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8.0. EDSR 03-08-1993 -c./ \( ITEM 8 r / tfiC TO: ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY River FROM: WILLIAM RUBIN, ED COORDINATOR/ JYL DATE: MARCH 3, 1993 UUP" SUBJECT: EXPANSION OF A CERTIFIED DEVELOPMENT COMPANY INTO SHERBURNE COUNTY INTRODUCTION On Monday, March 8, 1993, the EDA Commissioners will hear a presentation by Kristin Wood, Administrator, of the Coon Rapids Development Company (CRDC) . Based on a recent change in its Bylaws, CRDC is exploring options of extending its service territory into one or more counties, including Sherburne. Additional information on the CRDC follows. BACKGROUND WAS IS CRDC? • CRDC is a private, nonprofit development corporation that has been "certified" by the Small Business Administration (SBA) , thereby allowing it to offer certain SBA programs to small companies. The basic SBA program offered is the 504 Loan; as a result, a certified development company is sometimes referred as a 504 Development Company. To date, there are eight active 504 companies in Minnesota, including a State-wide organization known as Opportunities Minnesota, Inc. (OMNI) which operates in areas that lack its own development company. CRDC was organized in 1978; it is owned by shareholders who purchased stock in the organization. The sale of stock, by and large, was viewed as a donation toward CRDC's economic development efforts. The organization maintains its own Bylaws and Board of Directors. The Directors are elected from CRDC shareholders at its annual meeting. Officers, in turn, are elected by the Directors. Except for the administrator, the Directors and Officers are volunteers to the organization. EXPANSION OF SERVICE TERRITORY CRDC' s Bylaws define its area of operation. Initially, the Company could only offer SBA financing to companies located (or to be located) in the Coon Rapids city limits. A few years ago, shareholders approved a bylaw change to include all of Anoka County in the CRDC service territory. In November, 1992, • shareholders voted to remove any territorial restrictions on the company' s loan processing activities. Pursuant to the Bylaw change, expansion beyond Anoka County's borders requires 720 Dodge Avenue N.W., Elk River, Minnesota 55330 (612)441-7420 • the request of other communities. Final action on service territory expansion rests with the SBA. NEEDS IN SHERBURNE COUNTY During its recent survey of manufacturing companies, the Sherburne County Economic Development Council found that small. businesses lack easy access to long term, low interest financing programs. Due to changing underwriting standards, lenders are requiring more equity into commercial loans . Some survey participants suggested that local banks needed to be more business-oriented and user-friendly. Presumably, a Certified Development Company, working with small businesses and local lenders, could address the needs identified in the manufacturer's survey. SUMMARY Economic development professionals throughout Sherburne County have discussed the merits of a certified development company at great length. Similar discussions have occurred with communities and advisory groups in neighboring Benton and Wright counties. It was concluded that creating a new 504 company would be cost prohibitive. A solution is to align with • an existing 504 company such as the CRDC. Issues which emerged from this discussion include: renaming the organization, expanded representation on the Board of Directors, and stock purchases-donations. For example, if territory expansion is approved, CRDC will likely be renamed; one suggestion is "Central Region Development Company" . More Directors from the expanded territory will be required for the Board. Lastly, stock is dominated by the original investors in 1978 and from persons that invested in subsequent years . To further encourage broader representation in the expanded CRDC, new stock sponsors are sought. Likely sponsors include EDA's, cities, banks, and utility companies. Each group is requested to purchase $1,000 worth of stock in the renamed (and reorganized) 504 company. This purchase would be payable only after SBA acts on the service territory expansion. ACTION REQUESTED Following a presentation by the CRDC Administrator, the EDA will be respectfully asked to purchase $1,000 (one thousand dollars) worth of stock in a Central Region Development Company which will serve an expanded territory of Sherburne County. This stock purchase will not occur until SBA approves a request 110 for territory expansion. IIEE FACT 003 0 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 S25,000 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 DC) is a private/public sector non- improvements(grading,street fit corporation whose purpose is to The 504 Certified Development improvements,utilities,parking lots,and ontribute 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 S 15,000 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 staff with the capacity to market the $750,000. Total project size is Maturities of 10 and 20 years are rogram and process,close and service unlimited. A practical project size is$1 available. an 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 onprobation,parole or market rate for five-and 10-year U.S. 4. Reserve deposit of 1/2 percent. pp pending criminal charges. Treasury issues,plus a spread over the 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 ship;net worth of business must not 3. Refinancing. 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. 3. Submit an annual report containing • 1. A first mortgage (50 percent) from a 4. "Vanity"publishers,producers, 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, concernsrear. project's cost. including political,ideological or Y REPAYMENT philosophical viewpoints. ADDITIONAL INFORMATION 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 Administration,under the U.S.Govern- FEES 7. Schools teaching academics or ment 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 41)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 GOVERNMENT PRONG OFRCE:1989 0-941-485 • SMALL BUSINESS ADMINISTRATION 100 North Sixth Street Minneapolis, MN 55403 503/504 Development Companies Coon Rapids Development Company Region Nine Development P.O. Box 33346 Corporation 1308 Coon Rapids Blvd. 410 South Fifth Street Suite 209 P.O. Box 3367 First Bank Coon Rapids Bldg. Mankato, MN 56001 Coon Rapids, MN 55433 507/387-5643 612/755-2304 Gina Feehan Kristin Wood St. Paul Enterprise Development Minneapolis Economic Development Corporation Company 25 W. Fourth Street Grain Belt Office Building St. Paul, MN 55102 1215 Marshall Street NE 612/228-3308 Minneapolis, MN 55413 Connie Hills • 612/673-5181 Russell Knighton Southeastern Minnesota 504 Development, Inc. Opportunities Minnesota Inc. 220 S. Broadway, Suite 100 980 American Center Building Rochester, MN 55904 150 East Kellogg Boulevard 507/288-6442 St. Paul, MN 55101 Dwayne Lee 612/297-1391 Paul Moe Twin Cities-Metro Certified Development Company Prairieland Economic Development 8990 Springbrook Drive Corporation Suite 230 2524 Broadway Avenue Minneapolis, MN 55433 P.O. Box 265 612/786-9448 Slayton, MN 56172 Robert Heck 507/836-8549 Randy Jorgenson • 7/91 - 10 -