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4.1. JFC 06-25-2019 The Elk River Vision A welcoming community with revolutionary and spirited resourcefulness, exceptional service, and community engagement that encourages and inspires prosperity Request for Action To Joint Finance Committee Item Number 4.1 Agenda Section General Business Meeting Date June 25, 2019 Prepared by Amanda Othoudt, EDD Item Description Microloan Underwriting Practices Reviewed by Cal Portner, City Administrator Reviewed by Action Requested Information presented for discussion. Background/Discussion In May, staff attended the California Association for Micro Enterprise Opportunity (CAMEO) Microloan Essentials class. This was a two-day class focusing on underwriting practices and procedures for microloans in the public and non-profit sector. We focused on real case study’s involving small to medium sized businesses. There were several helpful tools and resources for underwriting loans, and accessing lender risk by implementing a standardized underwriting grid. In an effort to strengthen our microloan program, staff would like to present the key take-a-ways from the course. Financial Impact N/A Attachments  PowerPoint Presentation  Economic Development Business Microloan Fund Program  Economic Development Jobs Incentive Microloan Program  CAMEO Microlending Steps  CAMEO Sample Credit Memo  CAMEO Sample Required Document List  CAMEO Sample Underwriting Grid  CAMEO Sample Microloan Application Questions  CAMEO Elements of a Loan Program City Council Joint Finance Committee Meeting City Council Microloan Essentials Two day class hosted by Southwest Initiative Foundation and Great River Energy Goal of the class is to help business owners access capital while lowering the city’s lending risk by establishing an underwriting criteria. City Council Training Outcomes Understand the five C’s of credit Cash Capacity, Credit Capacity, Character, Capital, Collateral Know important micro-lending underwriting analyses Understand elements of underwriting criteria Ability to complete a Credit Memo Evaluate your city’s loan underwriting process Leave with ideas to strengthen your program City Council Current Underwriting Process: Staff Responsibilities Reviews each application for completeness Collects $2,000 processing fee Review jobs/wage goals Project design, conforms to city policies and ordinances, building and zoning codes. Reviews availability and applicability of other governmental grants or microloan programs Determine financial feasibility of the project no real underwriting criteria Completes microloan application scoring worksheet City Council Current Underwriting Process – Continued Joint Finance Committee Responsibilities: Project design and conformance to city policies and objectives of the Microloan program Reviews Microloan Application Scoring Worksheet Financial feasibility Reviews Tax Returns, Projections, P&L, Balance Sheets at the Joint Finance Committee meeting. City Council Recommended Actions Review and discuss sample documents provided by CAMEO Discuss and develop an standard underwriting grid utilizing the five C’s of credit Create a required document list that parallels underwriting grid. Create an easy-to-read credit memo template Discuss and develop loan servicing procedures Powered by Nature Economic Development Business Microloan Fund Guidelines, Policy & Application Amended: May 2011 November 2013 July 2014 November 2014 December 2016 April 2017 August 2017 City of Elk River Economic Development Division 13065 Orono Parkway Elk River, MN 55330 763.635.1040 Page 2 of 21 EDA & City Council Approved August 21, 2017 ELK RIVER ECONOMIC DEVELOPMENT BUSINESS MICROLOAN FUND GUIDELINES, POLICY & APPLICATION 1. POLICY PURPOSE The Economic Development Authority for the city of Elk River (EDA) recognizes the need to stimulate private sector investment into manufacturing and certain commercial 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 the city and in the Downtown District. Subsequently, the purpose of this microloan program is to provide low interest, long- term (i.e. greater than one year) loans as incentives for new industrial and commercial development within the city of Elk River and to encourage commercial and retail business owners in the Downtown District to rehabilitate their existing buildings. 2. ELIGIBLE BUSINESSES Any project located or proposed to be located within the city limits of Elk River as defined by this microloan program, may be eligible for a Microloan as further defined herein: • Unless otherwise stated, 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). • Religious, political, and pornographic enterprises are not eligible. 3. MICROLOAN FUND TERMS & CONDITIONS Loan Structure All Economic Development Microloans shall be structured as direct loans unless otherwise approved by the EDA Finance Committee. If a participation loan is requested, an agreement will be signed by the borrower, primary lender and the EDA. The EDA may require additional agreements to be signed by the borrower (i.e. security agreement, personal guarantees, business subsidy agreement). Simultaneous Microloans The simultaneous use of different EDA microloan programs by any one borrower or for any one project is prohibited. Loan Repayment Jobs Incentive funds, including principal and interest received may not be used to support restaurant, retail, casinos, or sports facilities. Page 3 of 21 EDA & City Council Approved August 21, 2017 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 loan. Late Payment Charge A late payment charge of 8% of the installment amount will be enforced following a grace period of 10 calendar days. 4. 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 ordinances and state building codes. 5. LOAN SECURITY AND GUARANTEES 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 equal to the amount of the loan. Applicant must demonstrate the financial means to repay the loans, as determined by the EDA. Whenever possible, personal, corporate, and/or entity guarantees will be made part of any loan agreement. Key person life insurance may be required as determined by the EDA Finance Committee based on loan amount and company ownership partners. 