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4.1. JFC 08-27-2019 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 Meeting Item Number 4.1 Agenda Section General Business Meeting Date August 27, 2019 Prepared by Amanda Othoudt, ED Director Item Description Distinctive Iron, LLC Jobs Incentive Microloan Application Review Reviewed by Cal Portner, City Administrator Reviewed by Action Requested Consider and provide recommendation to the EDA on the following Jobs Incentive Microloan application for Distinctive Iron, LLC. The Joint Finance Committee may recommend approval, approval with conditions, or denial of the request. Background/Discussion The city received an application from Distinctive Iron, LLC requesting a $100,000 Jobs Incentive Microloan. The Jobs Incentive Microloan Program goal is to encourage the growth of new jobs and the retention of existing jobs. The company currently employs 14 FT and 2 PT with an average hourly wage of $18.80/hr., has outgrown their leased space on Industrial Blvd in Elk River, and intends to relocate their operation to 15970 Jarvis Street NW, Elk River. Analysis Purpose: To assist existing businesses with expansion and attract new businesses to the city whose local operations will 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 quality, high-paying jobs within the city. Distinctive Iron, LLC will retain 14 FT and 2 PT paying an average of $18.80/hour, exclusive of benefits. They plan to create 5 FT jobs paying an average hourly wage of $18.80. Amount: Up to $200,000 of secondary financing not to exceed 20% of the project cost. The total project cost is $1,530,000. The requested amount is 6.5% of the total project cost, which is less than the 20% maximum allowed. Equity: Must have private-sector commitments for 50% of the project cost. Borrower must provide 10% or more of project financing. The applicant indicated they will provide $116,000 as equity contribution to the project. In addition, Distinctive Iron will be purchasing $35,000 of new equipment. The total contribution represents approximately 9.9% of project equity, just under the 10% requirement. N:\Departments\Community Development\Economic Development\EDA\Administrative\Agenda\EDA Finance Committee Agenda Packets\2019\08272019\4.1 sr Distinctive Iron Job Incentive Microloan Request.docx Criteria: Borrower must create one new full-time job for each $20,000 loaned, retain one new full-time job for each $10,000 loaned, or combination of retainage and creation to meet the requirements. All new jobs must be created within two years and retained for the period of the loan. Said jobs must pay greater of $15.00 per hour or 150% of state or federal minimum wage, exclusive of benefits required by law. Any loans shall meet the city of Elk River Business Subsidy Policy for the creation of new jobs, as well as a 5-year location requirement. Creating 5 FT jobs in Elk River accounts for a loan amount up to $100,000 and retaining 14 FT jobs accounts for $140,000. By policy, the applicant is eligible for a $240,000 loan. The maximum loan available per the city’s policy is $200,000. Summary The applicant is eligible for a maximum loan of $200,000 per the city’s policy, meeting the equity, wage, and job criteria requirements and the proposed fund uses are eligible expenses. However, the applicant has an existing loan with the city with a balance of approximately $90,060. The applicant has requested the old loan to be refinanced with the new request of $100,000 for a total of approximately $190,060. This amount may be adjusted based upon principle and interest payments received. The project scored 36/50 points, representing a highly desirable project. Terms Staff is proposing to roll the existing loan balance of $90,060 into the new loan of a $100,000 for a total of $190,060. The loan will be amortized over 20 years at 3% with a 5-year balloon payment. The EDA will retain a 2nd position on the equipment and real estate, and in addition the loan will be secured with a personal guarantee. Financial Impact If the committee agrees this loan meets the goals of the city and EDA, the loan funds could be funded from the City Microloan Fund account, which has a balance of $950,516.68 Attachments  Microloan Application  Scoring Worksheet  Company Information  Commitment Letter from the Bank of Elk River  Commitment Letter from Applicant  City Microloan – Additional Information  Company Financials (confidential, available at the meeting) 1. Business overview and company history and ownership - include organizational structure, parent Company and any affiliates Distinctive Iron, LLC is a woman owned and operated company that designs, fabricates and installs structural and miscellaneous steel products. The company is owned 60% by Cynthia Hemmer and 40% by her son, Steven Hemmer. The company was started in a 2,400 square foot pole building at their residence. The business