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7.0. EDSR 04-11-2005 Item 7. • City or Elk River MEMORANDUM TO: Economic Development Authority CC: Lori Johnson, Finance Director FROM: Heidi Steinmetz, Assistant Director of Economic Development frS DATE: April I I, 2005 SUBJECT: Consider Call of Micro Loan: Display Solutions, Inc. Attachments • Letter from Bob Michalek of Display Solutions,April 5,2005 • Micro Loan Policy& Guidelines, Revised June 2004 • Subsidy Agreement document between Display Solutions and EDA • Background At its May 2004 meeting, the EDA approved a $50,000 Micro Loan per the recommendation of the Finance Committee to be used to purchase machinery and equipment necessary for Display Solutions to begin operations in Elk River. The company is a manufacturer of two product lines: store fixtures and point-of-purchase displays. The loan was approved with the following terms: • Personal guarantee from owners and spouses • Additional financing sources secured • Secured by 2nd lien position on equipment • Term: 3%interest, 10-year amortization, 3-year balloon payment • Structured as participation loan with American National Bank • Job performance agreement (7 full-time jobs @ no less than$12.00/hour within 2 years) Issue Bob Michalek of Display Solution has submitted the attached letter indicating that the company is in need of leasing 20,000 to 30,000 SF,which is currently not available in Elk River. The company is currently leasing 4,500 SF in the McChesney Industrial Park and has given notice to vacate the space by the end of April. Display Solutions would like to maintain their current term,which is 3%interest, a 10-year amortization, and a balloon • payment due in May of 2007. The company has remained current on the loan repayment. Consider Call of Micro Loan: Display Solutions,Inc. April 11,2005 EDA Meeting Page 2 of 2 • Staff Recommendation The attached Micro Loan Policy states on page 5, number 3 that the loan will become due and payable in full if the company relocates outside of the City of Elk River prior to the maturity date of the loan. In addition, the attached Subsidy Agreement document between Display Solutions and the EDA indicates on page 1, letter d that if the company relocates outside ofElk River prior to five years upon receipt of the loan,the company must repay all amounts of the loan. The Subsidy Agreement also included job and wage goals (7 full-time jobs @ no less than $12.00/hour within 2 years. Currently, the company has 6 full-time employees, 3 of which were hired after the receipt of the loan. The employees'wages are $9.00,$12.00 and $15.00 per hour. Since the amount of lease space needed by the company is unavailable in Elk River, staff recommends that the EDA consider the following options when considering the Display Solutions request: • Maintain current term (3%interest, 10-year amortization,balloon payment due May 2007) • Require loan to be paid in full • Negotiate adjusted terms for the loan repayment such as: o Require balloon payment to be paid in May of 2006 rather than May of 2007 • o Increase interest rate to a market rate Representatives from Display Solutions will be available at the EDA meeting to discuss their request and answer questions. 4111 Display Solutions April 5, 2005 Heidi Steinmetz Asst. Dir. Economic Development 13065 Orono Parkway Elk River, MN. 55330 Heidi, I just wanted to follow up with our phone conversation we had last Friday. As I mentioned, we would like to keep our payment plan in place regarding the $50,000 note with the Economic Development Department. We definitely need more space, at least 20,000 to 30,000 sq ft. immediately. After searching all available sights in Elk River, we have not been able to come up with anything so therefore are forced to look elsewhere. Short term, we will probably need to • sign a two year lease. However, our long term goal is to move back to Elk River and construct our own building. Again, we would appreciate any help you can give us. We would also be happy to meet you and the board on Monday night. Thanks, /61,We/ Bob Michalek Display Solutions • 18983 York St.N.W. Elk River,MN 55330 • Phone (763)274-0609 • Fax(763)274-1282 • ELK RIVER ECONOMIC DEVELOPMENT MICRO LOAN FUND POLICY & GUIDELINES Revised June 2004 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 central business 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 central business district to rehabilitate their existing buildings. II. LOAN PROGRAMS In order to meet the economic and community development objectives of the EDA, two distinct loan programs exist within the Micro Loan Fund to promote business growth in Elk River. • Industrial Incentive Program Purpose: The purpose of the Industrial Incentive Program is to encourage industrial 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 to 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 up to 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: 15-years on real estate uses; 10-years on equipment uses. Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 2 of 8 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. Borrower must be an industrial 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 plus benefits. Loans in excess of$75,000 shall meet the City's Business Subsidy Policy for new job and wage goals, as well as location requirements. 