8.0.-11.0. EDSR 11-13-1995 ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY
MEMORANDUM
TO: EDA Finance Committee
FROM: William Rubin, EDA Executive Direct yi
��V
DATE: November 8, 1995
SUBJECT: Request for Micro Loan
Frank and Jody Galli
(The Vault Hearth-style Bread)
Introduction
Frank and Jody Galli request a loan from the EDA Micro Loan Fund in the
amount of$50,000 to launch a gourmet bread bakery and coffee shop venture
in the lowest level of the building referred to as the Elk River Travel
• building, 315 Jackson Avenue, Elk River, Minnesota. This loan would be
used by the Gallis to leverage primary financing and owner equity for the
acquisition of the building, the renovation of the lowest level space within
said building, and miscellaneous equipment and fixtures associated with the
production of hearth-style gourmet bread and related specialty coffee shop
uses and activities. Elk River Travel would continue to occupy its space on
the main level of the building. Monthly rental income from this space as well
as the monthly income from a two bedroom apartment on the upper level
would help provide supplemental income for the Gallis.
Background
Just as high end coffees such as espresso and cappuccino have increased in
popularity in recent years, so too has the hearth-style gourmet breads. These
breads are advertised as "fresh baked" and fat free with no additives or
preservatives. Three very successful hearth bakery endeavors can be found
in the Twin Cities area. They are Great Harvest Bread Company,
Breadsmith, and Turtle Bread Company. The Vault Hearth Bakery will
attempt to duplicate the success of the more urban-based endeavors.
Original formulas, quality ingredients, labor-intensive production,
specialized equipment, freshness and original product ' displays will
• differentiate the Galli's venture from other bakery concepts within the
surrounding trade area. The premium nature of the Galli's product will be
P.O. Box 490 • 13065 Orono Parkway • Elk River, MN 55330-1743 • (612) 441-7420 • Fax: (612) 441-7425
Equal Opportunity Housing and Equal Opportunity Employment
conveyed through a floor plan which makes the hearth oven and labor
. intensive production techniques visible to the customers. The Vault Hearth
Bakery will also capitalize on the building's historic presence within
downtown Elk River. In addition, this venture will concentrate on original
old world formulas, specialty ingredients, and old world ambiance created
through an open style floor plan and product displays.
Financing
The cost to acquire the building, remodel it, and purchase the necessary
production equipment is estimated at $214,000 and is broken down as
follows:
Building Acquisition (and related closing costs) $117,500
Equipment $ 65,000
Renovation $ 24,000
Working Capital $ 7.000
$214,000
Sources of financing for this endeavor are broken down as follows:
Amount Percent of Project
• Primary Lender $ 61,000 28.5%
Applicant Equity
-Cash $ 55,000 25.7%
-Home Equity Loan $ 48,000 22.4%
EDA Micro Loan 5 50.000 23.4%
$214,000 100%
Loan repayments are proposed as follows:
Source Term Interest Rate Security
Primary Lender 15 year amortization First Real Estate
(with 5 year balloon) 10%fixed Mortgage
EDA Micro Loan
(Real Estate Portion) 15 years 6%fixed Second Real Estate
Mortgage
(Equipment Portion) 7 years 6%fixed UCC Filing
Debt service for the project is outlined as follows:
Source Annual Debt Service
Primary Lender $ 7,869.00
EDA Micro Loan
Real Estate Portion $ 1,772.75
Equipment Portion $ 5.700.50
$15,342.25
Micro Loan policy guidelines indicate that the interest rate for EDA loans
will be tied to the lowest prime rate as published in the Wall Street Journal
the day a loan is closed. Attracting investment and reinvestment to a
community's central business district should offer additional incentives. In a
recent letter to ECM Publishers, Inc., the city and EDA outlined the
availability of Micro Loans from two sources that would carry interest rates
below that of the stated policy guidelines. Toward that end, a similar below-
market rate has been pursued by the Gallis.
Company Income/Expenses/Cash Flow, Etc.
