Economic Development Finance:

Introduction to Economic Development Certificate Program

October 13, 2010

California State University, Fresno University Business Center,

Craig School of Business

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PRESENTATION BY:Paula Connors, Manager - Bond Finance Unit

California Infrastructure and Economic Development Bank

980 9th Street, 9th Floor, Sacramento, California 95814Phone: (916) 322-1498 – Fax: (916) 322-6314

E-Mail: Pconnors@ibank.ca.gov

Dan Bronfman, PresidentGrowth Capital Associates, Inc.

82 Estates Drive, Orinda, California 94563Phone: (925) 386-0760 – Fax: (925) 386-0765

E-Mail: dan@gro-cap.com 2

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Financing Basics for Economic Development

Session Overview:• What is your ED Financing Environment?• Screen the Deal and Analyze the Deal• Financing Resources and Programs• Issues to Consider• Where to Get More Information• Handouts/Appendix

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Understanding Your ED Environment

• Need to understand all aspects of the project in order to tailor the proposed assistance

• Each project will have its individual and unique needs.

• Need a full toolbox, not just financing tools or incentives, to meet the needs of all projects.

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Understanding Your ED Environment

• Most projects do not need financial assistance, but can use other assistance

• Financing is only part of the equation

• There is a tendency to throw money at projects without really understanding the project and its true needs.

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Business Financial Analysis

I. The Process

II. Terms and Concepts

III. Tips for Doing the Deal

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– The analysis depends on the need– Look at the business and the project– Examine the past, present and future financial

information– The information tells a story about the business’

financial picture, operating cycle, trends, and ability to handle downturns

– Reformat financial information– Determine key ratios, compare with industry

averages and past performance– Analyze projections for reasonableness– Match funding to the “gap”

Cost of capitalAvailability of capital

The Process

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Types of Business Loans

• Short-term loans – working capital, inventory, accounts receivable.

• Medium-term loans – equipment, machinery, leasehold improvements.

• Long-term loans – building, acquisition, renovation, construction, land acquisition.

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Have the owner tell you their “story” What is the business trying to finance? Who does the business bank with?

Has the business applied for a loan with its bank?

If declined, why? Is the business profitable? Does the business owner have cash to

put into the deal? Do they have collateral to secure the

loan? Is there a business plan and financial

information?

Screen the Deal

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SOURCES AND USES FORMSnapshot of the Proposed Project

Business Lender Other Gap/ This Loan

TOTAL

Land

Construction

Machinery/ Equipment

FFE

Other

TOTAL

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Analyze the Deal• “Spread” the Financial Statements: Horizontal and vertical analysis

• Ratio Analysis - Key ratios•Current: current assets/current liabilities

–Quick: cash + cash equivalents + accounts receivable/current liabilities

–Debt-to-worth: total liabilities/net worth

• Review projections and assumptions to business plan, historical data and industry data (make sure jobs are there)

• Projections should be done with and without public assistance • Compare to industry averages (Robert Morris Associates - RMA) • Analyze business operating cycle

•Cash – Inventory – Sales – Accounts Receivable – Cash--Automobiles – long cycle

--Food Service – short cycle• Use tax returns to verify information

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Analyze the DealThe C’s of Credit

When the analysis is done, you should be able to summarize the

proposal:

Character business history, credit reports, personal interviews

Credit credit history, business history

Capacity analysis of financial statements, equity,

secondary sources of repayment

Capital equity, working capital) -

Remember “Cash is King”

Collateral appraisal, net worth

Cash Flow balance sheet, projected income statement,

personal financial statements

Conditions market study, business plan, economic conditions

Commitment business plan, equity committed

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Income Statement

Balance Sheet

Statement of Cash

Flows

II Terms and ConceptsWhat Are Financial Statements?

