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An Introduction to ECONOMIC DEVELOPMENT Using CDBG

An Introduction to ECONOMIC DEVELOPMENT Using CDBG

WELCOME!WELCOME!

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Course sponsorCourse sponsor Training workshop sponsored

by the NCDA Conducted by ICF International

Carole Norris, Vice President, San Francisco Regional Office

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THE PROCESSTHE PROCESS

EconomicAnalysis

EconomicAnalysis

StrategyDevelopment

StrategyDevelopment

Program Implementation

Program Implementation

Evaluation & Refinement

Evaluation & Refinement

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ECONOMIC ANALYSISECONOMIC ANALYSIS

Assess qualitative and quantitative conditions

Evaluate business and social environment

Assess monetary, human, and physical resources & obstacles

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STRATEGY DEVELOPMENTSTRATEGY DEVELOPMENT

Choose priority outcomes and market sectors

Determine how to direct your assistance: locational approach; minority business; sectoral approach

Choose activities to match intended outcomes

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IMPLEMENTATIONIMPLEMENTATION

Describe goals Written strategy summarizes

plans and needs Action plan implements the

strategy Plan is iterative and refined

based on monitoring and evaluation

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USING CDBG FOR EDUSING CDBG FOR ED

CDBG RegulationsFound at 24 CFR 5701980s/early 1990s: the context

for changeED edits published 1/5/95Consolidated rule effective

11/9/95Revised rule 4/29/96

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KEY ED CHANGESKEY ED CHANGES Microenterprise eligibility category Job training flexibilities Public benefit standards for ED National objective criteria and

presumptions Neighborhood Revitalization

Strategies CDFI and CBDO flexibilities

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ELIGIBLE ED ACTIVITIESELIGIBLE ED ACTIVITIES Four major types:

Special economic development (570.203)

Microenterprise assistance (570.201(o))

Commercial rehabilitation (570.202)

Assistance to CBDO (570.204)

Section 108 and BEDI are special CDBG enabled ED options

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SPECIAL ECONOMICDEVELOPMENTSPECIAL ECONOMICDEVELOPMENT

570.203 a) Commercial/industrial

improvements by recipient or subrecipient

b) Assistance to for-profit business c) Economic development services

in conjunction with above activities (including job training)

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MICROENTERPRISEMICROENTERPRISE 570.201(o) Financial assistance Technical assistance General support Training and TA to increase

capacity of recipient/subrecipient to work with microenterprise businesses

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MICROENTERPRISES DEFINEDMICROENTERPRISES DEFINED

Five or fewer employees, including owner

Commercial enterprise Existing business or persons

developing microenterprises

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COMMERCIAL REHABCOMMERCIAL REHAB

570.202 Limited types of rehab on

commercial structures If for-profit owned, only

exterior improvements or correction of code violations

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CBDO ACTIVITIESCBDO ACTIVITIES

570.204 Neighborhood revitalization Community economic

development Energy conservation

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INELIGIBLE ACTIVITIESINELIGIBLE ACTIVITIES Buildings for conduct of government General government expenses Political or religious activities New housing construction Income payments Purchase of equipment Operations and maintenance (some

exceptions for ED activities and CBDOs)

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NATIONAL OBJECTIVESNATIONAL OBJECTIVES 570.208 All CDBG activities must either:

(1) Benefit low and moderate income Benefit low and moderate income personspersons

70% of funds must be spent this way

(2) Prevent slums and blightPrevent slums and blight used only in specific area or for

specific structure

(3) Meet urgent needsMeet urgent needs only used in emergencies

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NATIONAL OBJECTIVESNATIONAL OBJECTIVES

LOW/MOD BENEFIT

SLUM/BLIGHT

URGENT NEED

Area Benefit Limited Clientele Housing Jobs

Area Spot

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LMI: AREA BENEFITLMI: AREA BENEFIT Activity that benefits all residents of

area Where 51% of residents are LMI That is primarily residential That meets the needs of the residents

Street improvements Water/sewer lines Commercial façade programs

Upper-quartile exception, area benefit only

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AREA BENEFITAREA BENEFIT Need to determine the area served

by the business Need to determine whether the

service area is Primarily residential 51% LMI

Area will differ with various kinds of businesses…. examples

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LMI: LIMITED CLIENTELELMI: LIMITED CLIENTELE

Activity that benefits specific population Presumed clientele; or

Eligibility requirements limit participation to LMI; or

Documentation that 51% participants are LMI; or

Nature and location indicate LMI; or

Removal of architectural barriers (some activities);

Microenterprise activities with LMI owners; or

Certain types of job training efforts.

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LMI: HOUSING ACTIVITIESLMI: HOUSING ACTIVITIES

Permanent housing where 51% of occupants are LMI (based on HH inc!)

Ownership or rental w/ ‘affordable’ rents

Single-unit structure: LMI occupied 2 units: at least 1 occupied by LMI 3 + units: 51% or more LMI New, MF, non-elderly: 20% or more

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HOUSING NATIONAL OBJECTIVEHOUSING NATIONAL OBJECTIVE

What type of businesses can meet this national objective?

