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7.0. EDSR 09-12-2005 ITEM # 7. • City of Elk -�-1 River MEMORANDUM TO: Economic Development Authority CC: Lori Johnson, Finance Director FROM: Heidi Steinmetz, Assistant Director of Economic Development DATE: September 12, 2005 SUBJECT: Consider Micro Loan for Provo Enterprises, LLC (Alliance Machine, Inc. Project) Attachments • Staff report to Finance Committee,August 17, 2005 • Finance Committee Minutes,August 17, 2005 • • City of Elk River Micro Loan Fund Policy Issue On August 17, 2005, the Finance Committee reviewed a Micro Loan application from Pat and Bryan Provo of Affiance Machine. The attached staff report to the Finance Committee summarizes the application. Affiance conducts light,precision machining of plastic and metal components for national and international clients in the aerospace, medical, defense and computer industries. See the August 17`" Finance Committee minutes for details on the Committee's recommendation that the EDA consider awarding Provo Enterprises,LLC (Affiance Machine) a $100,000 Industrial Incentive Program Micro Loan. The loan will be used towards the construction of an 18,000 SF manufacturing facility in Northstar Business Park in Elk River. A representative from Affiance Machine will be available at the EDA meeting to answer questions. Action Requested Staff requests that the EDA consider approval of the application from Affiance Machine for a$100,000 Industrial Incentive Program Micro Loan to Provo Enterprises, LLC per the recommendation of the Finance Committee with the following terms: Consider Micro Loan Application for Provo Enterprises,LLC September 12,2004 EDA Meeting Page 2 of 2 Rate Fixed, 2 points below prime with a 3% floor Term 15-year amortization,up to 5-year balloon payment Security Secured by 2nd position on the real estate,personal guarantee from owners and spouses Structure Participation loan with The Bank of Elk River Job performance agreement 9 new full-time jobs in Elk River with a$15.00 (subsidy agreement) minimum hourly wage The Micro Loan Policy is attached. Additional Information In the past, the City Council has held public hearings prior to approving$100,000 Micro Loans. The public hearing for the Provo Enterprises,LLC loan is scheduled for October 3, 2005. The Business Subsidy law requires that the City Council approve the loan but only requires a public heating if the loan exceeds $100,000. • . • City Elofk -�-1 River MEMORANDUM TO: EDA Finance Committee CC: Patrick Klaers, City Administrator Lori Johnson, Finance Director FROM: Heidi Steinmetz, Assistant Director of Economic Development DATE: August 17, 2005 SUBJECT: Consider Micro Loan Application: Alliance Machine, Inc. Attachments • Affiance Machine, Inc. Micro Loan Application including attachments • TRF Projection Worksheet • • E-mail message from Sid Inman of Ehlers &Associates,August 11, 2005 • City of Elk River Business Subsidies Policy Issue The owners of Affiance Machine, Inc. (Patrick and Bryan Provo, father and son) have submitted the attached application for an Industrial Incentive Program Micro Loan in the amount of$100,000 to be used for the construction of a new industrial/business park building in Elk River. The loan is proposed to be structured as a participation loan with The Bank of Elk River. Background Staff has been assisting Affiance Machine since last fall to find a suitable site for the relocation and expansion of the company's precision machining facility from Maple Grove to Elk River. Use of Tax Rebate Financing (TRF) or "Abatement" for the Project The company has accepted the EDA's proposal of a 100%land write-down using City and County TRF in the amount of$207,956 ($138,470 from the City and the same from the County). The City Council will hold a public hearing and consider final approval of the use of TRF for this project on August 15`" S Consider Micro Loan Application: Alliance Machine,Inc. EDA Finance Committee—August 17,2005 Page 2 of 2 Below is a current summary of the Affiance Machine project: Nature of Business Light, precision machining of plastic and metal components for national and international clients in the aerospace, medical, defense and computer industries City TRF Assistance $103,978 to Provo Enterprises,LLC who will lease the property to Affiance Machine, Inc. (50% of the land cost) TRF Years 10 (estimated) Building Size 18,000 SF Lot Size 2.84 acres to acoomodate a 10,000 SF expansion (see attached site plan) Jobs Retained 30 ($20 average hourly wage) Jobs to be Created 9 ($15 minimum hourly wage) Use of the Micro Loan Fund for this Project The applicant proposes to use Micro Loan funds to finance construction costs. The applicant has proposed that the EDA take a second position on the real estate. Below is a summary of the project costs and proposed financing: • Project Costs Land-2.84 Acres $207,956 (see attached TRF projection worksheet) Construction $963,400 (see attached construction statement) Total $1,171,356 Proposed Project Financing (see attached bank proposal for details): Bank Loan 1 $980,000 Bank Loan 2 $140,000 EDA Micro Loan $100,000 Total $1,220,000 Project "But For" Analysis Sid Inman of Ehlers &Associates (the City's financial advisor) completed the"But For" analysis for the use of TRF for this project and reported to the EDA on August 8th that the Affiance project met the "But