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Sales-Cost of Goods Sold (raw materials, labor, manufacturing) Gross Profit

-Other Expenses-SG&A (rent, advertising, admin. overhead, officer salariesNet Income from Operations

+Other Income-Income TaxNet Income

The Income Statement: How Did We Do?(AKA…..Profit and Loss Statement; P& L)

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The Income Statement: How Did We Do?Sample Income Statement

Revenue:

Sales $18,000

Investment Income 2,000

Total Revenue $20,000

Expenses:

Wages, Sal/Benefits $3,000

Merch & Supplies 12,000

Depreciation 400

Property 300

Income Tax 1,000

Interest Expense 300

Total Expenses<$17,000>

Net Income $3,000

Sample Balance SheetAssets LiabilitiesCurrent Assets Current LiabilitiesCash 400 Accts Payable $300Accts Rec. 200 Total Current Assets $600 Long Term Liabilities

Loan Payable 200Total Liabilities $500

Fixed Assets Owners Equity $1,500Land $1,000 Bldg. 500 Equip. 900

$2,400Total Assets $3,000 Total Liab. & Equity.

$3,00016

Balance Sheet: Snapshot in Time Assets = Liabilities + Equity

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Current Ratio: CA: Current AssetsCL: Current Liabilities

Measures liquidity Should be greater than 1:1, preferably

1:5 or 2:1 depending on industry

Quick Ratio:Cash + Accounts ReceivableCurrent Liabilities

Measures relationship of short term debt to very liquid (cash) assets

Key Ratios to RememberCurrent Ratio

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Key Ratios to RememberWorking Capital

Current Assets CA

Current Liab. - CLWorking Capital WC

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Total Liabilities Equity

Relationship of investment of owners to investment of lenders

2:1High: little investment by ownersLow: May not be a good use of debt

Strike a balance

Key Ratios to RememberDebt:Equity

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ECONOMIC DEVELOPMENT ECONOMIC DEVELOPMENT FINANCING RESOURCESFINANCING RESOURCES

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When you have nothing but an idea and ambition:

• Limited funding options• Personal Savings: crack open the piggy bank, max out

credit cards, get a second mortgage on the house• Beg & Borrow: call rich friends/relatives;offer a stake

in return for an investment;be clear about risks• Loans: tough sell; personal assets as collateral; have

to make payments NOW• Angel Investors: $ and expertise; where do you find

them??• SBA: guidance, not loans

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Once you have a product, you have more options:

• Traditional Lenders and Programs

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Financing Resources• Business

– SBA– IDB– CA Loan Guarantee– USDA Loan

Guarantee– CDGB– Redevelopment– Local RLF’s– PERS Private Equity

• Real Estate – CDBG– Redevelopment

• Infrastructure– I-Bank– CDBG– Redevelopment– US EDA– Mello-Roos/

Assessment– Business Impr.

Districts

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Small Business Administration504 Loan Program: Long term, fixed asset financing used for land acquisition, building construction, purchase of existing building, site improvements, rehabilitation and major equipment acquisition.How it works: 50% Private Lender

40% Debenture10% Equity Injection

* Packaged through certified development corporations

www.sba.govwww.sba.gov/gopher/Local-Information/Certified-

Development-Companies

Hot off the Press –NEW SBA changes

• Fee reductions:  504 fee waivers for banks (.5%) and borrowers (1.5%) were extended through Dec. 31, 2010, or until the $505 million appropriated is used.  

Additional opportunities to be rolled out as SBA fine-tunes policy:• Increased Loan Maximum:  maximum loan size permanently

increased to $5 million ($5.5 million for manufacturers and energy loans).

• Debt Refinancing: for the next 2 years allows refinance of real estate loans coming due on owner-occupied commercial property. It enables refinancing of qualified existing debt without business expansion.

• First Mortgage Pooling program: Extends the first-mortgage pooling program two years.

• Alternative Size Standard: establishes a standard of maximum tangible net worth of $15 million and 2-year average net income after federal income tax of $5 million, which will apply to both programs. 25

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Small Business Administration• Low Doc Loan Program: A streamlined lending process

for loans up to $150,000, same uses as 7(a) program.Structure: SBA guarantees 85% of commercial lender loan.