grew very quickly, and they added 2,800 square feet to the pole building. When they outgrew that space, they purchased a 13,000 square foot industrial building located at 19128 Industrial Blvd NW, Elk River in March 2015. Hemmer Companies LLC was formed in 2011 for the purpose of owning and leasing real estate, specifically to Distinctive Iron. The Hemmer’s are eager to take their business to the next level. With over 30 years of experience, Distinctive Iron prides themselves in exceeding customer’s expectations in design, fabrication and project management in a quality-driven environment at a competitive price. Recent projects include the expansion of Alliance Machine (Elk River), UMA Precision Machining (Zimmerman), P&F Machine, along with several Schools which include Blaine and Ramsey Elementary Schools, Guardian Angels (Ostego), Nystrom & Associates, the proposed Elk River Multipurpose Facility, McPherson Constriction, Halco, North Dakota Steel Building, Babinski Properties in Sioux Falls South Dakota – two- story balcony decking for renovating old apartment buildings. 2. Product or industry outlook for the project Manufacturing, growth of manufacturing as a whole to the economy. Respond to the customer base and grow MN The United States structural steel industry supplied fabricated and erected structural steel framing for over 10,000 buildings, bridges and industrial facilities through a network of producers, service centers, steel fabricators and erectors in 2017 down substantially from a peak of nearly 15,000 in 2006 and 2007. The decrease in market volume was the result of a downturn in overall construction activity. Total industry employment in 2017 was estimated to be in excess of 200,000 individuals in 2,300 firms down approximately 15% from 2006. Total industry revenue in 2017 was estimated to be in excess of 20 billion dollars. It is anticipated that industry employment and revenue will expand by four percent during 2018 based on the current 2018 growth rate of non-residential construction. Structural Steel: An Industry Overview, American Institute of Steel Construction, August 2018 3. Total projected sales for the project both inside and outside of Minnesota – Exhibit 5 2014: $3.6M 2015: $4.4M 2016: $4.8M 2017: $8.8M 2018: $11M 2019: $12M 2020: $12.5M 2021: $13M Products shipped to South Dakota, North Dakota, Iowa, and Minnesota Jobs and Fabrication conducted in Minnesota and North Dakota and South Dakota 4. Estimated sales to Minnesota customers that replace purchases from outside Minnesota With the new expansion, Distinctive Iron will obtain estimated sales around $2 million. We believe that these sales would have gone to one of our competitors in Wisconsin, Iowa, or in the Dakotas if we didn’t move forward with the expansion. 5. Markets (local, statewide, national, and international) along with their respective percentage to total sales and the customers served. Distinctive Iron serves the local market as well as the upper Midwest. Products are manufactured at their Elk River facility, and installed onsite. Opportunities in North Dakota presented itself to expand our submarket. Local: Represents 80% of the work. Upper Midwest market share represents 20% of work. There is an opportunity in Fargo, ND to expand our market and design and construct steel products for facilities in that submarket. Sites have been considered in Fargo if the expansion doesn’t move forward. 6. Philanthropic or other ways in which the business contributes or will contribute to Minnesota Distinctive Iron holds various professional association certifications, are proud sponsors of the Special Olympics, Susan G. Komen Breast Cancer Foundation and Eric Applen Children’s Cancer Fund. The business prides itself in contributions to the local community through hiring local and patronizing local businesses. Elk River Chamber of Commerce, Workforce Development Committee, Active Members of Minnesota Subcontractors Association (MSA), Association of Women Contractors (AWC), and Distinctive Iron contributed $500 and $1500 Scholarships to the Anoka Tech Foundation, and the Elk River High School. 7. Attach three years of historical financials (Profit & Loss/Balance Sheets/Income Statement/Cash Flow Statement) and financial projections: Exhibit 3,4 PART B – Project Description. 