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JOB CREATION & RETENTIONJOB CREATION & RETENTION

Must create or retain jobs 51% of jobs must be held by or

available to LMI persons Most common national

objective for economic development

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JOB RULESJOB RULES Permanent FTE basis, no temporary

jobs For each business: 51% of jobs must

be held by or available to LMI persons Can aggregate jobs if:

Property development only (incubator)

Loans are provided by a CDFI

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LMI PRESUMPTIONLMI PRESUMPTION Job can be presumed LMI if either:

Job holder resides in Census tract with 20% poverty & general distress;

Census tract with 30% poverty, CBD, & general distress;

EZ/EC area; or

Census tract/block group with 70% LMI.

Business and job located in Census tract with 20% poverty and general distress;

Census tract with 30% poverty, CBD, and general distress; or

EZ/EC area.

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JOBS “AVAILABLE TO” LMIJOBS “AVAILABLE TO” LMI

No special skills/education beyond HS required, or if so, business will train

Ensure that LMI persons receive first consideration

Must have a written agreement Reasonable application process, pool

of applicants, and no logistical barriers

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JOBS “HELD BY” LMIJOBS “HELD BY” LMI 51% of the FTE jobs must be held by

LMI persons Must document income of LMI

persons or evidence of presumption Can use self-certification from

person Must have a written agreement with

business

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ACTIVITIES THAT RETAIN JOBSACTIVITIES THAT RETAIN JOBS

Document that jobs would be lost without CDBG and that:Job currently held by LMI

person; or

Job expected to turn over in 2 years and will be filled by/available to LMI person

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SLUM AND BLIGHT: AREASLUM AND BLIGHT: AREA

Area must meet state/local definition Substantial number of deteriorated

buildings/ all infrastructure in disrepairActivity must address these

conditions Occasionally used for ED when

working in specified renewal area

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SLUM & BLIGHT: SPOT SLUM & BLIGHT: SPOT Activities that address specific

condition Acquisition, clearance, relocation,

historic preservation, building rehab Rehab limited to public health and

safety May rarely use for ED given limited

eligible activities

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URGENT NEEDURGENT NEED

570.208 (c) Activities that alleviate

emergency conditions Threat to health/welfare of the

community

Recently became urgent

Inability of recipient to finance the activity on their own

No other means of funding

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PUBLIC BENEFIT STANDARDSPUBLIC BENEFIT STANDARDS

Measures $ cost in CDBG funds against benefits derived

# Jobs or LMI persons served used as “benefit” criteria

Grant or loan, does not matter Applies to 570.203 activities, some

570.204 activities, and infrastructure undertaken as jobs activity

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INDIVIDUAL STANDARDSINDIVIDUAL STANDARDS

Create/retain 1 Job per $50,000 CDBG funds

OR Goods and services to 1 LMI

person per $1,000 CDBG

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AGGREGATE STANDARDSAGGREGATE STANDARDS

Create/retain 1 Job per $35,000 CDBG funds

OR Goods and services to 1 LMI

person per $350 CDBG

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APPLYING INDIVIDUAL STANDARDSAPPLYING INDIVIDUAL STANDARDS

If activity creates jobs and provides goods/services, qualifies as long as it passes at least one criteria

Applied at time of obligation

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APPLYING AGGREGATE STANDARDSAPPLYING AGGREGATE STANDARDS

All activities obligated during any program year

Categorize each activity as either jobs or goods/ services! But meet both criteria!

Some job activities may be excluded: Unemployed Homeless Low-skill, LMI w/ clear advancement Highly distressed or NRS areas

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ADMINISTERING ENTITIESADMINISTERING ENTITIES

Options:Grantee staff

Subrecipients

CBDOs

Contractors

CDFIs

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CBDO -- DEFINITIONCBDO -- DEFINITION Association or corporation organized under state

law to engage in community development w/i jurisdiction

Primary purpose is the improvement of service area May be nonprofit or for profit (under certain

circumstances) 51% of governing body is LMI or representative Not a public agency Governing body is nominated by membership Assets do not revert to grantee Free to contract for goods and services

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OTHER ADMINISTRATIVE ISSUES

OTHER ADMINISTRATIVE ISSUES

Compliance with OMB Circulars Grantee and subrecipients

Ensure proper use/accounting for program income

Comply with other Federal requirements

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SMALL BUSINESS DEVELOPMENTSMALL BUSINESS DEVELOPMENT

Development of small business is important activity for economy and many grantees

Two types:Micro business

Small business Existing

Start-ups

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WHAT IS A SMALL BUSINESS?WHAT IS A SMALL BUSINESS?