According to the Vault's business plan, the break-even point for this venture
is combined daily sales of 120 loaves retail and 100 loaves commercial. The
ibusiness expects profitability by the fourth month of operation. Gross profit
for year one and year two is projected at ($1,922) and $22,788 respectively.
This profit/loss is in addition to Mr. Galli's salary as bakery manager. This
information is evidenced from the pro forma income statement for the year
ending April 31, 1997, which indicates sales of $120,120; gross margins of
$19,260; and net income of($1,922).
For the year ending April 31, 1998, retail and commercial sales are projected
at $157,344; gross margins at $45,660; and net income at $27,788.
For the year ending April 31, 1999, retail and commercial sales are projected
at $196,592; gross margins at $78,016; and net income at $55,384.
Mr. Galli has submitted multiple break even analysis illustrations. The first
illustration indicates a break even point when 120 loaves are sold per day at
a retail price of $2.60 per loaf and when 100 loaves are sold per clay at a
commercial price of $1.50 per loaf. Another break even analysis (retail only)
indicates that 180 loaves per day must be sold to break even. For commercial
only, 300 loaves per day must be sold. Various other multiple scenarios
suggest that break even points can be achieved when 160 loaves (retail) and
20 loaves (commercial) are sold per day; or when 140 loaves (retail) and 40
. loaves (commercial) are sold per day; or when 120 loaves (retail) and 80
loaves (commercial) are sold per day, etc.
Employment
According to the. Micro Loan application, the Vault Hearth Bakery would
create five (5) jobs with a total payroll of$75,000 per year.
Action Requested
Following its review of the Vault Hearth Bakery loan request, the EDA
Finance Committee is asked to present a recommendation to the EDA
Commissioners. The EDA will consider the loan request and
recommendation at its meeting on November 13, 1995.
This loan will be secured by a second real estate mortgage on the property at
315 Jackson Avenue, a UCC filing on the equipment, plus a promissory note
and personal guaranty signed by Frank and Jody Galli.
Availability of Funds
The EDA Micro Loan had a cash balance (that is, funds available to eligible
projects) of$122,046 as of September 30, 1995.
• Presentation
Frank Galli will be in attendance to make a presentation to the Finance
Committee regarding the Vault Hearth Bakery loan request.
ECONOMIC DEVELOPMENT MICRO 1,0ANrUND
ELK RIVER, MINNESOTA
APPLICATION
APPLICANT 11211/Y h V/r✓CCA/r 61LX
• ADDRESS ;6093 i�L -fir
CITY GLi< RIO5 2 STATE MTV ZIP CODE ..55330
CONTACT PERSON(S) I '14w/` eVq Lii
BUSINESS PHONE a!7 2(o3 -31.35 HOME PHONE 6a---2.0 -3135"
AMOUNT REQUESTED 3-0 Ooo
TERMS REQUESTED /O
SOCIAL SECURITY NUMBER 417/-78-393e FED ID # /104
STATE ID # N//4
1 . Type of Project:
Construction/New Building Expansion/Existing
Building
Equipment/Machinery Purchase X Remodel/Commercial
Retail/Industrial
• Industrial Inventory Working Capital
Other
2 . Describe Project:
4a,t,e.mdatj a. 41 l-/z-aC4^(
0AI.e • ; i I v.. ?L C-litre
•' 31 S ,,�-Y, .$ £ th
Sezie-oui7 tA)-(6 Gyp /zatzt
C1A4Gi • • / AP"
a . IA , 6'41;t1(42„ Alt.a4k641)
• . , 315 4• . '.
t
Grp' 2 - , • .
•
3 . Purpose hof Loan:
A.dC/CTY14nQi C- 6e4:S1a/lAti
•
IT4t10/01,12/Pire,t4(Ilet40--4.1
4 . Cost of Project:
A) Land $ N/14
B) Buildings (attach plans & costs) $ 117, 500, ,
C)
17, 5c0-
C) Equipment/Machinery/Fixtures (attach list 1
and estimated costs) $ bS, .5oo,
411 D) Remodeling $ ��/ 000.
E) Industrial Inventory/Working Capital $ 7� Cn9.
