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6. EDSR 03-14-2011ITEM # 6. City E ver MEMORANDUM TO: Economic Development Authority. FROM: Catherine Mehelich, Director of Economic Development DATE: March 14, 201 I SUBJECT: Discuss Draft Amendments to Micro Loan Fund Policy Attachment • EDA Finance Committee Meeting Minutes -November 4, 2010. • 1't Draft Revised Micro Loan Fund Policy Background The Micro Loan Program was last amended in 2006. At its November 2010 meeting, the EDA Finance Committee reviewed the current Micro Loan Policy and discussed several potential amendments. The Committee requests the EDA's feedback on the proposed amendments. Discussion of Proposed Amendments The following proposed amendments were provided by staff and the EDA Finance Committee: • Continue to limit the use of the program to the core Downtown District (south of Hwy 10), with the understanding that it maybe expanded to include the Central Business District (north of Hwy 10) after the Downtown Revitalization Study is complete. • Include provision that in addition to the application fee, all legal and filing costs for direct loans (non-participation loans) will be paid by borrower at loan closing. • Include a provision for Micro Loan applications to be reviewed by the Small Business Development Center as advisory consult for staff and Finance Committee. • Expand the Downtown Rehabilitation Program to include "leasehold improvements" as a permitted use of loan funds in newer buildings (The Bluffs & Jackson Place) with a loan limit of $10,000 and requirement for additional collateral (personal property). • Support for creating a program to finance Energy Efficiency Improvements in Commercial/Industrial Buildings. • Include a provision that `key man life insurance' maybe required as determined by the Finance Committee based on loan amount and ownership partners. Following the EDA's feedback, staff anticipates presenting a revised Micro Loan Fund Policy and Application for the Finance Committee's review and recommendation for final EDA adoption at an upcoming meeting. MEETING OF THE EDA FINANCE COMMITTEE HELD AT THE ELK RIVER. CITY HALL THURSDAY, NOVEBMER 4, 2010 Members Present: Chris Carlson, Cliff Lundberg, Paul Motin, Nate Ovall, Dan Tveite, Larry Toth and Chad Vitzthum (proposed member) Members Absent: none Staff Present: Economic Development Assistant Annie Deckert, Director of Economic Development Catherine Mehelich, Accountant Lori Stich Consider Micro Loan Request- Promo Products, LLC Ms. Mehelich summarized the Micro Loan application from Promo Prods cts, LLC. She indicated the applicants, Duane Hass, Director of the company, and Andy Isle, President of the company, were applying for an EDA Industrial Incentive Micro Loan in the amount of up to X25,000 to assist in financing interior remodeling, including an HVAC unit, lighting and flooring. The loan is proposed to be structured as a participation loan with First National. bank of Elk River and the ED1 would obtain a 3`d mortgage lien position on the real estate, in addition to obtaining personal guarantees from the company owners. Promo Products, LLC provide custom pad printing, silk screening, hot stamping, multi-color heat transfers and packaging for industrial, medical and promotional products. In operation since 2000, and currently located in Ramsey, the company is interested in purchasizlg a ~-ac~tnt 10,000 square feet building located at 19228 Industrial Park Blvd (former L ~'~ O Tool building). The company currently has eight employees and plans on creating two jobs wid~in the nekt two years. The applicants were in attendance at the meeting acid presented an overview of their company and remodeling plans. They indicated they have met with Elk River Municipal Utilities to discuss rebate options and plan on closing in late December, with an anticipated move-in date of late February. Their existing lease in Ramsey is up ?March 15, 2011. Mr. Haas and 1~~Ir. Isle were c~cused from the meeting following this discussion. The finance committee discussed die applination and loan terms. MOVED BY TVIETE AND SECONDED BY MOTIN, THE FINANCE COMMITTEE RECOMMENDS THAT THE EDA CONSIDER APPROVING THE MICRO LOAN REQUEST FOR PROMO PRODUCTS, LLC, IN THE AMOUNT UP TO $25,000) AT A 3% FIXED INTEREST RATE; GIVING STAFF THE FLEXIBILITY TO NEGOTIATE THE LOAN TERM UP TO 20 YEARS (10 YEAR IS PREFERRED) WITH 5 YEAR BALLON WITH THE EDA TAKING A THIRD MORTGAGE LIEN POSITION ON THE REAL ESTATE IN ADDITION TO OBTAINING PERSONAL GUARANTEES FROM THE COMPANY OWNERS. THE MOTION CARRIED 6-0. Micro Loan Status Updates Updates were provided on Roma Tool, Waterfall and Ethanol Tech Micro Loan applications. Staff will continue to work with the state, attorney and primary lender on these applications. Mr. Ovall suggested staff take a more aggressive stance on loans in default, by attaching judgments to the guarantees or negotiating a forbearance. Staff will discuss these options with City attorneys. EDA Finance Committee