Relative Typical thresholds

Number of employees

Project size

Sales

Net profit after tax; net worth

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SMALL BUSINESS AND ECONOMIC DEVELOPMENT

SMALL BUSINESS AND ECONOMIC DEVELOPMENT

Business attractionFocus on Fortune 1000

Birch ReportImportance of small and

medium sized businesses Business Retention

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CDBG ASSISTANCE TO SMALL BUSINESSCDBG ASSISTANCE TO SMALL BUSINESS

Typically done under 570.203, Special Economic DevelopmentPermits wide range of

assistance to for profit entities Includes financial assistance (direct

loans, guarantees, equity, leases, etc.) and TA

Triggers public benefit considerations

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TECHNICAL ASSISTANCETECHNICAL ASSISTANCE

Helps reduce risk Often focused on business plan

development or legal and accounting issues

Often offered in conjunction with financial assistance

Critical to programs directed to start-ups

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PROVIDING TA UNDER CDBGPROVIDING TA UNDER CDBG

Under CDBG: As part of special economic

development Caveat: public benefit

Public service

Through a CBDO Public benefit

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FINANCIAL ASSISTANCEFINANCIAL ASSISTANCE

Usually done under Special Economic DevelopmentGrants

Loans

Guarantees May meet several different

national objectives

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SMALL BUSINESS PROGRAMS -- OTHER SOURCESSMALL BUSINESS PROGRAMS -- OTHER SOURCES

Small Business Administration and partners: Small Business Development Centers

Service Corps of Retired Executives

Business Information Centers

Small Business Institutes

Women's Demonstration Program

Women's Network for Entrepreneurial Training

Minority Enterprise Network

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MICROENTERPRISE ASSISTANCEMICROENTERPRISE ASSISTANCE

CDBG can fund micro enterprise loans

Microenterprise =Owners or persons who work

toward developing business

Commercial enterprise with employees (including owner)

570.201(o)

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NATIONAL OBJECTIVENATIONAL OBJECTIVE

Limited clientele if the owner is LMI

Otherwise:Job creation/retention

Presumptions

Possibly under LMI area benefit or area slum and blight

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WHAT IS MICRO BUSINESS ASSISTANCE?

WHAT IS MICRO BUSINESS ASSISTANCE?

Assistance to small companiesFunding

Technical Assistance

Training

Support Services (such as childcare or transportation)

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CDBG RULES IICDBG RULES II Can do TA and training to increase

capacity of recipient/subrecipient to do micro programs

No limit on amount or type of CDBG loan/grant to micro

Not subject to public benefit test if separate program

Owner not required to be LMI but remember national objective

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KEY STEPS IN SETTING UP A SMALL BUSINESS PROGRAM

KEY STEPS IN SETTING UP A SMALL BUSINESS PROGRAM

Define program objectivesWhat do you want to

achieve? Know your target market

Geographic area

Who or what targeted?

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KEY STEPS IIKEY STEPS II Determine technical and credit needs

Other sources of financing

Types of credit needed Develop lending program

Underwriting criteria

Administrative procedures

Loan criteria and fees

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KEY STEPS IIIKEY STEPS III

Design TA and trainingOffer in conjunction with

financing Ensure program has funding

and implement Monitor and evaluate progress

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SUMMARY: MICRO AND SMALL BUSINESS ENTERPRISESSUMMARY: MICRO AND SMALL BUSINESS ENTERPRISES

TA is an important element Labor intensive High transaction costs Separate Micro Loan Program

from other economic development revolving loan fund

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SUMMARY: MICRO AND SMALL BUSINESS ENTERPRISES IISUMMARY: MICRO AND SMALL BUSINESS ENTERPRISES II

Beware closing costs Many prospects for one funded

deal Ensure the venture has a

reasonable chance of success

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WHAT ARE BUSINESS INCUBATORS?WHAT ARE BUSINESS INCUBATORS?

Typically facility where businesses share expertise and costs

Offer access to expertise and services through: Shared office space

Research or manufacturing space

Business support

Common equipment

Mentoring

Joint marketing Incubators without walls

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INCENTIVESINCENTIVES

Lower break-even point Reduced rent

Shared services, facilities and equipment

Peer reinforcement TA

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FINANCIAL BURDENFINANCIAL BURDEN

Incubator is a specialized real estate transaction

Cash flow must fund operating expenses, capital expenditures and debt service

Successful incubators balance real estate realities with enhancing survival of fledgling businesses Keep capital costs low as possible

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USE OF CDBGUSE OF CDBG

Fund construction/development

Provide assistance to businesses locating within incubator

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FUNDING INCUBATOR CONSTRUCTIONFUNDING INCUBATOR CONSTRUCTION

Typically under special economic development eligibility category

Remember public benefit test!

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FUNDING BUSINESSES WITHIN INCUBATORSFUNDING BUSINESSES WITHIN INCUBATORS

Typically under microenterprise (570.201)Must meet the tests for this

assistance May do other types of business

assistance under special ED (570.203)

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CLUSTER INCUBATORSCLUSTER INCUBATORS

May focus on a particular industry

Fosters information sharing, alliances, promoting identity

Examples: software; food; health care; advanced technology

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EVALUATING INCUBATOR APPLICATIONS

EVALUATING INCUBATOR APPLICATIONS

Evidence of need and support Qualified management Cluster concentration within the

community Ability to leverage Plan for self-sufficiency

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INCUBATOR DEVELOPMENTINCUBATOR DEVELOPMENT

Prepare a feasibility analysis Locate site Do financials and marketing

plan Identify resources Develop

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INCUBATOR RESULTSINCUBATOR RESULTS

Enhanced employment & earnings

Expanded networking

New business formations

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SUMMARY: INCUBATORSSUMMARY: INCUBATORS

TA is important Business in incubator may need

financing assistance Ultimately, incubator is a real estate

deal Facility may need operating

subsidies

Complete total analysis before funding acquisition

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JOB TRAINING & OTHERPUBLIC SERVICESJOB TRAINING & OTHERPUBLIC SERVICES

What is it?