F) Other (attach description) $ Alli
TOTAL COSTS $ 2 /11/ DOC)
5 . Proposed Financing:
SOURCE NAME TERMS AMOUNT
otaezAjt_
ST
A) Bank Loan ! Itk
/07
p $1400
B) Bank Loan N,4 $
vo '
C) Other Priia Fudsmoe-TM7 3/4.1 ,o $ c-1 g 02)
D) Applicant Contribution $
E) Other C A-sH A1/411 $ 55,000
F) Fed Grant/Loan /V%}- $
G) State Grant/Loan NAP' $
• H) This Loan b 670 $ 50 n9 0
1
TOTAL FINANCING $ :-/1"/ {a)
-2- /
6 . Collateral to be assigned �(Describe and show lien position) :
A) To Bank: 315 3-60440-11
V .
B) To Bank:
• C) To Private Funding Source:
D) To Other Source: 81MAJOyaQ
E) To Federal Govt:
F) To State:
G) To This Loan: 36.)616/66-01/1Z1- NO
7 . Value of Collateral :
COST BOOK VALUE EXISTING
LIENS
A) Land $ /U/A $ $
B) Buildings $ /12 S-03, $ / /00. $ Q
C) Mach. & Equip. $ (OS S-0"), $ (AgO), $ 0
D) Other )1 $ 2.-L1 ( $ V7' Cti9, $ O
E) Other $ $ $
8 . Employment* :
111 Present: # of Employees 0 Total Payroll
After Project: # of Employees Total Payroll 7S,oco. y/
*If Loan is for Job Retention Only, Explain in Business Plan.
9 . Attorney, Accountant (Names , addresses, phone) :
AC-WV/kr/Kr buiti./iM b' .fig M AO V6 Hyl- 2cOl0
PffORNGY (N/iv5 Nr?T Se,I,EGT6
ro' 1HL V entTu fre .c)
10 . Bank and Other Credit References (Names, addresses, phone) :
N 1121--3330
`6.0_17 a.RAA'7?t d. 4�,, i4t4.),
4' )
-3-
• I/We certify that all information provided in this application is
true and correct to the best of my/our knowledge. I/We authorize the
City of Elk River and the Finance Committee to check credit
references and verify financial and other information. I/We agree to
provide any additional information as may be requested by the City
and the Finance Committee.
DATE l l n 27 1 ??S
Applicant Name •
PM; /'()(d ,rr
By
By rl..... � �
-5-
First atl n
o al Ban
•11 of Elk River
November 2, 1995
William Rubin
Economic Development Coordinator
Anoka Office Economic Development Micro Loan Fund
1121 W.Hwy.10
Anoka,MN 55303
(612)422-0537 Re: The Vault
Hearth Bakery Venture
Frank and Jody Galli
Dear Bill:
Elk Park Center Office
19157 Freeport Ave. First National Bank of Elk River would like to recommend to the EDA that the Micro
Elk River,MN 55330
(612)441-5684 Loan Fund be used to provide supplemental financing for The Vault Hearth Bakery
venture.
We feel this project meets the guidelines for the Micro Loan Fund by rehabilitating
Office a retail building in the heart of downtown Elk River. The project will also create a
*lain
9 Main Street new business that blends well with the current trend of specialty shops in the
Elk River,MN 55330
(612)441-2200 downtown area.
The FNB-ER has approved a loan request from Frank and Jody Galli as follows:
AMOUNT: $61,000.00
SAX Office TERM: 15 year amortization with a 5 year balloon
19424 Evans Sc NW COLLATERAL: 1st REM on 315 Jackson Street,Elk River
Elk River,MN 55330
(612)441-2447 INTEREST RATE: 10%fixed,resulting in payments of approx.$656.00/mo
Supplemental financing is necessary for this project to become a reality due to the
inherent risks associated with a start-up bakery/restaraunt. Our Bank is limited to
Zimmerman Office very conservative advance rates on the specialty equipment and leasehold
26040 Main St. improvements required for this project. The Micro Loan Fund was designed to
Zimmerman,MN 55398 provide gap financing for projects that stimulate the economic growth of the City of
(612)856-2266
Elk River. The business plan provided by Frank Galli does an excellent job of
explaining the financing requirements and the need for a Micro Loan.