8. Provide details for the project for which funds are being requested. Discuss topics such as square footage increase, lease vs ownership, new construction vs renovation or leasehold improvements, etc. Distinctive Iron is a growing metal design and fabrication business. They are currently located at 19128 Industrial Blvd NW, Elk River. Distinctive Iron proposes to purchase property located at 15970 Jarvis Street NW, Elk River. In addition to the purchase of the building, they plan to renovate the existing building onsite, and construct a 4,680 sf. indoor paint facility. Distinctive Iron will be investing $1,529,480 to purchase, renovate and construct the new facility, and retain 14 full-time and 2 part-time jobs within the city. We anticipate the growth of 5 more full time jobs over the next two years. This project will add approximately $135,000 in taxable value to the county and increase taxes by about $4,944 annually. The business prides itself in contributions to the local community through hiring local and patronizing local businesses. Distinctive Iron is requesting $100,000 from the city as gap financing, which will support Distinctive Iron’s investment in Elk River. The funds requested from the city would help with the site prep and construction of the new building. 9. Explain why funding is necessary for this project to move forward (e.g., financing gaps, lack of collateral, potential non-Minnesota locations). If available, please provide further documentation that demonstrates these reasons. Funding is necessary to close the gap for loan vs improvements and train and support new hires for the increased production opportunity. We are considering outstate sites in Fargo, ND to be close to business. Without gap financing for this project by the city, state and county, Distinctive Iron would not be able to expand their operations in Minnesota. 10. Describe how the project will strengthen and/or diversify the local or Minnesota economy. Distinctive Iron is the first manufacturing project expansion in 2019 for Elk River. The project will help strengthen our local economy and it is anticipated that this project will result in spin-off development of neighboring properties. By being approved for the funding, we will be able to strengthen our workforce by constructing the new facility, and having the ability to store materials outdoors. In addition, the funding will assist us with hiring additional employees and have a safe workplace to perform duties for production of our product. We believe this area we are moving too will provide extra dollars to the local economy by way of municipal taxes, purchasing of local supplies, hiring of new employees in the area, if possible or working with the local staffing firms to fill positions temporarily. 11. Describe any local government assistance for the project (e.g., city loan, abatement, TIF, etc,) and comment on dollar amounts and/or general information on any city projects related to this project. The City of Elk River and Sherburne County are jointly participating as gap lenders in this project. We have requested a $100,000 microloan from the city and a $90,000 microloan from Sherburne County to cover the gap in financing needs. By providing financing gap, growth can happen at their new facility. 12. Attach line-item construction cost estimates for real property improvements for the project - Exhibit 11 13. If available, attach a commitment letter from each financing source (ie Financial Institutions), including a letter of commitment for any business equity -- Exhibit 8 PART C – Business Competitors. 14. Identify the competitors of the business within local community (city and county), the adjacent counties, and in the state of Minnesota. Include: a. The name of each major competitor and the location of each competitor by city i. Linco Iron Erection, Inc. – St. Michael – Steel Fabrication ii. Superior Iron, LLC – Elk River – Fab Steel, Capacity is smaller than DI iii. Twin City Wire & Fabrication – Focus is on public sector work. iv. Industrial Steel Fabricators – Minneapolis – Niche manufacturing company specializing in custom flex manufacturing. v. Astro Engineering and manufacturing aluminum and special metal manufacturing vi. Briese Iron Works, Inc. – Rochester – Structural Steel Detailing vii. CMF – Willmar - Provides steel packages to contractors for multi-story commercial buildings, retail locations, manufacturing facilities, hospitals, worship center, schools, condominiums, and sports facilities. viii. M&M Structures – Winsted – Provides a full-service structural steel design and fabrication company 15. How the products or services are different than the business’ Distinctive Iron provides custom steel fabrication, and installation of their finished product. Distinctive Iron works primarily with raw steel. 16. How the competitive markets are different from the business’ Distinctive Iron provides excellent customer service, which equates to a total project relationship. Their company evolved from ornamental steel fabrication to specializing in structural steel fabrication. PART D – Detailed job & wage information. 2. If applicable, provide quarterly payroll reports from the last year for current permanent full-time employees who will be located at the project site - Exhibit 1, 2 3. For new full-time permanent employees, complete the form on Page 5 of this application or attach a listing of jobs that includes the information from the form on Page 5. – Exhibit 12 **Exhibits Available at the Meeting