Minutes November, 4, 2010 Page 2 of 2 Page 2 4. Discuss Amendments to the Micro Loan Programs and Policies Ms. Mehelich presented potential amendments to the Micro Loan Programs and Policies including; expanding the boundaries of the Downtown Rehabilitation Loan program to include businesses north of HWY 10, increasing the fee for direct loans (not participation loans), include loan review by the Small Business Development Center and consider a new program to provide low cost-financing assistance for energy efficiency improvements in commercial and industrial buildings. Staff also suggested including leasehold improvements on The Bluffs and Jackson square commercial space. The Committee suggested including a guideline and threshold to loan amount gat which life insurance would be requested. Mr. Moon stated that because of the HWY 10 improvement study, he was not in favor of expanding the boundaries of the downtown program at this time, however because of the recent City visioning session, it may be appropriate to look at expanding into other .areas after the downtown filled up to help achieve the City's visioning goal of beautifi~ing d~c City's maul corridors. The committee would have the option to approve or deny applications based on future road vl~Ino~-ements. It was the Committees consensus to work with the SBDC to review futare loan applications and that the written comments provided by the SBDC were sufficient iu lieu of SBDC staff being present at the committee meeting. Mr. Vitzthum suggested the applicants provide responses to the SBDC comments. The committee discussed expanding the downtown program to include the Bluffs and Jackson Place commercial space and indicated their interest to consider applications which requested funds for leasehold improvements and equipment purchases but in a smaller loan amount to mitigate risk. Ms. Mehelich discussed looking into various existing energy efficient improvement programs and indicated staff would come back to the committee ~~-ith proposed amendments to the policy and guidelines. She asked the cominittce to submit additional comments to her via email on any other proposed amendments. 4. Closin;? The >~:DA Finance Comu~ittee meeting ended at 8:16 a.m. Respectfully submitted by, Annie Deckert Economic Development Assistant N:\Departments\Community Development\Economic Development\Micro Loan Fund\Finance Committee\2010\Nlinutes\11.4.10.doc ELK RIVER ECONOMIC DEVELOPMENT MICRO LOAN FUND POLICY & GUIDELINES PURPOSE The Economic Development Authority for the City of Elk River (EDA) recognizes the need to stimulate private sector investment into manufacturing facilities and equipment in order to create new jobs, boost productivity and retain existing jobs for local residents. Additionally, the need exists to encourage investment in the expansion and/or rehabilitation of commercial and retail buildings in order to maintain the economic viability of Elk River's Downtown District. Subsequently, the purpose of this program is to provide low interest, long-term (i.e. greater than one year) loans as incentives for industrial development within the City of Elk River and to encourage commercial and retail business owners in the Downtown District to rehabilitate their existing buildings. II. LOAN PROGRAMS In order to meet the economic and community development objectives of the EDA, ~.,,~ ~° distinct loan programs exist within the Micro Loan Fund to promote .Formatted: Not wgni~ght business growth in Elk River. Industrial Incentive Program Purpose: The purpose of the Industrial Incentive Program is to encourage industrial and high technology business development that supports the tax base and brings quality jobs to the city. Amount: Up to $100,000 of secondary financing not to exceed 20% of the project cost. Equity: Must have private-sector commitments for 50% of the project cost. Borrower must provide 10% or more of project financing. Rate: Fixed; 2 points below the lowest prime rate published in the Wall Street Journal the day the loan is closed, or 3%, whichever is greater. Term: Financing with a balloon payment in 5-years. The balloon payment must not be longer than the balloon payment of the participating bank. Loans may be amortized up to the following limits: 20-years on real estate uses; 10-years on equipment uses. Extension: In the event that the Borrower is unable to obtain conventional financing to replace the Micro Loan at the end of five years, the loan may be extended up to two additional years at a market rate of interest. Micro Loan Fund Policy & Guidelines Page 2 of 15 Amen~le~l March 2011 DKAFT' Criteria: 1. Borrower must be an industrial or high technology firm and create one new full-time job for each $20,000 loaned within 2 years. Said jobs must pay a minimum wage of $10.00 per hour excluding benefits required by law. Loans in excess of $75,000 shall meet the attached City of Elk River Business Subsidy Policy for the creation of new jobs at a minimum wage of $15.00 per hour excluding benefits required by law, as well as a 5-year location requirement. In the case where the multiple sources of public financing are requested (e.g. Micro Loan and Tax Increment Financing) job creation goals shall not be double-counted. 