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4.3. SR 11-09-1998'ity of Item #4.3. River MEMORANDUM TO: Mayor & City Council  FROM: DATE: Paul T. Steinman, Director of Economic Development November 9, 1998 SUBJECT: Sherburne County Business Development Fund Issue The Economic Development Authority will be reviewing the issue of the city's participation in the Sherburne County Business Development Fund at its meeting prior to the Council meeting on November 9. Staff is recommending that the EDA request the Council to approve the city's participation in the Sherburne County Business Development Fund by pledging to invest up to $250,000 in FDIC insured certificates of deposit with area banks to create a pool of funds to attract/retain industrial and manufacturing businesses in Sherburne County. Background The Sherburne County Business Development Fund is an interest rate buy-down program. The city, as an investor in the program, is called upon to buy certificates of deposit with designated banks at the time a business application has been approved. The investors will take a very minor reduction in the interest rate it could otherwise receive through other investments, and pass this savings along to the business. The investors dollars to this program are all federally insured and cities are allowed to purchase certificates of deposit as a legal investment instrument. One example of a project might be as follows: manufacturing business approved for $500,000 (maximum) loan ten investors (i.e. cities, utility companies, banks, etc.) are called upon to purchase $50,000 worth of certificates of deposit with the designated bank 13065 Orono Parkway · P.O. Box 490 · Elk River, MN 55330 · TDD & Phone: (612) 441-7420 · Fax: (612) 441-7425 the designated bank then in turn lends the "new money" to the business at a rate of 7 percent the certificates of deposit which are purchased by the investor are for a term of five years. The issues which are variable in this example include that the City of Elk River, as an investor in the program, may be called upon to purchase $100,000 in CD's or any amount up to its maximum pledge of $250,000. The amount the city will be called upon to invest relates to the size of project, location of project, and location of designated bank. In other examples, the City of Elk River may not be asked to make its investment at all for a project that other investors wish to participate in and is planned to occur elsewhere in the county. Conclusion City staff has encouraged the formation of this interest buy down program at the county level for approximately one year. It is one more valuable tool that Elk River will be able to take advantage of as well as other communities in Sherburne County. This tool will not only help grow businesses in Elk River, but build tax base for the entire county through participation from major stakeholders in Sherburne County. Staff feels Elk River is in a good position to get its share of businesses through this program, and will work hard to do so. Other investors who have committed to the program include Sherburne County, in the amount of $1,000,000, The Bank of Elk River, and First National Bank of Elk River. In staffs view, every investor, taxpayer, and economic development organization in Sherburne County stands to benefit from the results of this program, regardless of the location of the new business or business expansion project. Recommendation Staff recommends the Council approve a request from the Economic Development Authority (to be determined at the EDA meeting on November 9) regarding the city's participation as an investor in the Sherburne County Business Development Fund Program. Attachments · EDA Report - November 9 meeting EDA Agenda Memo November 9, 1998 Page 2 7. Recommendation to Council on Sherburne County Business Development Fund Issue Michael Darger, Director of Economic Development for Sherburne County, will be available at this EDA meeting to request an EDJJCouncil commitment to the Sherburne County Business Development Fund. Staff is supporting this fund by recommending that the EDA requests the Council to approve the city's participation in the fund by pledging to invest up to $250,000 in FDIC insured certificates of deposit with area banks to create a pool of funds to attract/retain industrial and manufacturing businesses in Sherburne County. EDA action will be forwarded to the City Council for final approval on November 9, 1998. Background The Sherburne County Business Development Fund is an interest rate buy-down program. There will be a number of"investors" in the program such as cities, the county, banks, utility companies, etc. Each investor will pledge to participate in the program by committing to invest a specific dollar amount at the time of approval of business applications to the fund. Sherburne County has agreed to pledge an investment of up to $1 million and other committed investors include the Bank of Elk River and First National Bank of Elk River. The investors will take a very minor reduction in the interest rate we could otherwise receive through other investments, thereby passing this savings along to the business. The business applicant will be able to secure a 5 year fixed financing rate at 7%. The difference between what the city could invest its dollars for in other instruments versus certificates of deposit may be approximately 1%. This 1% "loss" of interest income would approximate $12,500 over a 5 year term if all $250,000 of the city's pledge were to be called upon for use immediately. It is unlikely that all $250,000 of the city's pledge would be called upon immediately due to the number of investors in the program and the entire pool of funds which may be approximately $ 2 million. Business applicants are limited to $500,000 per business and staff would estimate the potential $ 2 million fund to last approximately 2 years. Staff also would encourage the EDA and Council to view the $12,500 not as lost interest income, but as an additional investment in growing the tax base of Sherburne County. One example of a project may be as follows: EDA Agenda Memo November 9, 1998 Page 3 · Manufacturing business approved for $500,000 loan · 10 investors are called upon to purchase $50,000 each in CDs with the designated bank · The designated bank then in turn lends the "new money" to the business at a rate of 7% · The CDs which are purchased by the investor are for a minimum term of 5 years. There are several issues in this example which are variable, including that the City of Elk River, as an investor in the program, may be called upon to purchase any dollar amount of CDs at a designated bank up to its pledge of $250,000. There may be other instances where the City of Elk River, as an investor, is not called upon at all to purchase CDs for a specific project. In that instance, the specific project may be entirely funded by the city in which it will locate its operations. Conclusion City staff has encouraged the formation of this interest buy-down program at the county level for approximately one year. It is one more valuable tool that Elk River will be able to take advantage of as well as other communities in Sherburne County. This tool will not only help grow businesses in Elk River, but build tax base for the entire county through participation from major stakeholders in Sherburne County. Staff feels Elk River is in a good position to get its share of businesses through this program, and will work hard to do so. Other investors who have committed to the program include Sherburne County, in the amount of $1 million, The Bank of Elk River, and First National Bank of Elk River. In staffs view, every investor, taxpayer, and economic development organization in Sherburne County stands to benefit from the results of this program, regardless of the location of the new business or business expansion project. Recommendation Staff recommends the EDA request the City Council to participate as an investor in the Sherburne County Business Development program by pledging to commit $250,000.