Sincerely,
First National Mortgage
716 Main Street
Elk River,MN 55330 �— ��1 �in ` i
d�q
0120441-7133 Thomas L. Lund
Assistant Vice President
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• JACKSON AVENUE NW
i
EDA RESOLUTION 95-5
ti4` A RESOLUTION OF THE ECONOMIC DEVELOPMENT AUTHORITY IA>
• A RESOLUTION REQUESTING THAT CENTRAL MINNESOTA DEVELOPMENT
COMPANY EXTEND ITS SERVICE TERRITORY TO INCLUDE THE CORPORATE
LIMITS OF ELK RIVER, MINNESOTA
WHEREAS, the Central Minnesota Development Company(CMDC)is a private,not -
for- profit organization which pre-screens, packages, and processes Small
Business Administration 504 loans for businesses in Anoka County, and;
WHEREAS, in 1992, CMDC shareholders approved a change in its by-laws which
enables CMDC to provide SBA loan processing to other communities and
counties upon request, and;
WHEREAS, the Economic Development Authority for the City of Elk River(EDA)is a
public body corporate and politic that possesses the powers necessary or
convenient to carry out the objectives of pro-active economic development
as provided by Minnesota Statute, and;
WHEREAS, a fundamental objective of the Elk River EDA is to provide financing
assistance to support the expansion, consolidation, or relocation plans of
small businesses in the community, and;
WHEREAS, a primary financing program to support this objective is the SBA 504 loan
program, and;
WHEREAS, a locally-oriented not-for-profit organization similar to CMDC does not
exist in Elk River or in Sherburne County.
NOW,THEREFORE, BE IT RESOLVED by the Economic Development Authority for
the City of Elk River that:
1. The EDA supports the goal of providing small businesses in Elk River with
improved access to SBA loan programs.
2. The EDA hereby requests that CMDC provide SBA loan processing to
new or expanding businesses in the City of Elk River.
Passed and adopted by the Economic Development Authority for the City of Elk River
this 13th day of November, 1995.
Jeffrey A. Gongoll, President
Elk River Economic Development Authority
ATTEST:
•
William Rubin, Executive Director
Elk River Economic Development Authority
s:lresoluti\eda95-5.doc
m.
MOM= sommkvAi • iTilisommimm _ is
M --7 K aIII a—
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• CENTRAL MINNESOTA DEVELOPMENT COMPANY
1308 Coon Rapids Boulevard, Suite 202 • Coon Rapids, Minnesota 55433
(612) 755-2304 • Fax (612) 757-4955
October 20, 1995
Bill Rubin, Development Director
Elk River City Hall
P.O. Box 490
13065 Orono Parkway
Elk River, MN 55330
Re: Proposal to Expand SBA 504 Service Area
Dear Bill:
Over the past several years, you may recall that Central Minnesota Development Company has
explored opportunities to expand its SBA 504 certification area beyond Anoka County. During
our explorations,we met with many economic development professionals, lenders, City and
• Chamber of Commerce representatives in Sherburne, Isanti and Chisago Counties and have
received positive feedback. We are now formally proposing to expand into these three counties,
all of which are directly adjacent to our existing service area.
Central Minnesota Development Company is an 18-year-old SBA Certified Development
Company currently authorized to serve all of Anoka County and, over the past several years, has
evolved from a part-time single community organization dependent on public support,to an
independent self-supporting entity with expanded offices and a multi person full time staff
CMDC comprises a core of experienced lenders, executives and citizens,many of whom
represent your area. Our central location allows us to provide economic and community
development services to the communities and businesses we serve, and to maintain close
working relationships with the financial institutions in our existing and proposed market.
The purpose of this letter is to request your written support of our proposed expansion. Enclosed
is a sample letter of support which you can use or amend as you deem necessary. Our formal
application for an expanded service area will be made to SBA November 6, 1995, and we would
greatly appreciate it if you would send us your letter of support by October 31, 1995.