2. Borrower must comply with the provisions of the city's Industrial and Business Park zoning ordinances as applicable. Downtown ~b+litatae~o-Etevitalization Financing Program Purpose: The Downtown i1.4'..i~-. 3 ~ ;I~.e.-it ' l~ ~,ncin Program is available to business and property owners in the Downtown District (DD) Sri,-~.~--i~=• for the rehabilitation and restoration of ~?~c~i:r Older bulldln s t: ~,~~el' ~ ~~ :: Formatted: Font: Garamond g ~-- _- _ _ Amount: Up to $75,000 of secondary financing (not to exceed 40% of the project cost. Equity: Must have private-sector commitments for 50% of the project cost. Borrower must provide 10% or more of project financing. Rate: Fixed at 2%. Term: Financing with a balloon payment in up to 5-years. Loans may be amortized up to the following limits: 20-years on real estate uses; 10-years on equipment uses. Extension: In the event that the Borrower is unable to obtain conventional financing to replace the Micro Loan at the end of five years, the loan may be extended up to two additional years at a market rate of interest. Criteria: 1. At a minimum, 20% of Micro Loan dollars must be used for the improvement of the building fac~ades._~ irz<> c<, }ht,'.d • z - iLl be ~ic' cad ar a 1' ~=1~.~ (00 rt ~ n; i_'e . t.,.~.. tiu tic:_.T__'__t l:~teru, 2. Rehabilitation loans in the Downtown District are exempt from job creation and wage goals since the loan amount does not exceed $75,000 and does not qualify as a business subsidy by state law. Micro Loan Fund Policy & Guidelines Page 3 of 15 Amended March 2011 DRAFT 3. Borrower must be located in the Downtown District (DD) (see attached map). ~r -~ -~' ~~ra~~~ pr€~v~ ~: rc~ r t_T ,7I~,_t€ rx~i~_a~zc criteria here Formatted: Indent: Left: U" __. __ Formatted: Font: Gill Sans MT, Underline Micro Loan Fund Policy & Guidelines Page 4 of 15 Amended Mareb 2019 DKAFT Energy Efficiency Improvement Program Purpose: The Energy Efficiency Improvements Program is available to property owners of commercial or industrial buildings in Elk River to provide capital to businesses to invest in energy efficiency and improve their profitability through reduced energy costs and enhance their ability to retain and create jobs. In addition the program helps the City of Elk River used energy conservation as an economic development tool. Amount: Applicants may apply for the cost of improvements up to $75,000 Eligible Uses: Energy efficiency measures installed in or on a building, including: • Facility systems optimization (commissioning or re-commissioning) • Facility systems control improvements • Lighting efficiency improvements • Heating, ventilation and air conditioning system modifications • Exterior envelope impro~-emcnts • Motor and pump efficiency improvements • Ground-source heat pump systems used to heat or cool a f~lcility • Installation of equipment or devices that use renewable energy sources to generate electricin~ or heat or cool a building including solar electricity photovoltaic, wind turbine or solar thermal. Equity: Must have a minimum of 10"~~~ cquit<- pro~-idcd by the borrower. (are there .rti-rrclar~~ed ~r~ p~uticipcrtion loans or ~~it~e~~f lo~zn.r?~ Rate: Fi~cd at ~°,% Term: '1'hc mazilnum maturity- date dill be determined by the useful life of the improvement and the energy payback achieved. For projects that have a shorter length of pa~Tback (2-5) years as calculated according to energy savings, the loans will leave an initial maturity of up to 5 years from the date of closing. Longer life improvements (5-15 years) may apply for a longer maturity of up to 10 years. Repayment: Monthly installment payments will be made to the Elk River EDA according to the amortization schedule approved as part of the loan. Utility rebates as applicable will be assigned to the Elk River EDA and applied toward principal repayment of the loan. Criteria: Applicant must voluntarily agree to energy audits conducted and paid fox by the utility company's conservation improvement program (CIP). Engineering studies then are performed on facilities with conservation opportunities, 25% of the cost paid by the participating business and 75% paid by the utility company. ????? Proposed energy efficiency improvements will be reviewed and approved by the utility company servicing the building (e.g. Elk River Municipal Utilities, Connexus, CenterPoint) along with a letter indicating eligible utility rebates. An Elk River Energy City Commission member will be asked to participate in the EDA Finance Committee review and recommendation of the application. The loans will be secured by personal and corporate guarantees, and if applicable a lien on equipment financed. Installation must be certified through a licensed contractor and electrician. Loans less than $75,000 do not qualifi' as a `business subsidy' by state law and are therefore exempt from state repotting requirements. However the EDA will track jobs retained and created as a result of the project. (confirm avith city attorney on business .rub~icly linaitr) III. USES 1. Permitted Fund Uses: a. Building construction b. Land acquisition c. Machinery d. Furniture, fixtures, and equipment (FF&E) e. Renovation and modernization of buildings f Exterior renovation of retail, commercial and industrial buildings g. Public infrastructure needed for economic development expansions h. Investment real estate with a minimum of 50% of the space pre-leased 2. Ineligible Fund Uses: a. Expenditures for the construction and/or renovation of residential units b. Working capital c. Refinancing of existing debt d. Inventory IV. BUSINESSES ELIGIBILITY Any project meeting the above criteria, and located or proposed to be located within the city limits of Elk River as defined by this program, may be eligible for an Economic Development Micro Loan as further defined herein: • Business must be afor-profit corporation, partnership, or sole proprietorship. • Business must be a small business as defined by the Small Business Administration (SBA). • Business must have a positive net worth. • Religious, political, and pornographic enterprises are not eligible to use the Economic Development Micro Loan Fund. V. MICRO LOAN FUND TERMS & CONDITIONS 1. Loan Structure All Economic Development Micro Loans ~~11-s1~€ll be structured as participation loans and serviced by the project's primary lending institution r; t1 €n ~~z_c~c ~ ~ ~ o~her~.~~ise a ~ °,rc}vcd b,~ the I DA Finance C;<,_.;__ -Such an arrangement allows fox the central distribution and collection of funds and simplifies the financing process for all parties involved. A participation agreement will be signed by the borrower, primary lender and the EDA. The agreement will include the following provisions, among others: • If Borrower does not meet the job and wage goals specified in the Subsidy Agreement, the interest rate will change to 2 points above the participating bank's rate, effective from the two year anniversary of the loan closing. Upon subsequent achievement of the jobs and wage goals, the interest rate will revert back to the rate when the loan was originated, effective from the date of attainment of the job and wage goals. Micro Loan Fund Policy & Guidelines Page 5 of 15 Amended March 2019 DKAFl • If Borrower defaults on the loan, the EDA will collect all further payments during the default based on a pro-rata basis with the participating bank excluding the distribution of proceeds resulting from the foreclosure on collateral. The EDA may require additional agreements to be signed by the borrower (i.e. security agreement, personal guarantees, subsidy agreement). 2. Simultaneous Micro Loans The simultaneous use of different Micro Loan Fund Programs by any one borrower or for any one project is prohibited. 3. Call of Loan A loan shall become due and payable in full if a business relocates outside of the city of Elk River prior to the maturity date of the loan. 4. Late Payment Charge A late payment charge of 8% of the installment amount may be enforced. VI. REGULATION FOR NEW CONSTRUCTION AND IMPROVEMENTS All buildings which public funds will be used for construction or renovation are to be brought into conformance with city ordinances and state building codes. Repairs may include the following systems and portions of real property: a. Mechanical heating, plumbing, and electrical b. Structural; including the facade of the structure and energy related irriprovements. c. Hook-up to city services (i.e. water, sewer) d. ADA (Americans with Disabilities Act) improvements VII. LOAN SECURITY AND GUARANTEES Applicant must be able to secure the loan by providing the EDA with a minimum of a subordinate mortgage upon the building and/or assets or other approved collateral. Applicant must demonstrate the financial means to repay the loans, as determined by the Economic Development Authority. Whenever possible, personal guarantees will be made part of any loan agreement. 3r: i ran<e nay be ~_ - -` ~ _ .' b~• tr _ ~,:~~.~ce .-. VIII. TIMING OF PROJECT EXPENSES No project should commence until the Elk River Economic Development Authority has approved the loan application. Any costs incurred prior to the approval of the loan application are generally not eligible expenditures. Formatted: Indent: First line: 0" Micro Loan Fund Policy & Guidelines Page 6 of 15 Amended March 2011 DRAFT No building construction should commence until the required City permits are secured. The applicant will be responsible for all legal, recording, and other fees required for protection of a security interest in the loan, payable by anon-refundable 1% processing fee, which is paid at the time of application. h~ .l~litic~~~ tip i:hi nan- P 1 ~ procc~,nl~tee _ 1 ' as 1 f«r. ~ :~~ (~~an- `,all bc~~ yid l.