2. Borrower must comply with the provisions of the city's industrial and business park zoning ordinances. Redevelopment Financing Program Purpose: The Redevelopment Financing Program is available to business and property owners in the central business district (CBD) for the rehabilitation and restoration of their buildings. Amount: Up to $50,000 of secondary financing (not to exceed 40% of the project cost. Equity: Must have private-sector commitments for 50% of the project cost. Borrower to 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 2%,whichever is greater. Term: Financing with a balloon payment in up to 3-years. Loans may be amortized up to the following limits: 15-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 three 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's facade. 2. Borrower must be located in the Central Business District (see attached map). III. USES 1. Permitted Fund Uses: • a. Building construction b. Land acquisition Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 3 of 8 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 a for-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 EDA Micro Loans will be structured as participation loans and will be serviced by the project's primary lending institution. Such an arrangement allows for 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. • If Borrower defaults on the loan,the city 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. • Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 4 of 8 The EDA may require additional agreements to be signed by the borrower (i.e. security agreement,personal guarantees,job performance agreement). III2. Simultaneous Micro Loans The simultaneous use of different Micro Loan Fund Programs by any one borrower or for any one project is prohibited. rimmaiims) 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 EDA loan. 4. Late Payment Charge A late payment charge of up to 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 codes and policies. 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 improvements. c. Hook-up to city services (i.e.water, sewer) VII. LOAN SECURITY AND GUARANTEES ill 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. 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. 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 a 1%processing fee,which is paid at the time of application. 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. Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 5 of 8 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 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 loang Pro rams. 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. The EDA Finance Committee and EDA Commissioners will review each application in terms of its consistency with the goals of the Growth Management, Strategic, and Economic Development Plans and in relation to the project's overall impact on the community's economy. Redevelopment 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. 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. • Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 6 of 8 • 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. 6. 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 from a conventional lender. Refinancing will not be allowed solely for the purpose of reducing the interest rate due to lower market interest rates. 7. The EDA Finance Committee will recommend the approval, denial, or request a resubmission. A recommendation from the Finance Committee will be 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 City. • Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 7 of 8 XI. COMPLIANCE WITH STATE STATUTES 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 1161993 and the City's Business Subsidy Policy summarized below: Progress Reports The borrower shall file a report annually for two years after the closing of the loan or until all goals set forth in the application have been meet,which ever is later. Reports shall be completed using the format drafted by the State of Minnesota and shall be filed with the City in March of each year for the previous year. Maintain Facility The borrower agrees to maintain and operate its facility at the site where the loan is used for a period of 5-years after the date the loan is closed. Goal Attainment In addition to attaining or exceeding the jobs and wages goals set forth in Section IV of the Application,the borrower agrees to achieve at least one of the goals for community development set forth in Section IX,part 5, subdivision (e) of the Micro Loan Fund Policy. Redevelopment loans in the Central Business District are exempt from job creation and wage goals stated in Section IX,part 5, subdivision (e) provided the loan amount • does not exceed 50%of the project cost. Failure to Comply Businesses failing to comply with the above provisions will be subject to fines, repayment requirements in accordance with the state statute, and be deemed ineligible by the State to receive any loans or grants from public entities for a period of 5-years. XII. 