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8.0. EDSR 12-13-1994 f �� EDA ITEM #8 ,- f ( / ityof „ /'lli River cq November 22, 1993 Cat9 Mary Eberley Elk River Insurance Agency 710 Dodge Avenue NW Suite D Elk River, MN 55330 Dear Mary, As 1993 draws to a close, I felt it appropriate to contact you for an update on the status of a local Certified Development Company (CDC) . This request is made by virtue of the CDC ' s placement on the Elk River Economic Development Authority 1993 Work Program. The EDA will hold its regular monthly meeting on Monday, December 13, 1993 . I am hopeful that an update can be provided • to the EDA Commissioners at that time. However, I am respectful of busy holiday schedules which may prevent you from passing along a written or verbal update. If you are able to prepare an update on this topic, it would be greatly appreciated. In the event of questions or comments, please feel free to call me at 441-7420. Sincerely yours, William Rubin Economic Development Coordinator WR:ah • P.O. Box 490 • 13065 Orono Parkway • Elk River, MN 55330 • (612) 441-7420 • Fax: (612) 441-7425 lik . Sherburne County Economic Development Council411111 DEC=. 8 1993 it411 op 13880 Highway t0 P.O. Box 311 Elk River, MN 55330 November 28, 1993 Bill Rubin Economic Development Coordinator City of Elk River • P. 0. Box 490 Elk River, MN 55330 Dear Bill : Thank you for your letter of November 22, 1993 , about the status of a local Certified Development Company. (CDC) . As you well know, this issue las become very confusing and somewhat frustrating for everyone involved, „Much, time and energy has been spent on the-project.. _...y... -. • Although we had been told that the resolutions of support from the county, community FDA' s, and b.isiness., groups are vital to SBA approval for territory expansion, I have now been told by a board member from Coon Rapids Development Company that these documents are not necessary. They evidently intend to market in Sherburne County, and I understand that Twin Cities Metro has also been marketing in parts of Wright and Sherburne County. Since the Council represents the county at-large, our desire was to secure convenient service for all businesses in the county. With Coon Rapids Dev. Company, Twin Cities Metro and MEFI marketing their sevices to business, it seems we have what we wanted. The services of a CDC are available to all businesses, and a business can choose the provider that best fits its needs. Mark Lautenschlager of the SBA stated that if a business prefers a specific CDC to work with them, SBA will likely acknowledge that CDC in spite of specific"territory assignments. It has 'been done in the past: We evidently need do nothing further. It is good that "turf" is not restricting business development, and that. business can he assisted with expansion plans 'by a CDC of its choice . 1 am hopeful this is evidence that state and federal • government are doing away with some of that "hassle factor" that we heard so much about in the BR & E interviews! • NgSherburne County Economic Development Council • 13880 Highway 10 Page 2 P.O. Box311 CDC Elk River, MN 55330 If this latest information differs from your sources, please give me a call . We can talk about it, but I 'm not sure what other avenues we can explore. The circular regulations have frustrated all of us, so maybe it' s most productive to just let businesses choose the bank and the CDC they find most convenient, and then proceed. I ' d like to thank you for all the information and time you shared in this process. Your committment has been important, and may have erased some of the "beauracracy" business complainsabout having to endure in order to growl Cordially, - / . Mary Eberle , Chair Al • Sherburne ounty Economic Development Council 34 Nation's Business December 1993 FINANCE C ` A Small Business asbt oIn Administration program r has enabled thousands of i tin 504 companies to borrow at Loans expand.le rates and p I By J. Tol Brooms Jr. l onnie Jones of Greensboro, N.C., had always dreamed of expanding l t` t his auto body shop business, but + `. , �,` s financing posed a major obstacle. F t111 '" The banks he visited wanted a 25 to 30 percent down payment in cash plus ��� t monthly loan payments that would not l have been affordable. Then Jones meta banker who sag- t lij 4 N"= ' gested that he apply fora loan under thes ,t C , U.S. Small Business Administration's '""` � 1, 1 ,, Section 504 program. With a 10 percent , down payment and an affordable monthly qa, . t a anent,Jones found that he was able to a 1oeli ., buy land and construct a 5,400-square- ' > foot body shop. "I was certainly pleased with the down . .x R . r f r '�„ .p,. ', � , payment part of the package,"Jones says. c �' "We got an excellent interest rate coin- .1* pared to our other options at the time,and . ' 40/ 5; a lower monthly payment." �e /i` Within a year and a half of completing '' ,e new facility, Jones