CDBG Rules

Structuring and supporting job training

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WHAT IS JOB TRAINING?WHAT IS JOB TRAINING?

Help unemployed or under-employed gain skills in demand in the labor market

Frequently linked to job placement

TA and entrepreneurial training to owner of micro-enterprise

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HOW IS JOB TRAINING ELIGIBLE UNDER CDBG?HOW IS JOB TRAINING ELIGIBLE UNDER CDBG?

Public service -- 570.201(e) As part of special economic

development project -- 570.203 (c)

By CBDO -- 570.204 As part of micro-enterprise

efforts -- 570.201(o)

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IF UNDERTAKE TRAINING AS PUBLIC SERVICE

IF UNDERTAKE TRAINING AS PUBLIC SERVICE

Qualify under LMI limited clientele:Document family size and income

& ensure that 51% are LMI persons;

Limit to only LMI persons;

Serve only a presumed group; or

Document based on location (very difficult)

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IF UNDERTAKE TRAINING AS PART OF SPECIAL ED

IF UNDERTAKE TRAINING AS PART OF SPECIAL ED

Qualify under EITHER:LMI Jobs, if clear connection to

jobs being created or retained; OR

LMI Limited Clientele, if CDBG is provided to business to pay only for training & the % of total project costs paid with CDBG is < % of LMI persons trained;

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WHO CAN UNDERTAKE JOB TRAINING?WHO CAN UNDERTAKE JOB TRAINING?

Grantee Other government agencies Subrecipients Businesses CBDOs

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TYPES OF JOB TRAINING PROGRAMSTYPES OF JOB TRAINING PROGRAMS

Job search assistance Short-term classroom training Long-term classroom training Subsidized employment

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KEY STEPS IN SETTING UP A JOB TRAINING PROGRAM

KEY STEPS IN SETTING UP A JOB TRAINING PROGRAM

Conduct a needs assessment Identify employment

opportunities Form partnerships Address barriers

Can provide subsistence payments as a loan to people in job training programs

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KEY STEPS IIKEY STEPS II

Develop “soft skills” training Create a flexible program Define performance measures Consider other funding sources

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SUMMARY: JOB TRAININGSUMMARY: JOB TRAINING

Link training to skills that employers need Unemployed persons may need training in

areas not directly related to performing the job Punctuality

Dressing appropriately

Interviewing

Dealing with conflict

Absences Enforce provisions related to job creation in

loan agreements

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OTHER PUBLIC SERVICES HELPFUL TO ED

OTHER PUBLIC SERVICES HELPFUL TO ED

May wish to consider other services such as:Child care

Transportation

Crime prevention

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PUBLIC SERVICE REQUIREMENTSPUBLIC SERVICE REQUIREMENTS

New service or increase in existing service previously funded with local or state $ (no substituting)

Level funding is OK once CDBG is in

CDBG can substitute for private or other Federal $

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PUBLIC SERVICES CAPPUBLIC SERVICES CAP

15% of grant allocation plus 15% of last year’s program income

Public services carried out by subrecipients are included in the cap

However…. there are flexibilities!!!

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FLEXIBILITY TA, training, support to microenterprises

(570.201(o)

Special economic development (570.203 (c)) -- Services in connection with eligible special ED activities, including training for persons filling jobs

CBDO job training/placement/support activities that increase economic opportunities (570.204(b))

Any CBDO service under a Neighborhood Revitalization Strategy (570.204(b))

Any job training done by a CBDO

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LARGE SCALE PROJECTS AND INFRASTRUCTURELARGE SCALE PROJECTS AND INFRASTRUCTURE

Covers:What is

commercial/industrial development

CDBG Rules

Key steps

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WHAT ARE LARGE SCALE PROJECTS?WHAT ARE LARGE SCALE PROJECTS?

Activities such as:Retail centers

Office buildings and other commercial manufacturing/industrial facilities

Public commercial development

Infrastructure related to ED

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TYPICAL CHARACTERISTICSTYPICAL CHARACTERISTICS

1. Large financial investment

2. Large impact

3. Real estate development

4. Multiple financing

5. Large scale infrastructure

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BE ACTIVEBE ACTIVE

Projects are complicated Screen early

Risk

Eligibility

Consistency with public policy

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ACTIVE (CON’D)ACTIVE (CON’D)

Identify appropriate form of public participationNegotiate

Know the cost of commitments before making them

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MANAGE THE PROCESSMANAGE THE PROCESS Develop project schedule

Prepare task list with due dates and responsibilities

Commit to writing and revise as needed

Keep all vested parties informed Ensure benefits are commensurate

with public participationEnsure benefits materialize

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CDBG ROLESCDBG ROLES Financing Lease Ancillary facilities Assist with equipment or

working capital Services Infrastructure

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CDBG AND LARGE SCALE DEVELOPMENTCDBG AND LARGE SCALE DEVELOPMENT

Typical Section 108 activity May also do under special economic

development (570.203) Community-Based Development

Organizations (570.204) Commercial Rehab (570.202) Infrastructure as part of economic

development project (570.201)

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SPECIAL ECONOMIC DEVELOPMENT ACTIVITIES

SPECIAL ECONOMIC DEVELOPMENT ACTIVITIES

Acquisition, construction, reconstruction, rehabilitation or installation by recipient or subrecipient

Assistance to for profit Economic development services Remember public benefit test!