6. TIMING OF PROJECT EXPENSES No project should commence until the EDA has approved the loan application. Any costs incurred prior to the approval of the loan application are 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 $2,000 processing fee, which is paid at the time of application. In addition to the processing fee, all legal and filing fees shall be paid by the borrower at loan closing. Closing of the Microloan should be simultaneous with the borrower’s primary funding. The EDA should be given two weeks’ notice before closing. 7. PROCEDURAL GUIDELINES FOR APPLICATION AND APPROVAL Page 4 of 21 EDA & City Council Approved August 21, 2017 1. All applicants shall first contact a primary lending institution to determine if additional equity is needed, and if so, how much (if applicable). 2. The applicant shall then meet with city staff to obtain information about the microloan program, discuss the project, and obtain application forms. 3. The applicant shall complete and submit an application form to the city, along with a $2,000 processing fee. The fee is used to cover processing expenses and any remaining funds will be returned to the applicant. The applicant must provide evidence of their ability to meet the 10% equity requirements or provide a letter of commitment for conventional financing from the primary lending institution. 4. The EDA is a governmental entity and as such must provide public access to public data it receives. Data deemed by Applicant to be nonpublic data under State law should be so designated or marked by Applicant. See Minn. Sat. Sections 13.59, Subd. 1, respectively. 5. 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 microloan 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. 6. The EDA Finance Committee and EDA Commissioners will review each application in terms of its consistency with the goals of the city’s Comprehensive Plan and Economic Development Strategic Plan and in relation to the project’s overall impact on the community’s economy. Downtown Revitalization Loan applications will also be reviewed by a Housing & Redevelopment Authority Commissioner in conjunction with the EDA Finance Committee. Energy Efficiency Improvement Loan applications will also be reviewed by an Energy City Commissioner in conjunction with the EDA Finance Committee. The EDA Finance Committee will 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 the project. b. Financial Feasibility - Availability of funds, private involvement, financial packaging and cost effectiveness. • Appropriate ratio of private funds to Microloan funds. • Sufficient cash flow to cover proposed debt service as demonstrated Page 5 of 21 EDA & City Council Approved August 21, 2017 by financial statements and projections. • Letter of Commitment from applicant pledging to complete the project during proposed project duration, if the loan application is approved. • 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 staff. d. Project compliance with all city codes and policies. e. Microloan Objectives - In addition to quality job and wage creation/retention requirements, the applicant must meet all Microloan 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. 7. 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. The application for an extension beyond the original term should include a letter of denial from a conventional lender. 8. 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 recommendation of approval, denial to the City Council for final action. 8. MICROLOAN 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. 9. RIGHT OF REFUSAL The EDA may deny any application if it is found not consistent with the goals of the city’s Comprehensive Plan and Economic Development Strategic Plan and in relation to the project’s overall impact on the community’s economy. Page 6 of 21 EDA & City Council Approved August 21, 2017 10. COMPLIANCE WITH MN BUSINESS SUBSIDY LAW All developers/businesses receiving financial assistance from the City of Elk River shall be subject to the provisions and requirements set forth by the City’s Business Subsidy Policy as amended and Minnesota Statutes Sections 116J.993 to 116J.995 (the “Minnesota Business Subsidy Law”) if applicable. 11. Agreement to Pay Costs of Review It is the policy of the city of Elk River to require applicants to pay costs incurred by the city in reviewing and acting upon applications, so that these costs are not borne by the taxpayers of the city. These costs include all of the city’s out-of-pocket costs for expenses, including the city’s costs for review of the application by the city’s Financial Consultant and City Attorney, or other consultants, recording fees, and necessary publication costs. The application processing fees cover anticipated costs; costs incurred above the application fee will be invoiced as they are incurred, and payment will be due within thirty (30) days. Any unused portion of the application fee will be returned to the applicant. If payment is not received as required by this agreement, the city may suspend the application review process and may deny the application for failure to comply with the requirements for processing the application. Payment for costs will be required whether the application is granted or denied. 12. Microloan Programs In order to meet the economic and community development objectives of the EDA, five distinct microloan programs exist within the Business Microloan Fund. Industrial Incentive Loan Purpose: The purpose of the Industrial Incentive Loan is to encourage industrial and high technology business development that supports the tax base and brings quality jobs to the city. Amount: Up to $200,000 of secondary financing not to exceed 20% of the total project cost. Remaining Principal: Must have private-sector commitments for 50% of the project cost. Borrower must provide 10% or more of project financing. Rate: Fixed at 3% Term: Loans must mature within 5 years, but must be amortized over a longer period of time. The balloon payment must not be longer than the balloon payment of the participating bank if applicable. Loans may be amortized up to the following limits: 20 years on real estate uses; Page 7 of 21 EDA & City Council Approved August 21, 2017 10 years on equipment uses. Extension: In the event that the Borrower is unable to payoff the loan or refinance the Microloan at the end of five years, the loan may be extended up to two additional years at 3% interest. Criteria: Borrower must be an industrial or high technology business and create or retain one new full-time job for each $20,000 loaned within 2 years. Said jobs must