Body Shop had ""1"../.../....i."'" , ubled its annual sales and added six PHOTO:OWANE HALL employees,bringing the total to 10. Expanding his business turned from dream to reality for Donnie Jones of Greensboro Since its inception in 1981, the 504 N.C., thanks to the federally guaranteed Section 504 loan program. program has generated more than $4.6 billion in loans. The program reached a new high in the 1993 federal fiscal year guarantee if the borrower defaults. The CDC,the project must create at least one that ended Sept. 30, with 2,454 loans bank,meanwhile,agrees to provide long- new job. totaling$813 million. term financing for the remaining 50 ■Machinery and equipment financed Even with this record of impressive percent.It should be noted that the bank, must have a useful life of at least 10 years. growth,many owners of small businesses not the borrower, initiates contact with ■The borrower must plan to occupy at are unaware that the program exists.And the local CDC. least two-thirds of a building constructed some others who have heard of 504 loans "Our bank has utilized the program a with the loan. steer clear of them because of the pro- great deal in recent years," says David ■For purchase or remodeling of an gram's association with the federal gov- Trautman, a vice president with Park existing facility, the borrower must plan ernment. National Bank, in Columbus, Ohio. "The to occupy at least 50 percent of the space. To help you determine whether you borrower is able to preserve working IN The borrower must qualify as a small should explore the 504 program,here's an capital for other uses, and the program business. An applicant is considered a explanation of how it works: offers an attractive rate structure and small business if the firm's net worth does favorable repayment terms." He adds not exceed $6 million and if after-tax net Fixed-Asset Financing that prospective borrowers are often profits have averaged less than$2 million '. The program is designed to provide "surprised to find that a 504 application during the previous two years.According 4 long-term, fixed-asset financing to small does not involve mounds of paperwork." to the SBA, 98 percent of all U.S. n businesses, specifically for land, build- The entire application process usually companies meet the agency's definition. 'V Ings, and equipment. There are four key takes from four to eight weeks,according i Strict equity requirements usually players in every 504 deal: the borrower, to Mark Barbash,who is executive direc- prohibit start-ups from participating in the bank,the Small Business Administra- tor of the Columbus Countywide Develop- the 504 program. `. tion (SBA), and a certified development ment Corp. "We encourage our banks to company(CDC). call us early in the process," he says. Jobs,And More Jobs The borrower is generally required to "That way we can begin some preliminary Since its inception,the 504 loan program's make a down payment of only 10 percent. evaluation before the package gets here, principal mission has been job creation, e CDC provides 40 percent at a long- which expedites the approval process." says Martin Orr,chief of the development rm fixed rate,with an SBA repayment company branch of the SBA,in Washing- Eligibility Requirements ton, D.C. "The overall emphasis [of the J. Tol Broome Jr.is a loan administrator There are several basic eligibility restric- 504 program] is on creating jobs and with FirstSouth Bank in Burlington, tions imposed by the SBA: meeting needs of local communities." N.C. ■For every $35,000 loaned by the According to SBA records,loans made 36 Nation's Business December 1993 I FINANCE I ! under the 504 program have helped years on the amortization schedule)and at lending criteria. Underwriting compo- create more than 314,000 jobs since 1981. least seven years for equipment loans. nents that are considered include credit history, management strength, the busi- o better evaluate whether your corn- Interest Rates And Fees ness's track record, collateral, cash flow, pany might qualify for a 504 loan and The interest rate for the CDC portion of and the company's level of equity to learn how to proceed,consider the the loan package is fixed for the term of following points: the loan and pegged to U.S.Treasury bill Role Of The CDC rates. In October, the 10-year rate for Paul Herringshaw, executive director of Underwriting Criteria equipment loans was 5.85 percent, while Centrolina Development Corp., in Char- The SBA imposes several basic un- —__—_ —__ _._._ lotte, N.C., refers to the CDC as derwriting restrictions on each pro- "the catalyst" for the 504 process. spective borrower: Growth Of The SBA 504 Once the bank has preliminarily ■The borrower must have been approved a 504 request,the prospec- turned down for bank loans. lending Program tive borrower is turned over to the ■The business owner must dem- CDC. onstrategood character and man- (Total amount each fiscal inions of dollars year.) "The certified development cor- agement ability. poration works with the applicant ■The collateral must be accepta- $800 and assists in preparation of the ble. 700 .! package,"says Herringshaw,whose ■The borrower must show ade- I ; CDC has helped create more than quate cash flow to repay the loan. 600tt,f. ✓ 3,500 jobs in the past 10 years. ■The borrower must own a sub- 4 After the CDC board of directors stantial stake in the business. 