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OTHER ELIGIBLE ACTIVITIESOTHER ELIGIBLE ACTIVITIES

Community-based development organizations can undertake under certain circumstancesLimitations of nonprofits as

developers of large scale projects Capacity Financial resources

Commercial rehab may be possible under limited conditions

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WHAT IS INFRASTRUCTURE?WHAT IS INFRASTRUCTURE?

Non-housing activities Public works

Transportation facilities

Water, sewer, drainage

Community facilities Parks, recreational facilities, senior

centers

Neighborhood service centers

Social services buildings

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TYPICAL ED INFRASTRUCTURE ACTIVITIES

TYPICAL ED INFRASTRUCTURE ACTIVITIES

Roads, streets, sewers that are: Leading to business location Within an industrial park On a business site

Special rules when doing infrastructure as an ED activity Public Benefit Standards Apply if CDBG

expenditure is more than $10,000/job

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SECTION 108 AND LARGE SCALE DEVELOPMENT

SECTION 108 AND LARGE SCALE DEVELOPMENT

Eligible activities Sample projects

Neighborhood shopping center

Grocery store

Mixed use-retail and housing rehab

Industrial expansion

Infrastructure

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NATIONAL OBJECTIVENATIONAL OBJECTIVE

Job creation/retention Area benefit Area slum blight VERY FEW under spot slum

blight

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COST BENEFIT ANALYSISCOST BENEFIT ANALYSIS

Assess risk Determine amount of public

participation- all costs Calculate benefit stream

JobsTax incrementsPayments

Relate risk and cost to benefits over time

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KEY STEPS IN DESIGNING LARGE SCALE PROJECTS

KEY STEPS IN DESIGNING LARGE SCALE PROJECTS

Decide if want to target neighborhoods

Ensure potential projects meet HUD criteria

Choose projects that are generators

Assess and control lending risksScreen early

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SUMMARY: LARGE SCALE PROJECTSSUMMARY: LARGE SCALE PROJECTS

Manage the process Be active Don’t forget “singles”

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FINANCING ECONOMIC DEVELOPMENT PROJECTS

FINANCING ECONOMIC DEVELOPMENT PROJECTS

Covers:Financing options

Revolving loan funds

Other economic development programs

Role of CDFIs

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METHODS OF FINANCINGMETHODS OF FINANCING

CDBG is very flexible Grants

Debt

Guarantees

Equity

Sale/ lease of assets

Remember! All special ED projects must meet public benefit test

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INVESTMENT THRESHOLDSINVESTMENT THRESHOLDS

Business loansAmount down

Monthly payment Developer deals

Amount down

Monthly payment

Return on equity

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INCENTIVE VARIABLESINCENTIVE VARIABLES

Availability Term Interest rate Percentage of financing

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PROGRAM VARIABLES FOR COMMUNITYPROGRAM VARIABLES FOR COMMUNITY

Risk Amount of funds available Niche program wishes to

address Leverage Goals, benchmarks Staff

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GRANTSGRANTS Cash contribution or principal

reduction Plus:

Easy to administer

May be only available $$ source Minus:

Resources not replenished

Business commitment? Politics

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GRANT EXAMPLESGRANT EXAMPLES Interest subsidy/ principal

reduction Rehabilitation rebate

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DEBT OPTIONSDEBT OPTIONS

Direct loansSubordinated loans

Tandem loans Repayment structure

Self amortizing

Contingent payment

Partial or full forgiveness

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AMORTIZING DIRECT LOANSAMORTIZING DIRECT LOANS

Loans that are paid back over time Plus:

Ensures business commitment

Extends resource

Interest can multiply impact Minus:

Need loan processing/servicing skills

Must have default procedures

May not be financially feasible

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CONTINGENT PAYMENT LOANSCONTINGENT PAYMENT LOANS

Part or all of repayment depends on future events, usually performance

Example Caveats

Use simple, quantifiable measures Avoid “net” thresholds Requires constant monitoring

Forgiveness is inverse concept More common for housing loans

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LOAN GUARANTEELOAN GUARANTEE Pledge loan repayment in event of

default Example Variables

Percentage of guarantee

Priority of loss

Timing of payment

Leveraged guarantee

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LOAN GUARANTEES (Cont’d.)LOAN GUARANTEES (Cont’d.)