pay a minimum wage of $15.00 per hour excluding benefits required by law. Loans of $75,000 or more shall meet the city of Elk River Business Subsidy Policy for the creation of new jobs at a minimum wage of $15.00 per hour excluding benefits required by law, as well as a 5-year location requirement. In the case where multiple sources of public financing are requested (e.g. Microloan and Tax Increment Financing) job creation goals shall not be double-counted. Borrower must comply with the provisions of the city’s Industrial and Business Park zoning ordinances as applicable. Permitted Fund Uses: a. Building construction b. Land acquisition c. Machinery d. Furniture, fixtures, and equipment (FF&E) e. Renovation and modernization of buildings f. Public infrastructure needed for economic development expansions g. Investment real estate with a minimum of 50% of the space pre-leased Ineligible Fund Uses: a. Expenditures for the construction and/or renovation of residential units b. Inventory c. Refinancing of existing debt d. Working capital Downtown Revitalization Financing Loan Purpose: The Downtown Revitalization Financing Loan is available to business and property owners in the Downtown Area primarily for the rehabilitation and restoration of older buildings, as well as new business development. Non-profit organizations may be considered. The Downtown Area shall be described as that area in the attached in Exhibit A. Amount: Up to $74,999 of secondary financing not to exceed 20% of the total Page 8 of 21 EDA & City Council Approved August 21, 2017 project cost. Remaining Principle: Must have private-sector commitments for 50% of the project cost. Borrower must provide 10% or more of project cost. Rate: Fixed at 3%. Term: Financing with a balloon payment in up to 5-years. Loans may be amortized up to the following limits: 20 years on real estate uses; 10 years on equipment uses. Extension: In the event that the Borrower is unable to payoff the loan or refinance the Microloan at the end of five years, the loan may be extended up to two additional years at 3% interest. Criteria: At a minimum, 20% of Microloan dollars must be used for the improvement of the building façade, with exceptions to be considered when it appears the façade improvements are not necessary. Financing of leasehold improvements will be considered at a limit of $25,000. Permitted Fund Uses: a. Building construction b. Renovation and modernization of buildings c. Furniture, fixtures, and equipment (FF&E) d. Exterior renovation of retail or commercial buildings e. Financing of leasehold improvements including façade improvements will be considered at a limit of $25,000 f. Expenditures for the construction and/or renovation of residential units Ineligible Fund Uses: a. Inventory b. Refinancing of existing debt c. Working capital Energy Efficiency Improvement Loan Purpose: The Energy Efficiency Improvements Loan is available to property owners of commercial or industrial buildings in Elk River to provide low interest loans to businesses to invest in energy efficiency and improve their profitability through reduced energy costs. In addition, the microloan program helps the city of Elk River use energy conservation as an economic development tool. Non-profit organizations may be considered. Amount: Applicants may apply for the cost of improvements up to $74,999 Page 9 of 21 EDA & City Council Approved August 21, 2017 Equity: Must have a minimum of 10% equity provided by the borrower. Rate: Fixed at 3% Term: The maximum maturity date of the loan will be determined by the useful life of the improvement and the energy payback achieved as determined by ERMU. For projects that have a shorter length of payback (2-5) years as calculated according to energy savings, the loans will have an initial maturity of up to 5 years from the date of closing. Longer life improvements (6-15 years) may apply for a longer maturity of up to 10 years. Criteria: Microloan funds shall be spent on energy efficiency improvements outlined below or related building improvement costs Applicant must agree to energy audits conducted under the utility company’s Conservation Improvement Program (CIP). If warranted, engineering studies then are performed on facilities with conservation opportunities under the utility company’s CIP Program. Energy efficiency is defined as improvements that are rebatable by the Elk River Municipal Utilities (ERMU) or the utility provider for the property if not ERMU. Proposed energy efficiency improvements that do not qualify for the utility’s prescriptive rebate program will be reviewed and approved by the utility company servicing the upgrade measures (e.g. Elk River Municipal Utilities, Connexus, CenterPoint) along with a letter indicating eligible utility rebates. Utility rebates as applicable will be assigned to the Elk River EDA and applied toward principal repayment of the loan. An Elk River Energy City Commission member will be asked to participate in the EDA Finance Committee review. The loans will be secured by personal and corporate guarantees, and if applicable a lien on equipment financed and subordinate mortgage on the property. Installation must be certified through a licensed contractor and electrician. New construction is eligible when participating with a utility company rebate program. Eligible costs shall include only incremental costs over industry design standards. Permitted Fund Uses: Page 10 of 21 EDA & City Council Approved August 21, 2017 a. Energy efficiency measures installed in or on a building include: b. Facility systems optimization (commissioning/re-commissioning) c. Facility systems control improvements d. Process efficiency improvements (CenterPoint Energy) e. Lighting efficiency improvements f. Heating, ventilation and air conditioning system modifications g. Exterior envelope improvements h. Motor and pump efficiency improvements i. Ground-source heat pump systems used to heat or cool a facility j. Installation of equipment or devices that use renewable energy sources to generate electricity or heat or cool a building including solar electricity (photovoltaic), wind turbine or solar thermal. Ineligible Fund Uses: a. Inventory b. Refinancing of existing debt c. Working capital d. Expenditures for the construction and/or renovation of residential units Micro-Brewery Loan Purpose: The Micro-Brewery microloan is available to business and property owners located