• Caplines Loan Program: An umbrella program under which SBA helps small businesses meet their short-term and cyclical working capital needs.Structure: SBA guarantees 80% of commercial lender loans less than $100,000 and 75% of loans greater than $100,000.

• Micro Loan Program: SBA provides funds to selected non-profits, who in turn make loans to eligible borrowers in amounts that range from $1,000 to $35,000; uses include working capital, equipment, supplies, etc.Structure: Loans are made by non-profit for a maximum 5-year term with fixed rate of interest.

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Small Business Administration

7(a) Loan Program: SBA’s primary loan program used for business acquisition, leasehold improvements, real estate, equipment, working capital, and investing.

How it works: SBA guarantees 75% of

commercial lender loan.

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California Loan Guarantee Program

Program enables small businesses to obtain a term loan or lines of credit when it cannot otherwise get a loan. Uses include equipment, construction financing, business expansion and working capital.

Structure: Commercial lender loans are guaranteed up to 90% not to exceed $500,000 on term loans and lines of credit.

• Packaged through 11 State Small Business Corporations

www.calbusiness.ca.gov/cedpgybfasblgp.asp

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Industrial Development Bonds

Issuer

Local Cities

and

Counties

Job-creating businesses and

Community organizations

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$4,073,331

$2,724,109

$1,349,222

$0$500,000

$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000$4,000,000$4,500,000

Bank LoanInterest

Payments

BondInterest

Payments

INTERESTSAVINGS to

theBorrower

6.75% 4.75%

Dare to Compare !!Interest Savings Benefits to Your Borrower

$5 million Industrial Development Bond 20 Years Term

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More than Manufacturing!

Industrial Development Bonds: Manufacturing and job creation

Nonprofit 501( c ) 3:

Community-based, community-

wide benefitsExempt facility, Pollution Control:

Environmental and economic

benefits

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Examples

• $10 million to relocate and expand a precision machine tools manufacturer

• $ 6 million to purchase and equip a new processing plant for a specialty foods manufacturer

• $5.5 million to expand a gourmet baked goods company

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Industrial Development Bonds• Tax-exempt financing (up to $10 million) for

manufacturing. • Uses include acquisition of land, building,

and new equipment. • Tax-exempt bond results in borrowing costs

20-30% below comparable bank rates.• Obligation to repay is solely that of the

borrower - not the Issuer or the jurisdiction

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Industrial Development Bonds

• How it works: An Industrial development issuer issues bonds, loans proceeds to the company. Company’s repayment is secured by a letter of credit from its bank.

• Step 1: • Screen the project• Reimbursement Resolution

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Industrial Development Bonds

• Step 2: • Borrower/Financial Advisor/Issuer work with

lenders/purchasers to structure financing• TEFRA hearing• (Local adoption of resolution to join JPA – if required)• Volume cap/CIDFAC state approvals (if required)• Bond closing similar to loan closing

– Many documents to sign

– Bonds “sold” ; proceeds to trustee to disburse to borrower

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Industrial Development Bonds

Typical structure 70% IDB

30% Equity Injection

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New Markets Tax Credit

• Community Development Entities make loans, investments or financial counseling in “Low Income Communities”

• Funding comes from a federal tax credit for equity investments in Community Development Entities

www.crfusa.com

www.clearinghousecdfi.com

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USDA Business and Industry Guaranteed Loan Program

In rural areas only, the program provides a loan guarantee of a commercial lender loan. Uses may be working capital, machinery, equipment, building acquisition and development.