Plus:Lender more willing/flexible

Not necessarily cost CDBG funds

Minus:Can be difficult to structure

Underwriting can be risky

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EQUITYEQUITY

Definition “Near”equity Advantages Disadvantages

Exit strategy

Lack of borrower recourse, fear of failure

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PURCHASE AND SALE OR LEASEPURCHASE AND SALE OR LEASE

Entity purchases asset and sells or leases asset to borrower at a negotiated price

Advantages Reduce equity investment May lower cash flow burden

Disadvantages Subordination issues of ground

leases Requires specific skills

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FUND A source of money which usually is a loan

LOAN Proceeds of fund are used to make loans

usually to small and medium size businesses

REVOLVING The small business loans are repaid and

reloaned. With interest, the fund can increase and become an endowment.

WHAT IS AN RLF?WHAT IS AN RLF?

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TYPICAL BORROWERSTYPICAL BORROWERS

Existing businesses Start-up ventures Developers Nonprofits Micro businesses

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SOURCES OF CAPITALSOURCES OF CAPITAL CDBG EZ/EC Small Business Administration Economic Development

Administration Department of Agriculture Private lender CRA activities Nonprofits and foundations

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CDBG RULES FOR RLFCDBG RULES FOR RLF

Must be separate, interest bearing fund

Payments to account used for similar activities

Interest earned by RLF loans is program income

Interest earned while RLF funds in bank must be remitted to Treasury

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STEPS -- DEFINE MARKET AND CONDUCT CLIENT SCAN

STEPS -- DEFINE MARKET AND CONDUCT CLIENT SCAN

Confer with professionals and borrowers to identify the market Bankers Realtors Economic development personnel Trade associations Local officials Small business groups or associations

What gap in funding exists? Understand existing efforts

Who will the effort serve?

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STEPS -- SELECT RLF ATTRIBUTES & FUNDINGSTEPS -- SELECT RLF ATTRIBUTES & FUNDING

Borrowers Minimum/maximum loan

amounts Minimum leverage Cost per job Minimum equity requirements

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STEPS: SELECT RLF ATTRIBUTES & FUNDING SOURCESSTEPS: SELECT RLF ATTRIBUTES & FUNDING SOURCES

Determine loan:Rate

Maturity

Subordination

General liens

Underwriting criteria Seek funds that will capitalize the

RLF

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STEPS-- SELECT ADMINISTERING ENTITYSTEPS-- SELECT ADMINISTERING ENTITY

Who will administer the program?City

Existing nonprofit

New organization Does staff have the necessary

skills to implement?

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STEPS-- DEVELOP ORGANIZATIONAL PROCEDURES

STEPS-- DEVELOP ORGANIZATIONAL PROCEDURES

Determine roles of board, loan committee, etc.

Role of elected officials? Is operating budget

reasonable?

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STEPS-- MARKETING AND IMPLEMENTATIONSTEPS-- MARKETING AND IMPLEMENTATION

Establish systems for delivery Marketing

Screening

Application

Approval

Closing

Disbursement

Portfolio Management

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STEPS-- MAKE AND SERVICE LOANSSTEPS-- MAKE AND SERVICE LOANS

Loan based on procedures Review periodically and adjust

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SECTION 108 BASICSSECTION 108 BASICS

Covers:General program overview

Section 108 process

Advantages

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WHAT IS IT?WHAT IS IT? Method of expanding funds by

using future CDBG grant as collateral to borrow:(1) Community applies to HUD(2) Based on community’s pledge, HUD

issues notes

(3) $$$ from sale of notes used for Section 108 eligible project

(4) Notes are repaid

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CHARACTERISTICS OF SUCCESSFUL COMMUNITIES

CHARACTERISTICS OF SUCCESSFUL COMMUNITIES

Utilize “systems” approach Screen early Acknowledge, assess and

manage risk

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PROGRAM UNIQUENESSPROGRAM UNIQUENESS

RiskNot “sophisticated

grantsmanship”If 3rd party does not repay,

locality mustEscalates cost/benefit

analysis Leverage potential

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SOURCES OF REPAYMENTSOURCES OF REPAYMENT

Pledge of future CDBG entitlement

Program income “Additional security”

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UNDERWRITING GUIDELINESUNDERWRITING GUIDELINES

Credit Reform Act OMB establishes loss reserve

(“credit subsidy”) Guidelines (low risk) reflect

loss reserve funded Additional security

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FORMS OF ADDITIONAL SECURITYFORMS OF ADDITIONAL SECURITY

Specific liens General liens Tax increment Portfolio income Parking revenue Leases Non tax revenue Assets

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OVERVIEW OF DELIVERYOVERVIEW OF DELIVERY

Screen project Submit application Approval Close Disburse Service

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PROGRAM PARAMETERSPROGRAM PARAMETERS

Maximum loan = 5 times annual entitlement

Maximum loan term = 20 years

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ELIGIBLE APPLICANTSELIGIBLE APPLICANTS

Entitlements Non-Entitlements through the

State

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ELIGIBLE ACTIVITIESELIGIBLE ACTIVITIES Acquisition Rehab of publicly owned property Clearance, demolition, site prep Economic development activities Housing rehab Finance costs Infrastructure/public facilities

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PROGRAM REQUIREMENTSPROGRAM REQUIREMENTS

National objectives Other Federal requirements

(relocation, Davis Bacon, environmental, etc.)