within the city of Elk River. Amount: Up to $74,999 of secondary financing not to exceed 20% of the Total project cost. Equity: Must have private-sector commitments for 50% of the project cost. Borrower must provide 10% or more of project financing. Rate: Fixed at 3%. Term: Financing with a balloon payment in up to 5-years. Loans may be amortized up to the following limits: 10 years on equipment uses Extension: In the event that the Borrower is unable to obtain conventional financing to replace the Microloan at the end of five years, the loan may be extended up to two additional years at a market rate of interest. Criteria: At a minimum, 50% of Microloan dollars must be used for the purchase of equipment. Loans must be supported by sufficient collateral, which will include personal guarantees. Page 11 of 21 EDA & City Council Approved August 21, 2017 Permitted Fund Uses: e. Renovation and modernization of buildings f. Furniture, fixtures, and equipment (FF&E) g. Exterior renovation of retail or commercial buildings h. Financing of leasehold improvements including façade improvements will be considered at a limit of $25,000 Ineligible Fund Uses: a. Inventory b. Refinancing of existing debt c. Working capital Page 12 of 21 ELK RIVER ECONOMIC DEVELOPMENT MICROLOAN FUND APPLICATION 1. CONTACT INFORMATION Legal Name of Business: Project Site Address: City / State / Zip Contact Person(s) Business Phone Fax Home Phone Email Check One: Proprietor Corporation Partnership Federal ID # State ID # 2. NATURE OF LOAN REQUEST Which Microloan Program are you applying for? Industrial Incentive Loan Downtown Revitalization Financing Loan Energy Efficiency Improvement Loan Micro-Brewery Loan Amount Requested: $ Total Project Cost: $ Type of project: New construction for a start-up business New construction for an existing business On site expansion Equipment purchase Remodeling: (circle one) Commercial / Retail / Industrial Other Page 13 of 21 Please give a brief summary of your business and its products or service: Please give a brief summary of the project: Please describe how this loan will impact your project: 3. FINANCING Project Costs Land $ Site improvements $ Buildings (attach plans & costs) $ Equipment/Machinery/Fixtures (attach list and estimated costs) $ Remodeling $ Industrial Inventory/Working Capital $ Other (attach description) $ Total Costs $ Comments: Page 14 of 21 Proposed Sources of Financing SOURCE NAME TERMS AMOUNT Bank Loan __________ $_________ Bank Loan __________ $_________ Other Private Funds __________ $_________ Applicant Contribution $_________ Other __________ $_________ Fed Grant/Loan __________ $_________ State Grant/Loan __________ $_________ EDA Microloan __________ $_________ Tax Increment Financing $ Tax Abatement $ Total Financing $_________ Collateral Assignments Lien Description of Collateral Position To Bank 1 To Bank 2 To Private Sources To Other Sources To Federal Govt To State To EDA Microloan Page 15 of 21 Value of Collateral Book Value Cost Existing Liens Land $_________ $___________ $__________ Buildings $_________ $___________ $__________ Machinery & Equip. $_________ $___________ $__________ Other__________ $_________ $___________ $__________ Other__________ $_________ $___________ $__________ 4. JOB & WAGE GOALS Present # of Employees_____________ Total Payroll_____________ Jobs To Be Created* Please provide the following information on jobs you expect to create within 2-years. Job Title Number of Jobs Average Hourly Wage Annual Salary Are the Jobs Permanent or Temporary? Expected Hiring Date *If loan is for job retention only, please explain in Business Plan. Microloan Program Objectives (Check all that apply) _____ 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. Page 16 of 21 5. PROJECT CONTACTS Attorney Name Address Phone ______ Accountant Name ______ Address Phone Financing Sources (lenders, partners, etc…) Name ______ Address Phone Name ______ Address Phone Parent Company Name ______ Address Phone Others Name ______ Address Phone Name ______ Address Phone Page 17 of 21 6. ATTACHMENTS CHECK LIST Please attach the following: ______A) Written Business Plan: 1. Description of Business 2. Ownership 3. Management 4. Date Established 5. Products/Services 6. Future Plans _______B) Financial Statements for Past Three Years and Year to Date 1. Profit & Loss Statements 2. Balance Sheets _______C) Financial Projections for up to Three Years _______D) A Project Proforma to include: 1. Projected revenues, 2. Operating expenses, 3. Net Operating Income, and 4. Annual Debt Service and Loan Payments. _______D) Resume of Owner/Management _______E) Personal Financial Statements of Proprietor, Partners, Guarantors _______F) Letter of Commitment from Applicant Pledging to Complete During the Proposed Project Duration _______G) Letter of Commitment from the Other Sources of Financing, Stating Terms and Conditions of their Participation in Project _______H) Processing Fee of $2,000 Page 18 of 21 7. AGREEMENT 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. The undersigned has received the city’s policy regarding the payment of costs of review, understands that reimbursement to the city of costs incurred in reviewing the application will be required, agrees to reimburse the city as required in the policy and make payment when billed by the city, and agrees that the application may be denied for failure to reimburse the city for costs as provided in the policy. APPLICANT SIGNATURE _______ BY DATE Page 19 of 21 Exhibit A: Downtown Area Page 20 of 21 MICROLOAN APPLICATION SCORING WORKSHEET 1. The project meets the criteria set forth in the appropriate the Microloan policy. a) Meets at least one of the microloan objectives in Section 7; 6(e). c) Consistent with all city plans and ordinances. d) Meets the wage requirements as defined in the city’s business subsidy policy. 2. Ratio of Private to All Public Investment in Project: Points: _____ $ Private Investment 5:1 5 $ Public Investment 4:1 4 Ratio Private: Public Financing 3:1 3 2:1 2 Less than 2:1 1 3. Job Creation in the City of Elk River: Points: _____ Number of new jobs as a result of the project. 