Sinc-.--ly,
• Connie M. Hills
Executive Director
• CMDC EFFORTS BRING $28.5 MILLION
IN NEW DEVELOPMENT TO ANOKA COUNTY
Anoka County has a population base of 275,000.
From June 1982, when we were certified by SBA to provide SBA
503 and 504 loans, through September 1994, CMDC originated
109 SBA 503 and 504 loans and, as of September 30, 1994, 92 of
the loans were funded totalling $17,010,000 with total
development costs of $44,649,984 and over 1,900 jobs created
. (913) or retained (1,011) in Anoka County.
In this past fiscal year, CMDC has completed and/or generated an
additional 39 loans in the County totalling $10,105,500 with total
development costs of $25,848,765 and over 700 jobs created or
retained in Anoka County.
Number of loans increased by 42%
Portfolio increased by 59%
Total Development Cost increased by 58%
• Job creation/retention increased by 37%
ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY
4111
October 23, 1995
Ms. Connie M. Hills
Central Minnesota Development Company
1308 Coon Rapids Blvd. Suite 202
Coon Rapids, MN 55433
Dear Connie:
Thank you for your letter of October 20, 1995. The need for a locally-oriented 504
development company that would serve the lenders and businessess in Sherburne County
was first identified in 1993. We are delighted to learn that you and your board continue to
explore the merits of expanding Central Minnesota Development Company's operations to
• Sherburne, Isanti and Chisago Counties. You can count on the support of the Elk River
EDA and the local lenders.
The EDA conducts its next meeting on November 13, 1995. At that time, the
commissioners will be asked to authorize a resolution of support in favor of your
organization. In the absence of a resolution, a letter of support will be offered under
separate cover.
In the event of questions or comments, please feel free to call me at 441-4905. Please
keep us posted as to your progress.
Sincerely yours,
William Rubin
Executive Director
Elk River EDA
WR:mrd
• s: uarers\maaoc
P.O. Box 490 • 13065 Orono Parkway • Elk River, MN 55330-1743 • (612) 441-7420 • Fax: (612) 441-7425
Equal Opportunity Housing and Equal Opportunity Employment
FACT EiE F0
• U.S.Small Business.Administration
SECTION 504
CERTIFIED DEVELOPMENT COMPANY PROGRAM
PURPOSE 4. Have the ability to sustain its MINIMUM AMOUNT
operations on a continuous basis from
The purpose of SBA's Certified reliable sources of funds. The minimum amount of CDC
Development Company program is to participation is$50,000. A$25,000
provide small businesses with 10-or 20- 5. Have at least five directors who meet debenture may be approved in special
year financing for the acquisition of land quarterly. At least one director must cases.
and building;machinery and equipment; have commercial lending experience.
construction;and modernization, USE OF PROCEEDS
renovation or restoration of existing 6. Have incorporated within its bylaws
facilities and sites. and articles that its chief purpose is to Proceeds may be used for the following
"promote and assist the growth and fixed asset projects:
WHAT IS A 504 CERTIFIED development of business concerns
DEVELOPMENT COMPANY? including small businesses." 1. Purchase of existing buildings.
A Certified Development Company HOW DOES A CDC WORK? 2. Purchase of land and land
C) is a private/public sector non improvements(grading,street
t corporation whose purpose is to The 504 Certified Development improvements,utilities,parking lots,and
contribute to the economic development Company is a conduit which allows landscaping.
of its area of operation. It must meet the private funds,guaranteed by SBA,to
following criteria: flow into community business. 3. Construction.
1. Operate in a defined area. 1. It is authorized to sell 100 percent 4. Modernization,renovation,or
SBA-guaranteed debentures to private conversion of existing facilities.
2. Be composed of 25 or more members investors in amounts of up to 40 percent
who are geographically representative of of a project or$750,000,whichever is 5. Purchase of machinery and
the CDC's area of operation and who lesser. equipment.
include representatives from each of the
following groups: 2. A CDC's portfolio must create or 6. Construction contingency fund not to
retain one job for every S15,000 of exceed 10 percent of construction costs.
a. Government agencies in the area debenture financing.
of operation. 7. Interest on interim financing.