For" test. Mr. Inman has responded to this question with the attached e-mail message indicating that the use of Micro Loan funds for this project would change the "But For" analysis and result in a recommendation to the EDA that less TRF be applied to this project.. Additional Information Each company that receives a business subsidy in the State of Minnesota shall be subject to a subsidy agreement with the City of Elk River,which includes reporting provisions and • requirements set forth by the MN Business Subsidy Law. The City's Business Subsidies Policy is attached. • MEETING OF THE EDA FINANCE COMMITTEE HELD AT THE ELK RIVER CITY HALL -� HAI777WEDNESDAY, AUGUST 17, 2005IJI, Members Present: Tom McNair,Paul Motin,Dave Rymanowski and Dan Tveite Members Absent: Chris Carlson and Cliff Lundberg Staff Present: City Administrator Pat Klaers and Assistant Director of Economic Development Heidi Steinmetz 1. Accept January 4.2005 EDA Finance Committee Minutes MOVED BY DAN TVEITE AND SECONDED BY TOM MCNAIR,THE FINANCE COMMITTEE MOVED TO ACCEPT THE JANUARY 4,2005 FINANCE COMMITTEE MINUTES. 2. Update: Minnesota Fabrication&Machine (MF&M),Inc. Micro Loan Assistant Director of Economic Development Heidi Steinmetz stated that the Finance Committee recommended and the EDA approved a two-year extension of the MF&M Micro Loan back in January of this year. She updated the Committee that the EDA approved the company's recent request that the EDA take a second position on the loan. 3. Discuss Micro Loan Portfolio Report Finance Committee member Dan Tveite asked if staff had received any recent Micro 41) Loan inquiries. Mrs. Steinmetz stated that despite an increase of marketing for the program, that there are no recent inquires to report. Mr.Tveite also asked for an update on Display Solutions,a company that received a Micro Loan in May of 2004. Mrs. Steinmetz indicated that Display Solutions has repaid the loan and moved to Brooklyn Park due to unavailable lease space within the City of Elk River. 4. Consider Micro Loan Application: Affiance Machine,Inc. Mrs. Steinmetz summarized Affiance Machine's request as outlined in the August 17th staff report to the Finance Committee. Finance Committee member Tom McNair clarified the company's equity position and provided an overview of The Bank of Elk River's financing proposal to the company. Mrs. Steinmetz indicated that staff's recommendation regarding the request would be that the Finance Committee first discuss its policy regarding the level of appropriate assistance provided to manufacturing companies entering the City of Elk River. Mr. McNair mentioned that the Micro Loan subsidy provided to Affiance Machine is not $100,000 rather it's the amount saved due to the lower interest rate of the loan. City Administrator Pat Klaers mentioned that banks should not offer City assistance on behalf of the City. Finance Committee member Dave Rymanowski inquired about the e-mail from Sid Inman of Ehlers &Associates (the City's financial advisor) provided to the Committee by staff • earlier in the meeting. The e-mail indicated that if the City were to provide the company with an additional subsidy beyond the Tax Abatement(already approved by the EDA&City EDA Finance Committee MinutesDR A�� Page 2 August 17,2005 • Council), that the additional subsidy would alter Mr. Inman's "But For" analysis completed for the Tax Abatement analysis for the project. Finance Committee member Paul Motin stated that offering Tax Abatement and a Micro Loan to the company may be"double dipping"regarding the use of incentives. Mr.Tveite indicated that the City appreciates that area banks are marketing the Micro Loan Fund but that the banks should communicate with City staff if Micro Loan dollars are included in bank proposals. Mr. Motin asked if future Tax Abatement applications should include a question such as "Will you be asking for a Micro Loan in addition to the Tax Abatement?" Mr. Rymanowski stated that these issues are policy issues in which the Committee should discuss in more detail. He added that banks should not be treated differently by the City. MOVED BY DAN TVEITE AND SECONDED BY PAUL MOTIN,THE FINANCE COMMITTEE MOVED TO RECOMMEND THAT THE EDA CONSIDER APPROVING A$100,000 MICRO LOAN TO PROVO ENTERPRISES, LLC (ALLIANCE MACHINE,INC). 5. Schedule Meeting to Review Micro Loan Policy The Finance Committee scheduled a meeting for 7:00 a.m. on September 28th to discuss policy issues regarding the level of appropriate assistance provided to manufacturing companies entering the City of Elk River. • 6. Closing The EDA Finance Committee meeting ended at 6:00 p.m. Respectfully submitted[_ by, / e/-6-4 .v�iC�✓t.�G Heidi Steinmetz Assistant Director of Economic Development • • 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. S 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 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. 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). • 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 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 11) 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 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. 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 116J.993 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. S Elk River Economic Development Authority Micro Loan Fund Policy&Guidelines Revised June 2004 Page 8 of 8