25+ 5 Number of existing/retained jobs 20+ 4 Total 15+ 3 10+ 2 Less than 10 1 4. Ratio of Public Investment to Job Creation: Points: _____ $ Public Investment $8,000 or less 5 Number of new jobs created/retained $10,000 or less 4 $ of Public Investment per new job $12,000 or less 3 $15,000 or less 2 Over $15,000 1 5. Wage Level of jobs created/retained or relocated Points: _____ Minimum hourly wage Over $21/ hour 5 of jobs created/retained: $18-21 / hour 4 $15 / hour 3 6. Project size: Points: _____ The project will result in the construction 40,000+ 5 of square feet 30,000+ 4 20,000+ 3 10,000+ 2 10,000 or less 1 TO BE COMPLETED BY CITY STAFF Page 21 of 21 7. Market Value/Tax Base Generation: Points: _____ The project will result in a per square foot Industrial Commercial estimated market value (land and building) $80/sf+ $110/sf+ 5 of $70/sf+ $100/sf+ 4 $60/sf+ $90/sf+ 3 $50/sf+ $80/sf+ 2 $40/sf+ $70/sf+ 1 8. Type of Project: Points: _____ 100% Owner Occupied 5 Mix Owner Occupied & Investment 4 Investment Property 3 9. Use: Points: _____ Industrial or Business Park Project 5 Commercial/Retail Rehabilitation/Redevelopment 4 ______ Downtown Revitalization or Microbrew 3 10. Likelihood that the project will result in Points: _____ unsubsidized, spin-off development. High 5 Moderate 3 Low 1 11. Point Adjustments Point Adjustments: The project contributes to the goals of Energy City. 5 points • Product promotes sensible use of energy, OR • Project utilizes significant energy efficient design &/or materials in construction. Sub - Total Points: of a possible 45 points. Total Points: Overall project desirability: High 50-35 points Moderate 34-29 points Low 28-20 points Not Eligible 19-0 points 1 EDA & City Council Approved April 17, 2017 Powered by Nature Economic Development Job Incentive Microloan Guidelines, Policy & Application (Seeded by State MN Investment Fund Awards) April 17, 2017 City of Elk River Economic Development Division 13065 Orono Parkway Elk River, MN 55330 763.635.1040 2 EDA & City Council Approved April 17, 2017 ELK RIVER ECONOMIC DEVELOPMENT JOB INCENTIVE MICROLOAN GUIDELINES, POLICY & APPLICATION GENERAL PURPOSE AND GUIDELINES The purpose of the RLF is to provide financial and technical assistance for the creation and retention of new employment. These objectives may be accomplished through the following means: 1. Create/retain permanent private sector jobs to fuel above-average economic growth. 2. Investment in technology and equipment that increase productivity and provide for higher wages; 3. Leverage of private investment to ensure economic renewal and competitiveness; 4. Increase the local tax base to guarantee a diversified industry mix; 5. Improve the quality of existing jobs, based on increases in wages or improvements in the job duties, training, or education associated with those jobs; 6. Improve employment and economic opportunities and create a reasonable standard of living; and 7. Enhance productivity growth through improved manufacturing or new technologies. One way to meet these objectives is to assist businesses that have location options outside of Elk River. These firms bring income into the state and raise the overall standard of living. ELIGIBLE EXPENDITURES The MIF-seeded funds may be used in a variety of ways include example noted below. More information is available in Minn. Stat. 116J.8731 and through conversations with your loan officer. 1. Provide loans, and other forms of participation, ensuring that RLF funds are matched by private financing/owner equity. 2. Fund strategic investments in renewable energy market development. Any expenditure for external marketing for renewable energy market development is not subject to the matching requirements listed above. 3. Provide entrepreneurs with training, other technical assistance, and financial assistance as defined by federal guidelines. ELIGIBLE PROJECTS Assistance must be evaluated on the existence of the following conditions as noted in Minn. Stat. 116J.8731: 1. Creation or retention of jobs, or the improvement of jobs as measured by wages, skills or knowledge; 2. Increase in the tax base; 3. Attraction of private funds to the project; 4. Incapacity of local communities and finance partners to finance project; 5. Results in higher wage levels or workforce skills; 6. Supports development of microenterprises, as defined by federal guidelines, through technical assistance or financial assistance. 7. The project promotes or advances the green economy. 8. Need for assistance to retain existing business; 9. Importance of assistance to attract out-of-Elk River business; and The assistance cannot meet solely 8 or 9; other conditions must also be present. 3 EDA & City Council Approved April 17, 2017 ELIGIBLE ACTIVITIES RLF’s may be used to fund a variety of business activities including: 1. Acquisition of land 2. Construction or rehabilitation of facilities 3. Site improvements 4. Utilities or infrastructure 5. Machinery and Equipment 6. Training Advance approval from DEED is necessary if the local government would like to provide financing for activities not listed above. Approval is more likely to occur in projects that relate to business development and involve other local government funds. INELIGIBLE ACTIVITIES In contrast to federal MIF funds, there are industry limitations on how state MIF RLFs may be used. State MIF RLFs may not be used for the operation, construction or expansion of a casino, a sport facility that that has a professional sports team as a principal tenant or any firm engaged in retailing merchandise. All assistance should follow the approved RLF guidelines. Please call the Economic Development Director to discuss any prospective financing. WAGE GOALS Businesses receiving RLF-State MIF assistance must pay each employee total compensation, including benefits not mandated by law, shall be the greater of $15.00 per hour or 150% of state or federal minimum wage, whichever is greater, exclusive of benefits required by law. OTHER ELIGIBLE USES OF THE FUNDS Minn. Stat. 116J.8731 allows local governments to loan or grant RLF funds to a regional development commission, other regional entities, or a certain statewide community capital funds to provide the local match required for capitalization of a regional or statewide RLF. CONFLICT OF INTEREST Minn. Stat. 471.87 and 471.88 provide guidance on conflict of interest in a MIF transaction. An actual conflict of interest shall be deemed to exist when a decision on a MIF transaction would compromise a duty to another party or if special advantage is deemed to occur. Potential conflict of interests should also be considered. BUSINESS SUBSIDY LAW As mentioned on page 1, Minn. Stat. 116J.993 and 116J.994 must be followed in the administration of RLF- State MIF. These sections pertain to the definition of a business subsidy, public purpose of the subsidy, criteria, subsidy agreements, wage and job goals, timing of the project, public notice and hearing requirements, failure to meet goals, and reporting of information regarding the outcomes of the subsidy. JOB LISTING REQUIREMENTS Per Minn. Stat. 116L.66, a business that receives grants or loans in an amount greater than $200,000 must agree to list any vacant or new positions related to the financial assistance on the MinnesotaWorks.net job bank website. 