3. Debenture proceeds provide
b. Private sector lending institutions. permanent financing. Therefore,interim 8. Professional fees directly attributable
financing will be required. to the project(surveying,engineering,
c. Business concerns. architectural,appraisal,legal,and
MAXIMUM AMOUNT accounting).
d. Community organizations.
The maximum amount of CDC TERM
3. Must provide a full-time professional participation in an individual project is
stafitof with the capacity to market the $750,000. Total project size is Maturities of 10 and 20 years are
gram and process,close and service unlimited. A practical project size is$1 available.
oan portfolio. to$2 million.
INTEREST RATE 3. Funding fee of 3/8 percent to cover 13. Illegal activities.
cost of public issuance of securities.
•The interest rate is based on the current 14. Applicant on probation,parole or
market rate for five-and 10-year U.S. 4. Reserve deposit of 1/2 percent.
Treasury issues,plus a spread over the pending criminal charges.
Treasury rate based on the current 5. Underwriting fee of 5/8 percent of INELIGIBLE PURPOSES
market conditions. total debenture amount.
COLLATERAL ELIGIBLE BUSINESSES 1. Working capital-inventory.
Collateral may include a mortgage on 2. Debt consolidation or repayment.
An eligible business must be a for-profit
the land and the building being financed; corporation,partnership or proprietor- 3. Refinancing.
liens on machinery,equipment,and 3. Refinancing.
ship; net worth of business must not
fixtures;and lease assignments. exceed$6 million;and average net profit 4. Financing a plant not located in the
after tax must not exceed$2 million for U.S.or its possessions.
The private sector lender is secured by a the last two years.
first lien on the project and SBA by a DEVELOPMENT COMPANY
second lien. INELIGIBLE BUSINESSES RESPONSIBILITIES
PERSONAL GUARANTEES 1. Businesses involved in speculation.
1. Inject 10 percent of the funds
Personal guarantees from all company 2. Not-for-profit corporations. necessary to complete each project.
owners of 20 percent or more will be 2. Maintain a place of business open to
required. 3. Newspapers,magazines,radio and the public during business hours and
TV systems,book publishers,theaters listed under a separate phone number.
TYPICAL 504 LOAN STRUCTURE and similar enterprises.
4. "Vanity" publishers,producers,
3. Submit an annual report containing
,1. A first mortgage (50 percent) from a p financial statements,management
private sector lender(non-federal funds). importers,exporters or distributors of information,a full activity report and an
communications such as newspapers, analysis of its assistance to small busi-
2. A second mortgage(40 percent)from magazines,books,greeting cards,sheet nesses.
CDC(100 percent SBA-guaranteed music,pictures,posters,film,tape live
debenture). broadcasts or other performances and 4. Ensure that the debentures are
recordings of musical programs. correctlyclosed and secured.
3. The development company or the
small business concern being assisted 5. Specialty stores engaged in selling
must provide at least 10 percent of the 5. Assist at least two small business
products that promote or advocate ideas, concerns perear.
project's cost including political,ideological or y
philosophical viewpoints. ADDITIONAL INFORMATION
REPAYMENT
6. Specialized delivery,distribution or For additional information contact your
Repayment is made in monthly,level- transportation concerns which distribute local SBA office. Check your local
debt installments. ineligible material. telephone directory for Small Business
FEES 7. Schools teaching academics or Administration,under the U.S.Govern-
mens section.
ideology.
1. Development company fee not to
exceed 1-1/2 percent processing fee on 8. Gambling facilities.
SBA's debenture and a 1/2 percent
service fee on unpaid debenture balance 9. Lending or investment companies.
(paid monthly).
10. Real estate investment companies.
2. Development company legal fees
0 related to loan closing not to exceed 11. Monopolies. Issued by:
$2,500 without SBA prior approval. Office of Public Communications
12. Pyramid sales plans. June 1989
U.S.GOVERMENT PRINTING OFACE:1989 0-941.188