California State University, Fresno University Business Center, Craig School of Business

1. Economic Development Finance:Introduction to Economic Development Certificate ProgramOctober 13, 2010 California State University, Fresno University Business Center, Craig School of Business

2. PRESENTATION BY: Paula Connors, Manager - Bond Finance Unit California Infrastructure and Economic Development Bank 980 9th Street, 9th Floor, Sacramento, California 95814 Phone: (916) 322-1498 – Fax: (916) 322-6314 E-Mail: Pconnors@ibank.ca.gov Dan Bronfman, President Growth Capital Associates, Inc. 82 Estates Drive, Orinda, California 94563 Phone: (925) 386-0760 – Fax: (925) 386-0765 E-Mail: dan@gro-cap.com

3. 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 A B C

4. 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.

5. 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.

6. Business Financial Analysis I. The Process II. Terms and Concepts III. Tips for Doing the Deal

7. The Process • 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 capital • Availability of capital

8. 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.

9. Screen the Deal • 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?

10. SOURCES AND USES FORM Snapshot of the Proposed Project

11. 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

12. Analyze the Deal The 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

13. II Terms and Concepts What Are Financial Statements? • Income Statement • Balance Sheet • Statement of Cash Flows

14. The Income Statement: How Did We Do? (AKA…..Profit and Loss Statement; P& L) Sales -Cost of Goods Sold (raw materials, labor, manufacturing) Gross Profit -Other Expenses -SG&A (rent, advertising, admin. overhead, officer salaries Net Income from Operations +Other Income -Income Tax Net Income

15. 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

16. Balance Sheet: Snapshot in TimeAssets = Liabilities + Equity Sample Balance Sheet AssetsLiabilities Current AssetsCurrent Liabilities Cash 400 Accts Payable $300 Accts Rec. 200 Total Current Assets $600 Long Term Liabilities Loan Payable 200 Total Liabilities $500 Fixed AssetsOwners Equity $1,500 Land $1,000 Bldg. 500 Equip. 900 $2,400 Total Assets $3,000Total Liab. & Equity. $3,000

17. Key Ratios to Remember Current Ratio • Current Ratio:CA: Current Assets • CL: Current Liabilities • Measures liquidity • Should be greater than 1:1, preferably 1:5 or 2:1 depending on industry • Quick Ratio:Cash + Accounts Receivable • Current Liabilities • Measures relationship of short term debt to very liquid (cash) assets

18. Key Ratios to Remember Working Capital Current AssetsCA Current Liab. - CL Working Capital WC

19. Key Ratios to Remember Debt:Equity • Total Liabilities • Equity • Relationship of investment of owners to investment of lenders • 2:1 • High: little investment by owners • Low: May not be a good use of debt • Strike a balance

20. ECONOMIC DEVELOPMENT FINANCING RESOURCES

21. 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

22. Once you have a product, you have more options: • Traditional Lenders and Programs

23. 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 Financing Resources

24. Small Business Administration 504 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% Debenture 10% Equity Injection * Packaged through certified development corporations www.sba.gov www.sba.gov/gopher/Local-Information/Certified-Development-Companies

25. 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.

26. 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.

27. 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.

28. 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

29. Issuer Industrial Development Bonds Local Cities and Counties Job-creating businesses and Community organizations

31. More than Manufacturing! Industrial Development Bonds: Manufacturing and job creation Nonprofit 501( c ) 3: Community-based, community- wide benefits Exempt facility, Pollution Control: Environmental and economic benefits

32. 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

33. 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

34. 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

35. 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

36. Industrial Development Bonds Typical structure 70% IDB 30% Equity Injection

37. 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

38. 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

39. 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

40. Community Development Block Grant • Business and development loans • Infrastructure grants • Establish local revolving loan funds • Entitlement and Non-Entitlement Programs • Federal and state overlay requirements www.hcd.ca.gov

41. 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)

42. 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.

43. FISCAL IMPACTSPrevailing WageIncentives

44. 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

45. 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

46. 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

47. Checklist for Evaluating Incentives • Quantify the benefits of the project (jobs, quality of jobs, taxes, etc.) • Determine the pay back period • Assess opportunity costs to the community (alternative use and benefits of the funds) • Match the level of incentive to the component of private investment • Require an increase in project benefit in exchange for an increase in community investment • Evaluate after the fact to see if projected benefits were received

48. III TIPS FOR DOING THE DEAL • Tips for working with businesses • Tips for working with lenders • Tips for working with start ups

49. Tips for Working with Businesses • 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

50. 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)