4 EDA & City Council Approved April 17, 2017 PREVAILING WAGE Per Minn. Stat. 116J.871, laborers and mechanics at the project site during construction, installation, remodeling, and repairs must be paid the state prevailing wage if the financial assistance is greater than $500,000 for a loan. All contracts for publicly owned infrastructure using the RLF must comply with the prevailing wage provisions. DATA PRIVACY The provision of any information related to any applications for assistance is guided by Minn. Stat. 13.591, particularly Subd 1 and 2. Other applicable state and federal laws and rules must also be followed. JOBS INCENTIVE MICROLOAN PROGRAM Purpose: To assist existing businesses with expansion and attract new businesses to the City whose local operations will help expand the City’s economy through job retention and creation and maintain/grow the City’s tax base. The purpose of the Jobs Incentive Program is to encourage the creation of high paying and quality jobs to the city. Amount: Up to $200,000 of secondary financing not to exceed 20% of the total project cost. Equity: Must have private-sector commitments for 50% of the project cost. Borrower must provide 10% or more of project financing. Rate: Fixed at 3%. Term: Financing with a balloon payment in up to 5-years. Loans may be amortized up to the following limits: 20 years on real estate uses; 10 years on equipment uses. MICROLOAN FUND TERMS & CONDITIONS Loan Structure All Economic Development Microloans shall be structured as direct loans unless otherwise approved by the EDA Finance Committee. If a participation loan is requested, an agreement will be signed by the borrower, primary lender and the EDA. The EDA may require additional agreements to be signed by the borrower (i.e. security agreement, personal guarantees, business subsidy agreement). Simultaneous Microloans The simultaneous use of different EDA microloan programs by any one borrower or for any one project is prohibited. Loan Repayment Jobs Incentive funds, including principal and interest received may not be used to support restaurant, retail, casinos, or sports facilities. Call of Loan 5 EDA & City Council Approved April 17, 2017 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 loan. Late Payment Charge A late payment charge of 8% of the installment amount will be enforced following a grace period of 10 calendar days. 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 ordinances and state building codes. LOAN SECURITY AND GUARANTEES 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 equal to the amount of the loan. Applicant must demonstrate the financial means to repay the loans, as determined by the EDA. Whenever possible, personal, corporate, and/or entity guarantees will be made part of any loan agreement. Key person life insurance may be required as determined by the EDA Finance Committee based on loan amount and company ownership partners. TIMING OF PROJECT EXPENSES No project should commence until the EDA has approved the loan application. Any costs incurred prior to the approval of the loan application are 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 $2,000 processing fee, which is paid at the time of application. In addition to the processing fee, all legal and filing fees shall be paid by the borrower at loan closing. Closing of the Microloan should be simultaneous with the borrower’s primary funding. The EDA should be given two weeks’ notice before closing. 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 (if applicable). 2. The applicant shall then meet with city staff to obtain information about the microloan program, discuss the project, and obtain application forms. 3. The applicant shall complete and submit an application form to the city, along with a $2,000 processing fee. The fee is used to cover processing expenses and any remaining 6 EDA & City Council Approved April 17, 2017 funds will be returned to the applicant. The applicant must provide evidence of their ability to meet the 10% equity requirements or provide a letter of commitment for conventional financing from the primary lending institution. 4. The EDA is a governmental entity and as such must provide public access to public data it receives. Data deemed by Applicant to be nonpublic data under State law should be so designated or marked by Applicant. See Minn. Sat. Sections 13.59, Subd. 1, respectively. 5. 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 microloan 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. 6. The EDA Finance Committee and EDA Commissioners will review each application in terms of its consistency with the goals of the city’s Comprehensive Plan and Economic Development Strategic Plan and in relation to the project’s overall impact on the community’s economy. Downtown Revitalization Loan applications will also be reviewed by a Housing & Redevelopment Authority Commissioner in conjunction with the EDA Finance Committee. Energy Efficiency Improvement Loan applications will also be reviewed by an Energy City Commissioner in conjunction with the EDA Finance Committee. The EDA Finance Committee will 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 the project. b. Financial Feasibility - Availability of funds, private involvement, financial packaging and cost effectiveness. • Appropriate ratio of private funds to Microloan funds. • Sufficient cash flow to cover proposed debt service as demonstrated by financial statements and projections. • Letter of Commitment from applicant pledging to complete the project during proposed project duration, if the loan application is approved. • 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 staff. 