organizations often require some involvement in the management and ownership decisions of the firm.

For these reasons, persons interested in venture capital arrangements are encouraged to discuss the matter thoroughly with their accountant, their attorney, and the venture capital provider, before proceeding.

A partial list of venture capital providers is provided for your convenience.  For more information, visit the Minnesota Venture Capital Association at www.mnvca.org.

MN Community Capital Fund 13911 Ridgedale Dr, Suite 260 Minneapolis, MN 55305 (800) 860-6223		MN Investment Network 1600 University Av W Suite 401 55433     St. Paul, MN 55104 (651) 632-2140 www.mincorp.org		Cherry Tree Investments, Inc.      3800 W. 80th St., Suite 1400 Minneapolis, MN 55431 (612) 893-9012
Great Northern Capital 332 Minnesota St. St. Paul. MN 55101 (612) 222-6130		Minnesota Technology 300 East St. Germain Suite 200 St. Cloud, MN 56304 (320) 654-5201		North Star Ventures (612) 659-7091
Norwest Venture Capital 80 S 8th St Minneapolis, MN 55402 (612) 251-1600		Pathfinder Venture Capital 7300 Metro Blvd. Suite 585 Edina, MN 55439 (952) 835-1121		P.R. Peterson Corp. 6111 Blue Circle Dr. Minnetonka, MN 55343 (612) 835-1121
Piper Jaffray, Inc. 222 South 9th St. Minneapolis, MN 55402 (612) 342-6310		St. Paul Venture Capital 8500 Normandale Lk Blvd, Suite 1940 Bloomington  55437 (612) 830-7474		Wellspring Corp. 80 South 8th St. Suite 4530 Minneapolis, MN 55402 (612) 338-0704
Granite Equity 3051 2nd Street South, Suite 105 St. Cloud, MN 56301 (320) 251-1800				Winton Partners 80 South 8th Street Suite 4422 Minneapolis, MN 55402 (612) 338-0216

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