Public benefit test for economic development

70% rule Certifications

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INELIGIBLE ACTIVITIESINELIGIBLE ACTIVITIES

Construction of governmental buildings

Non-federal share Long term planning

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THE SECTION 108 GUARANTEETHE SECTION 108 GUARANTEE

HUD

Guarantee

Pledge of CDBGFunds

Guarantee

Locality

Investors

Interim Lender

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LEVELS OF TRANSACTIONLEVELS OF TRANSACTION

# 1 Communities borrow from investors via notes

#2 Communities undertake activities or re-lend

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LEVEL #1 TRANSACTIONLEVEL #1 TRANSACTION

HUD

INVESTORS LOCALITY$

CDBG PLEDGE

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LEVEL #2 TRANSACTIONLEVEL #2 TRANSACTION

HUD

INVESTORS LOCALITY$

CDBG PLEDGE

$ THIRDPARTY

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PLAYERS AND THEIR ROLESPLAYERS AND THEIR ROLES

Community HUD Underwriter Fiscal Agent Private Investors Third Party Borrowers

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TYPICAL USESTYPICAL USES

Industrial expansion RLF Retail Incubator Office Housing rehab

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ADVANTAGES OFSECTION 108ADVANTAGES OFSECTION 108

Leverage CDBG Avoid referendum -- Not a general

obligation Receive funds now (no pay as you go) Spread costs Avoid private benefits restrictions Access funds at AAA rate Fixed rate

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INTERIM LOANSINTERIM LOANS

Public offering usually once a year Interim loan available until public

offering Must close Level # 1 transaction

Fiscal Agent makes interim loan Interest rate: 90 LIBOR + 20 basis points

HUD guarantees obligation

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BROWNFIELD ECONOMIC DEVELOPMENT INITIATIVEBROWNFIELD ECONOMIC DEVELOPMENT INITIATIVE

Competitive grant programStimulate and promote

economic developmentAssist with the redevelopment

of abandoned and underused industrial and commercial facilities

Burdened by real or potential environment contamination

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BEDI PURPOSEBEDI PURPOSE

Spur the return of brownfields to productive economic useProvides financial assistance

or security to improve the viability of a project financed with Section 108 loan guarantee

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ELIGIBLE BEDI ACTIVITIESELIGIBLE BEDI ACTIVITIES

Land Writedowns Site remediation costs Funding reserves Over-collateralizing the Section 108

loan Direct enhancement of security for

Section 108 loan Low interest rate loan to for-profit

business

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BEDIBEDI

All activities must meet a national objective

Minimum BEDI to Section 108 ratio is 1:1

Maximum grant amount is $1million

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UNDERWRITINGUNDERWRITING

Covers:Important components

Underwriting criteria

HUD criteria

150

UNDERWRITING DEFINEDUNDERWRITING DEFINED

Underwriting is the process for determining project risk and evaluating rewards

Public underwriting differs from private

Within CDBG, portions of this analysis are known as “appropriateness evaluation”

151

UNDERWRITINGUNDERWRITING

Business loansDefinition

Example Real estate loans

Definition

Example

152

UNDERWRITING CRITERIAUNDERWRITING CRITERIA

Business loansAbility to repay

Collateral

Commitment to project

Balance sheet analysis

Management experience

Character

153

ABILITY TO REPAYABILITY TO REPAY

DCR = CASH FLOW

DEBT SERVICE

1.25 = $100,000

$80,000

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DCR GUIDELINESDCR GUIDELINES The higher the better Use known cash flow or a

conservative estimate Generally private lenders want a

DCR between 1.2 and 1.3 Limit the number of deals with

DCR <1.1 Avoid deals with DCR <1

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COLLATERALCOLLATERAL

Loan to value = Loan amount

Value/Cost of assetssecuring the loan

.80 = $1,000,000

$1,250,000

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WHAT IS VALUE?WHAT IS VALUE?Fair market value Cost

Liquidation value Salvage value

Value in use

Replacement value

Investment cost

157

ACCEPTABLE LOAN TO VALUE RATIOACCEPTABLE LOAN TO VALUE RATIO

HUD has no requirement but generally 80%

Loan to value is matter of judgment

No definite standards Do not exceed 100% loan to

value

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RULES OF THUMB FOR LOAN TO VALUERULES OF THUMB FOR LOAN TO VALUE

Commercial buildings (80%) Home mortgage (80%) Machinery and equipment (50-

70%) SBA 504 (90%) Inventory (50-80%) Receivables (80%)

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LOAN TO VALUE GUIDELINESLOAN TO VALUE GUIDELINES

The lower the better Loan portfolios should have only

a few loans with a loan to value more than 90%

Cash flow is more important than collateral

Lenders avoid projects with a loan to value over 100%

160

COMMITMENTCOMMITMENT

Commitment by owners is critical!

Owner guarantee may be proportional to interest

161

BALANCE SHEETBALANCE SHEET

Look at soundness:Collection of receivables

Payment of bills

Management of inventory

Owner bleeding the company?