7 EDA & City Council Approved April 17, 2017 d. Project compliance with all city codes and policies. e. Microloan Objectives - In addition to quality job and wage creation/retention requirements, the applicant must meet all Microloan 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. 7. 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. The application for an extension beyond the original term should include a letter of denial from a conventional lender. 8. 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 recommendation of approval, denial to the City Council for final action. MICROLOAN 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. RIGHT OF REFUSAL The EDA may deny any application if it is found not consistent with the goals of the city’s Comprehensive Plan and Economic Development Strategic Plan and in relation to the project’s overall impact on the community’s economy. AGREEMENT TO PAY COSTS OF REVIEW It is the policy of the City of Elk River to require applicants to pay costs incurred by the City in reviewing and acting upon applications, so that these costs are not borne by the taxpayers of the City. These costs include all of the City’s out-of-pocket costs for expenses, including the City’s costs for review of the application by the City’s Financial Consultant and City Attorney, or other consultants, recording fees, and necessary publication costs. The application processing fees cover anticipated costs; costs incurred above the application fee will be invoiced as they are incurred, and payment will be due within thirty (30) days. Application fees are not refundable, though any unused portion is returned at the request of the applicant. If payment is not received as required by this agreement, the City may suspend the application review process and may deny the application for failure to comply with the requirements for processing the application. Payment for costs will be required whether the application is granted or denied. 8 EDA & City Council Approved April 17, 2017 The undersigned has received the City’s policy regarding the payment of costs of review, understands that reimbursement to the City of costs incurred in reviewing the application will be required, agrees to reimburse the City as required in the policy and make payment when billed by the City, and agrees that the application may be denied for failure to reimburse the City for costs as provided in the policy. AGREEMENT 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. The undersigned has received the city’s policy regarding the payment of costs of review, understands that reimbursement to the city of costs incurred in reviewing the application will be required, agrees to reimburse the city as required in the policy and make payment when billed by the city, and agrees that the application may be denied for failure to reimburse the city for costs as provided in the policy. APPLICANT SIGNATURE BY DATE 9 EDA & City Council Approved April 17, 2017 ELK RIVER ECONOMIC DEVELOPMENT MICROLOAN FUND APPLICATION 1. CONTACT INFORMATION Legal Name of Business: Project Site Address: City / State / Zip Contact Person(s) Business Phone Fax Home Phone Email Check One: Proprietor Corporation Partnership Federal ID # State ID # 2. NATURE OF LOAN REQUEST Which Microloan Program are you applying for? Jobs Incentive Loan (Funded by State MIF Funds) Amount Requested: $ Total Project Cost: $ Type of project: New construction for a start-up business New construction for an existing business On site expansion Equipment purchase Remodeling: (circle one) Commercial / Retail / Industrial Other Please give a brief summary of your business and its products or service: 10 EDA & City Council Approved April 17, 2017 Please give a brief summary of the project: Please describe how this loan will impact your project: 3. FINANCING Project Costs Land $ Site improvements $ Buildings (attach plans & costs) $ Equipment/Machinery/Fixtures (attach list and estimated costs) $ Remodeling $ Industrial Inventory/Working Capital $ Other (attach description) $ Total Costs $ Comments: Proposed Sources of Financing 11 EDA & City Council Approved April 17, 2017 SOURCE NAME TERMS AMOUNT Bank Loan __________ $_________ Bank Loan __________ $_________ Other Private Funds __________ $_________ Applicant Contribution $_________ Other __________ $_________ Fed Grant/Loan __________ $_________ State Grant/Loan __________ $_________ EDA Microloan __________ $_________ Tax Increment Financing $ Tax Abatement $ Total Financing $_________ Collateral Assignments Lien Description of Collateral Position To Bank 1 To Bank 2 To Private Sources To Other Sources To Federal Govt To State To EDA Microloan 12 EDA & City Council Approved April 17, 2017 Value of Collateral Book Value Cost Existing Liens Land $_________ $___________ $__________ Buildings $_________ $___________ $__________ Machinery & Equip. $_________ $___________ $__________ Other__________ $_________ $___________ $__________ Other__________ $_________ $___________ $__________ 4. JOB & WAGE GOALS Present # of Employees_____________ Total Payroll_____________ Jobs To Be Created* Please provide the following information on jobs you expect to create within 2-years. Job Title Number of Jobs Average Hourly Wage Annual Salary Are the Jobs Permanent or Temporary? Expected Hiring Date *If loan is for job retention only, please explain in Business Plan. 13 EDA & City Council Approved April 17, 2017 5. PROJECT CONTACTS Attorney Name Address Phone ______ Accountant Name ______ Address Phone Financing Sources (lenders, partners, etc…) Name ______ Address Phone Name ______ Address Phone Parent Company Name ______ Address Phone Others Name ______ Address Phone Name ______ Address Phone 14 EDA & City Council Approved April 17, 2017 6. ATTACHMENTS CHECK LIST Please attach the following: ______A) Written Business Plan: 1. Description of Business 2. Ownership 3. Management 4. Date Established 5. Products/Services 6. Future Plans _______B) Financial Statements for Past Three Years and Year to Date 1. Profit & Loss Statements 2. Balance Sheets _______C) Financial Projections for up to Three Years _______D) A Project Proforma to include: 1. Projected revenues, 2. Operating expenses, 3. Net Operating Income, and 4. Annual Debt Service and Loan Payments. _______D) Resume of Owner/Management _______E) Personal Financial Statements of Proprietor, Partners, Guarantors _______F) Letter of Commitment from Applicant Pledging to Complete During the Proposed Project Duration _______G) Letter of Commitment from