How it works: Up to a 80% guarantee of a loan made by a commercial lender

www.rurdev.usda.gov/ca

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California I-BankInfrastructure State Revolving Fund

Program

Program provides low cost loans to public agencies for a wide variety of infrastructure projects. Amounts range from $250,000 to $10,000,000; with loan terms up to 30 years.

www.ibank.ca.gov

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Community Development Block Grant

• Business and development loans

• Infrastructure grants

• Establish local revolving loan funds

• Entitlement and Non-Entitlement Programs

• Federal and state overlay requirementswww.hcd.ca.gov

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Community Development Block Grant

• Non-Entitlement (State Program)• Over The Counter• Revolving Loan Fund• Planning & Technical Assistance Grants

• Project must meet national objective• Benefit Low/Mod• Eliminate Slums and Blight• Urgent Need (Disaster relief)

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Redevelopment(locally controlled)

• Can provide loans, acquire land, sell land, ground lease land, assemble sites, write-down costs, provide infrastructure

• Potential for eminent domain authority.• AB1290 Restrictions – Redevelopment Agencies are

prohibited from providing direct assistance to:• Auto dealerships on land that has not been previously

developed.• A development on land of 5 acres, not previously

developed, that will generate sales tax, unless principal use of site is office, hotel, manufacturing or industrial.

• Does not prevent an Agency from assisting with cost of public improvements that are of area-wide benefit and that may incidentally benefit auto dealers/retailers.

• All spending must be in project area, with few exceptions; and must be tied to the elimination of blight.

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FISCAL IMPACTSFISCAL IMPACTSPrevailing Wage

Incentives

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Prevailing Wage• SB975 has changed the way agencies

assist businesses and developers.

• Prevailing wages may have to be paid on private projects when they receive public assistance

• SB 975: prevailing wages triggered when construction work is paid in whole or part with public funds

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Incentives

• Incentives are provided to have a project move forward that might not otherwise proceed. Incentives can be justified as follows:

• As an inducement to an action• Unavailability of capital• Cost of capital• Rate of return

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Incentives

• Incentives can vary depending on need of project. Incentives can include:

• Financing• Land or Land Write-downs• Tax Rebates/Tax Credit• Paying/Waiving of Fees• Training/Retraining Funds• Streamlined/Expedited Permit Process• Infrastructure• Master environmental/planning documents

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Checklist for Evaluating Incentives

Quantify the benefits of the project (jobs, quality of jobs, taxes, etc.)

Determine the pay back periodAssess opportunity costs to the community

(alternative use and benefits of the funds)Match the level of incentive to the component of

private investmentRequire an increase in project benefit in

exchange for an increase in community investment

Evaluate after the fact to see if projected benefits were received

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III TIPS FOR DOING THE DEAL

• Tips for working with businesses

• Tips for working with lenders

• Tips for working with start ups

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Have your meeting at the business

Explain your role up-front

Confidentiality

Give them a chance to tell their story

Don’t nickel and dime with

questions/concerns

Stay in communication

Don’t waste their time if project is not

feasible

Tips for Working with Businesses

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Tips for Working with Lenders

Understand credit score models Don Quixote Rule (Don’t tilt at windmills; don’t

ask them to do the impossible) Understand credit score models Be honest with your banker Use your banker as a third-party to say no to a

deal Berlitz Rule (Speak Their Language) Herb Cohen Rule (Be a good negotiator) Boy Scout Rule (Be prepared) Elephant Rule (Bankers Never Forget)

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Tips for Working Working with Start-ups

They must have equity (AKA cash) in the deal

They must have a business plan and financial projections.

Is there any collateral available? (including personal residence)

Help them get “HELP” Know your local non-profit lenders (if

you are not one yourself)

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Where to Get More InformationCalifornia Enterprise Development Authority www.ceda.caled.orgCalifornia Infrastructure and Economic Development Bank

www.ibank.ca.govInternational Economic Development Council (IEDC)

www.iedconline.orgEconomic Development Finance Service (NADO)

www.nado.orgSmall Business Development Centers

www.cccewd.net/servicesRobert Morris Associates

www.mahq.org/Ann_Studies/sstudiesNational Development Council

www.ndc-online.org/trainingMANEX: Corporation for Manufacturing Excellence

www.manex.org

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EVALUATING RESULTSHow Do You Measure Success?

• Commencement of project• Aesthetic appeal• Community impact• Economic impact• Subsequent project with

same business or developer• Business repays loans• Business stays open longer

than one year