Cash relative to needs

162

MANAGEMENTMANAGEMENT

Must be experienced in all areas of business

Should have direct or transferable skills

163

CHARACTERCHARACTER

Favorable credit history Good & fair reputation No recent bankruptcy Clean criminal report

164

SMALL START-UPSSMALL START-UPS

Likely to have a higher default rate

Look for:Business plan

Borrower commitment

Personality

Niche

165

UNDERWRITING CRITERIAUNDERWRITING CRITERIA

Real EstateAbility to repay

Collateral

Commitment to project

Experience of development team

Character

166

ABILITY TO REPAYABILITY TO REPAY

DCR = NOI

Debt Service

Usually conventional lenders look at 1.25 - 1.3

Usually public lenders look at 1.1 - 1.15

167

COLLATERALCOLLATERAL

Use Loan to Value Ratio Appraiser normally determines

value Be certain to carefully review

appraisal Generally LTV ranges from

75% to 90%

168

COMMITMENT TO PROJECTCOMMITMENT TO PROJECT

Ways to show commitmentCompletion guarantee

Recourse

Deferral of development fee

Guarantee cash flow shortfalls

Equity

169

EXPERIENCE & CHARACTEREXPERIENCE & CHARACTER

Be certain development team has significant similar experience

Developer should have good credit and be reputable

170

FINANCIAL ANALYSIS (UNDERWRITING)FINANCIAL ANALYSIS (UNDERWRITING)

Recommended, not mandatory Reasonable costs Commitment of other financing sources Necessity of assistance (non-

substitution) Feasibility of project Reasonable financial terms/return CDBG funds disbursed pro-rata

171

REASONABLENESS OF PROPOSED PROJECT COSTS

REASONABLENESS OF PROPOSED PROJECT COSTS

Risks:Inflated costsUnderstated costsExcessive fees

Contribution:Independent quotesScrutiny of budgetCost certificationRetainage

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COMMITMENT, NON-SUBSTITUTION, PRO-RATA DRAW DOWN

COMMITMENT, NON-SUBSTITUTION, PRO-RATA DRAW DOWN

CDBG funds may be contingent upon other financing

No substitution of private funds with CDBG

CDBG funds should be disbursed at a rate no greater than other sources of funds

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IDENTIFYING NEED FOR PUBLIC FUNDS: GAPSIDENTIFYING NEED FOR PUBLIC FUNDS: GAPS

Financing gap Rate of return gap Locational gap

174

FINANCING GAPFINANCING GAP

+ Reasonable cost

- Conventional debt

- Other debt

- Conventional equity

= Financing gap

175

RATE OF RETURNRATE OF RETURN+ Reasonable cost

- Conventional debt

Equity needed

+ Benefits to investors

+ Equity Invested = Project rate of return

gap?

Market rateof return

176

LOCATIONAL GAPLOCATIONAL GAP

+ Cost of project in location X

- Cost of project in location Y

= “Locational” gap

177

PROJECT FEASIBILITY AND RETURNPROJECT FEASIBILITY AND RETURN

Terms of CDBG loan reflect the ability to repay without threatening the success of project

Project is financially feasible with assistance

Terms don’t over-subsidize private participation (undue enrichment)

Terms of CDBG loan affect conventional debt and equity

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SUBSIDIZING PARTICIPATIONSUBSIDIZING PARTICIPATION

Use public funds to balance interest of those participating

Example of participants in investor deals: developer lender investors

Repayment terms of public funds are structured such that each receives a market (but not above) yield/fee

179

GETTING STARTEDGETTING STARTED Who should undertake the program? How much will it cost? Where and how will the program

occur? How will it be “sold”? What records must be kept? How well are strategic objectives met?

180

WHO WILL MANAGE & IMPLEMENT?

Grantees have options:

StaffSubrecipientsCBDOsCDFIsThird Party Contractors

181

WHAT WILL IT COST?WHAT WILL IT COST? Estimate likely revenues from

service delivery and miscellaneous sources

Evaluate operating expenses carefully

If new to economic development, consider Business Plan and a start-up budget

182

WHERE & HOW?WHERE & HOW?

Help guide program decisions Plan should include:

Overview of goals & objectives

Description of eligible participants

Description of services

Overview of industry targets if any

Overview of selection process

183

WHERE & HOW (LENDING)WHERE & HOW (LENDING)

Managing the loan:Packaging the loan

Underwriting

Legal counsel

Disbursement methods

Business counseling

184

HOW WILL IT BE SOLD?HOW WILL IT BE SOLD?

Develop a roll-out strategy & schedule:Step-by-step timetables

Technical assistance hurdle

Milestones

Assignment of marketing responsibility

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MARKETINGMARKETING Develop a marketing plan! Tools include:

Advertising, billboards, brochures, endorsements, direct mail, editorials, networking, community meetings, news conferences, news releases, newsletters, posters, public speaking, PSAs, events, trade fairs, videos

Look for ways to save on marketing costs

186

RECORDKEEPINGRECORDKEEPING

Important element! Must be well-thought out and

efficientHow?

Who?

What?

187

COORDINATING WITH OTHER PLANSCOORDINATING WITH OTHER PLANS

Consolidated Plan Plans by other organizations &

agencies Neighborhood Revitalization

Strategy