the Other Sources of Financing, Stating Terms and Conditions of their Participation in Project _______H) Letter of Commitment from the Applicant committing to prevailing wage requirements. _______H) Processing Fee of $2,000 15 EDA & City Council Approved April 17, 2017 7. AGREEMENT 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. The undersigned has received the city’s policy regarding the payment of costs of review, understands that reimbursement to the city of costs incurred in reviewing the application will be required, agrees to reimburse the city as required in the policy and make payment when billed by the city, and agrees that the application may be denied for failure to reimburse the city for costs as provided in the policy. APPLICANT SIGNATURE _______ BY DATE 16 EDA & City Council Approved April 17, 2017 MICROLOAN APPLICATION SCORING WORKSHEET 1. The project meets the criteria set forth in the appropriate the Microloan policy. a) Meets at least one of the microloan objectives in Section 7; 6(e). c) Consistent with all city plans and ordinances. d) Meets the wage requirements as defined in the city’s business subsidy policy. 2. Ratio of Private to All Public Investment in Project: Points: _____ $ Private Investment 5:1 5 $ Public Investment 4:1 4 Ratio Private: Public Financing 3:1 3 2:1 2 Less than 2:1 1 3. Job Creation in the City of Elk River: Points: _____ Number of new jobs as a result of the project. 25+ 5 Number of existing/retained jobs 20+ 4 Total 15+ 3 10+ 2 Less than 10 1 4. Ratio of Public Investment to Job Creation: Points: _____ $ Public Investment $8,000 or less 5 Number of new jobs created/retained $10,000 or less 4 $ of Public Investment per new job $12,000 or less 3 $15,000 or less 2 Over $15,000 1 5. Wage Level of jobs created/retained or relocated Points: _____ Minimum hourly wage Over $21/ hour 5 of jobs created/retained: $18-21 / hour 4 $15 / hour 3 6. Project size: Points: _____ The project will result in the construction 40,000+ 5 of square feet 30,000+ 4 20,000+ 3 10,000+ 2 10,000 or less 1 TO BE COMPLETED BY CITY STAFF 17 EDA & City Council Approved April 17, 2017 7. Market Value/Tax Base Generation: Points: _____ The project will result in a per square foot Industrial Commercial estimated market value (land and building) $80/sf+ $110/sf+ 5 of $70/sf+ $100/sf+ 4 $60/sf+ $90/sf+ 3 $50/sf+ $80/sf+ 2 $40/sf+ $70/sf+ 1 8. Type of Project: Points: _____ 100% Owner Occupied 5 Mix Owner Occupied & Investment 4 Investment Property 3 9. Use: Points: _____ Industrial or Business Park Project 5 Commercial/Retail Rehabilitation/Redevelopment 4 10. Likelihood that the project will result in Points: _____ unsubsidized, spin-off development. High 5 Moderate 3 Low 1 11. Point Adjustments Point Adjustments: The project contributes to the goals of Energy City. 5 points • Product promotes sensible use of energy, OR • Project utilizes significant energy efficient design &/or materials in construction. Total Points: Overall project desirability: High 50-35 points Moderate 34-29 points Low 28-20 points Not Eligible 19-0 points Sub - Total Points: of a possible 45 points. Recommended documents that parallel underwriting grid Business Documents Under $15K $5K-$15K $15K-25K $25K - $50K Over $50K Business Bank Statements 2 months X Business Bank Statements 3 months X X X Business Bank Statements 4 months X Tax Return – one year X X X Tax Return – two years X X Profit and Loss YTD X X Profit and Loss YTD + Previous Year X X Balance Sheet Current X X Balance Sheet Current + Previous Year X Business Plan – Start-up vs. Existing X X X X X Recommended documents that parallel underwriting grid Personal Financial Information Under $15K $5K-$15K $15K-25K $25K - $50K Over $50K Paystub – 2 most recent X X X X X Proof of other sources of income X X X X X Personal Bank Statements – 1 months X Personal Bank Statements – 3 months X X X X Tax Return – one year X X Tax Return – two years (SBA Requires 2 years of Tax Returns) X Tax Return – three years X Form 4506 X Personal Financial Statement X Utility Bill X X X X X Business documents and how it impacts the Five C’s of credit: Business Documents Cash Capacity Credit Capacity Character Capital Collateral Application X X X X X Credit Report X X X Business Bank Statements X X Tax Return X X Profit and Loss X Projections X Balance Sheet X X X X X Business Plan X Loan Officer Recommendation X X Personal Financial Information and how it impacts the Five C’s of credit: Personal Financial Information Cash Capacity Credit Capacity Character Capital Collateral Paystub X X X X Spouse Credit Report X X X Proof of other sources of income X X Personal Bank Statements X X X X Tax Return X X Form 4506 X Personal Financial Statement X X X X X Microloan Application Sample Questions Business Owner name Industry Home Address Description of business How many years have you lived there? Years of Experience Business Name Requested Loan Amount Business Email Purpose of funds Business Website Tax ID/SS# Business Cell Phone Birthdate of owner Ownership/Legal Structure Driver’s License Number and State Where do you conduct business? Do you have a separate business checking? How many days/hours is your business open? Do you have an existing merchant cash advance? When did you begin business operations? Have you received business coaching? Business Location Business Street Address When did you start at this location? Business Mailing Address Do you own your business location? Business Income Total Sales per month Type of financial records kept? Amount of monthly sales in credit cards Business Expenses Total expenses per month Utilities Cost of Goods Sold Payments to credit cards, car loans, other Business rent/mortgage Other major expenses: insurance, phone Payroll (besides yourself) Business Assets & Liabilities List of main business assets List of main liabilities Total business asset value Total liabilities Personal Monthly Income Monthly take-home from business Other sources of income Owners income from other employment Personal bank account Spouses Income Personal Expenses Food Credit Card Payments Clothing Vehicle Payments Utilities Mortgage or Rent Education/Childcare Child Support/Alimony Payments Social Impact Number of Employees Marital Status New Jobs/Retained Jobs in the next 2 years Years of Education Are you a veteran? Number of people in your household Gender Any credit issues you would like to disclose? Race