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. • Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 8 of 8 SUBSIDY AGREEMENT • The Economic Development Authority of the City of Elk River (hereinafter referred to as the "EDA") and Display Solutions, Inc. (hereinafter referred to as the "Company") agree that the assistance under this Agreement is a "Business Subsidy" as defined by the City of Elk River Micro Loan Policy and is subject to the provisions thereof, including without limitation,job creation goals, reporting requirements, five year commitment by the Company, and repayment of the subsidy if the Company is in default under this agreement, including this Section hereof. The assistance under this Agreement does not qualify as a "Business Subsidy" as defined by Minnesota Statutes, Sections 116J.993 through 116J.995 (the "Subsidy Law"), however this Agreement is reflective of the Subsidy Law requirements. Accordingly, it is agreed: (a) The amount if the subsidy is $ 50,000 The type of subsidy is City Micro Loan, sub-prime financing The subsidy will be used by the Company to purchase equipment necessary to operation (b) The public purposes of the subsidy includes job creation and • enhancement of city's industrial tax base (c) The goals of the subsidy include the above public purposes, the completion of the project and the retention of the project for at least five years after the "Benefit Date" of the project, as defined in the Subsidy Law, which is hereby determined to be the date upon which this loan is closed. emims)(d) If the Company fails to meet its obligations under this Agreement, the Company shall repay all amounts of the subsidy theretofore paid to the Company by the EDA, together with interest accruing at the annual rate per annum equal to the implicit price deflator of Minnesota statutes, Section 275.70, subdivision 2, with all such interest accruing on each subsidy payment made to the Company hereunder from the date of said payments. If the Company meets some but not all of the job goals hereinafter defined, the Company may request in writing, and the EDA may agree, in its absolute discretion, that the subsidy be repaid by the Company on a pro rata basis. The Company represents that the subsidy is needed in order to induce the Company to complete the project in the City of Elk River. The Company covenants that it will continue its operations at the project for at least five years after the benefit date. • 1 S:\Eda\MicroLoan\LOANS\Display Solutions\SUBSIDY AGREEMENT.doc • (e) The Company represents that it is a subsidiary of the following parent corporation: Company Name: Not Applicable Address: (f) The Company represents that it has accepted subsidies from the additional following public entities: • Not Applicable • (g) The Company represents that it is not in default on the date hereof on any subsidy agreement entered into by the Company under the Subsidy Law. (h)The Company represents that it is not able to complete this project in its current location, which is Not Appicable because (i) The Company represents that it currently has in the State of Minnesota 3 full-time equivalent permanent employees and, for its "job goals"hereunder, will create due to the project an additional 7 full time equivalent permanent employee positions within two years of the benefit date, with these jobs having wage levels of at least $12.00 per hour, exclusive of benefits, as required by City of Elk River Micro Loan Policy. (j) The Company shall complete and file with the EDA an annual report in a form supplied by its Executive Director. If the Company does not file such reports, when due, the EDA must mail the Company a warning within one week of the filing date, and if, after 14 days after the postmark data of that warning, the Company continues to fail to report, then the Company is required to and shall pay the EDA a penalty of$100 for each subsequent day until the report is filed, up to a maximum of$1,000.00. The Company shall file these reports with the EDA, in care of its Executive Director at the following times: • On March 1 of each year, beginning with the March 1 immediately following the benefit date. • Within 30 days of the "Compliance Date," hereby defined to be the date that is two years after the benefit date. • 2 S:\Eda\MicroLoan\LOANS\Display Solutions\SUBSIDY AGREEMENT.doc • If the job goals are not met by the compliance date, every • subsequent anniversary thereof until the subsidy is repaid, as may be required hereunder. Each March 1 report shall reflect the prior calendar year, and each subsequent report shall reflect the period since the last reporting period. (k) If the Company fails to meet the job goals by the compliance date, the EDA, upon receiving written request by the Company indicating the reasons why the job goals have not been met and the Company's reasonable assurance that the goals will be met, may, in its absolute discretion, grant a one year extension of the compliance date. (1) In the event that any provision of this Agreement is inconsistent or in conflict with any provision of the Subsidy Law, and in the event that any provision of the Subsidy Law provides additional requirements, the provisions of the Subsidy Law shall apply and govern. In witness whereof, the EDA and the Company have dully executed this agreement by their duly authorized representatives. Economic Development Authority Display Solutions, Inc. • of the City of Elk River (Company) if 00 By '.,�,���= •,4 ' By l'A*1 It;. Pr i en► Its P,zi ► � / By � , %- /%� By61vi Yee`?e'/K Its Executive Director Its j-2 ; By Its �yc77`�e2, S 3 S:\Eda\MicroLoan\LOANS\Display Solutions\SUBSIDY AGREEMENT.doc