500 VW,* y',!,. (made up of local bankers)approves the loan, the CDC loan officer then Types Of 400 / 4, recommends the package to the yp Projects *° t, According to Trautman, of Park ,, a \ SBA. Few requests are denied by National Bank,ideal 504 candidates 300 I x?� ,z the SBA once they have passed /include business owners who are 200 ' -u e,..- . ' muster with a bank and a CDC. growing quickly and need additional y , , i 1 capacity,who are leasing their place 100 1 , „ °- , Role Of The SBA 1 of business,and who lack the 20 to 25 _ In guaranteeing the CDC portion of percentpayment typically p '�'- t 1 the loan,the SBA provides the glue down a ent ty icall z e _-_ - quired for conventional financing. 1988 1989 1990 1991 1992 1993* that seals a deal.Without the guar- iiip "I recently made a 504 loan to a *Projected antee on the CDC loan, few banks orrugated box converter," says SOURCE:SMALL BUSINESS ADMINISTRATION will provide a 90 percent loan. Trautman, whose bank was one of The SBA has done an excellent the most prolific 504 lenders in Ohio in the 20-year rate for real estate loans was job of leveraging its resources.No federal recent years. "The company had been 6.75 percent. money is spent unless a 504 loan goes bad. located in a 60,000-square-foot facility The interest rate for the bank's portion Agency official Orr reports losses of 0.5 that was partially condemned," he says. of the loan can be fixed or variable. percent of total dollars loaned. "The down payment required for a con- A fee of about 3 percent is charged for ventional loan would have been a stretch. all CDC loans, while a bank typically Not For Everyone But we were able to put together a 504 charges a 1 to 2 percent fee on its portion The 504 program has many benefits,but it package to finance both the construction of the financing package. is not for every small-business owner. of a new 40,000-square-foot building and There are prepayment penalties at- some badly needed equipment." Preparing For The Application tached to the CDC loan portion of the Along with financing of construction, The borrower must submit several docu- financing. Consequently, a borrower including land purchase, and acquisition, ments to the bank and the CDC,including thinking of refinancing or moving only a renovation, or expansion of an existing financial statements covering the previ- few years after construction or expansion facility, a 504 loan can also cover soft ous three years and personal financial would be well-advised to avoid a 504 loan. costs, such as professional fees, surveys, statements for the principals in the corn- Not all banks are skilled at helping and interim interest. pany. small-business borrowers pursue 504 The equipment financed must have a Borrowers must sign an agreement loans. A good relationship among the useful life of at least 10 years and must not making them personally responsible for bank,the CDC, and the SBA is essential be subject to short-term obsolescence. paying any portion of a defaulted loan not to the timely completion of the 504 covered by the collateral. approval process. Project Size Limitations For new real estate projects or for With the requirement that one job be The SBA places size limitations only on renovation, construction estimates and a created per $35,000 in CDC loan money, the CDC loan portion of the project. The completed set of plans and specifications the program might not work for a busi- minimum amount for a CDC loan is must be submitted. An equipment-loan ness owner looking to add equipment, $50,000, and the maximum is $1 million. request should include estimates on the such as robotically controlled machinery Given that the CDC loan usually provides total cost of the machinery to be pur- which could decrease employees. 40 percent of the overall project amount, chased. Although the program may not be ie total value of a-504 project ranges appropriate for everyone, 504 loans have om$125,000 to$2.5 million. Role Of The Bank helped thousands of companies secure The local bank is the starting point for all much-needed financing for capital im- Loan Terms 504 loan requests.It is important to find a provements or equipment purchases. N3 The participating bank is required by the lender familiar with the program. SBA to extend a term of at least 10 years The bank analyzes the feasibility of the .1•, To order reprints of this , for real estate projects (most will go 15 loan request based on its standard set of V article, see Page 76.