~v the bc~s-rc~,~-er at r {{~' IX. PROCEDURAL GUIDELINES FOR APPLICATION AND APPROVAL 1. All applicants shall first contact a primary lending institution to determine if additional equity is needed, and if so, how much. 2. The applicant and the primary lender shall then meet with City Staff to obtain information about the Micro Loan program, discuss the project, and obtain application forms. 3. The applicant shall complete and submit an application form to the City, along with a processing fee of 1% of the loan request. (The fee is used to cover processing expenses and will be returned only if application is denied.) The applicant must provide evidence of their ability to meet the equity requirements or provide a letter of commitment for conventional financing from the primary lending institution. 4. The application will be reviewed by the City staff to determine if it conforms to all City policies and ordinances and to consider the following: a. The availability and applicability of other governmental grants and/or loan programs. b. Whether the proposed project will result in conformance with building and zoning codes. c. Whether it is desirous and in the best interests of the public to provide funding for the project. 5. i `__:';t ~~ ° ion ~r ' t t'~e a_ ,lic t. >?I~ zt~ii }n z~ ''_` ~~ _ ~f to € i3t~su~c~~ ~~} ~m~ it C .~___ _ _~t=;~- :~.: ~. 4 a..1ft 3 -=Ce C.,OL'1T tii e. Ek. The EDA Finance Committee and EDA Commissioners will review each application in terms of its consistency with the goals of the City's Comprehensive Plan and Economic Development Strategic Plan and in relation to the project's overall impact on the community's economy. Rehabilitation Loan applications will also be reviewed by an HRA member in conjunction with the EDA Finance Committee. They will also evaluate the project application in terms of the following: a. Project Design -Evaluation of project design will include review of proposed activities, time lines and a capacity to implement. Micro Loan Fund Policy & Guidelines Page 7 of 15 Amended March 2011 DRAFT b. Financial Feasibility -Availability of funds, private involvement, financial packaging and cost effectiveness. • Appropriate ratio of private funds to Micro Loan funds. • Sufficient cash flow to cover proposed debt service as demonstrated by financial statements and projections. • Business must show a positive net worth. • Letter of Commitment from applicant pledging to complete the project during proposed project duration, if the loan application is approved. • Letter of Commitment from other financing sources stating terms and conditions of their participation in the project if applicable. • Sufficient collateral. c. All other information as required in the application and/or additional information as may be requested by the Economic Development Authority. d. Project compliance with all city codes and policies. e. Program Objectives - In addition to quality job and wage creation/retention requirements, the applicant must meet all Micro Loan Fund criteria and demonstrate how the proposed activities will meet at least one of the following objectives: • The project contributes to the fulfillment of the city's approved and adopted economic development and/or redevelopment plans. • The project prevents or eliminates slums and blight. • The project increases the local tax base. • The project brings a structure into compliance with an existing buIlding code violation. €>~ 'mm,A written request for an extension shall be accompanied by a copy of current financial statements and a $500 upfront processing fee. The processing fee is used to cover processing expenses and will be returned if request is denied. The application for an extension beyond the original term should include a letter of denial Formatted: Indent Le Ft: 0.5", No bullets or numbering Micro Loan Fund Policy & Guidelines Page 8 of 15 Amended Marcb 2011 DKAFI' from a conventional lender. Refinancing will not be allowed solely for the purpose of reducing the interest rate due to lower market interest rates. _ _ 4,The EDA Finance Committee will recommend the approval, denial, or ', Formatted: indent: Left: os", No bullets or request a resubmission. A recommendation from the Finance Committee will be ' numbenng forwarded to the EDA for final action. X. LOAN POLICY REVIEW The above criteria will be reviewed on an annual basis to ensure that the policies reflected in this document are consistent with the economic development goals set forth by the Ciry. XI. RIGHT OF REFUSAL The Elk River Economic Development Authority may deny any project which it deems inappropriate according to the guidelines established in this document. XII. COMPLIANCE WITH MN BUSINESS SUBSIDY LAW Each company receiving assistance in excess of $75,000 from the EDA Micro Loan Fund shall be subject to the provisions and requirements set forth by Minnesota State Statute 116J.993 and the attached City of Elk River Business Subsidy Policy. Micro Loan Fund Policy & Guidelines Page 9 of 15 Amended Marc{i 2011 DRAFT