5.2. SR 09-19-2005
Item 5.2.
MEMORANDUM
TO:
Mayor and City Council
cc:
Lori Johnson, Finance Director
FROM:
Heidi Steinmetz, Assistant Director of Economic Development
~0
DATE: September 19,2005
SUBJECT: Consider Micro Loan for Provo Enterprises, LLC (Alliance
Machine, Inc. Project)
Attachments
. Staff report to Finance Committee, .L~ugust 17, 2005
. City of Elk River IYIicro Loan Fund Policy
Background
Pat and Bryan Pro'vo of .L~lliance I\1aclllne submitted a Industrial Incenti\Te Program rvIicro
Loan application in early .L~ugust in tlle amount of $100,000. TIle attaclled staff report to tlle
EDA Finance Cormnittee summarizes tlle application. .L~lliance :NIacIllne conducts ligllt,
precision machining of plastic and metal components for national and international clients in
tile aerospace, lnedical, defense and computer industries. TIle loan is proposed to be used
to\vards the constluction of an 18,000 SF manufacturing facility in Nortllstar Business Park.
Issue
Bodl tlle Finance COlwmttee and tlle ED.L~ l1Rve recommended appro\Tal of the loan. In
addition, the ED.L~ recommended that tlle City Council consider \vaiving tile public llearing
sclleduled for October 3, 2005 to accommodate an early October closing date for the
purcIlase of land, bank financing and City financing.
Action Requested
Staff requests that tlle City Council consider appro'val of t11e application from .L~lliance
tvfacIllne for a $100,000 Industrial Incenti'le Program Ivlicro Loan to PrO,TO Enterprises, LLC
per the recommendation of tlle Finance Committee and the EDA \vitll the follo\ving terms:
Rate FL"X:ed, 2 oints belo\v rime \y-ith a 3~/o floor
Term 15-year amortization, u to 5-year balloon a rment
Security Secured by 2nd position on the real estate, personal
uarantee from o\vners and souses
Parrici arion loan \y-ith TIle Bank of Elk Ri,Ter
9 ne\v full-time jobs in Elk Ri\Ter \y-ith a $15.00
minimum 110ml T \va e
Consider ivlicro Loan .A.pplication for Provo Enterprises, LLC
September 19, 2005 City CouncillvIeeting
Page 2 of2
Staff also recolnmends tllat the City Council consider \vaiving the public 11earing scheduled
for October 3, 2005. In tlle past, the City Council has l1eld public hearings prior to
appro'ving $100,000 Tvlicro Loans. TIle Business Subsidy la\v requires that tlle City Council
approve the loan but only requires a public hearing if the loan exceeds $100,000. The
IVlicro Loan Policy is attacl1ed for your revle\v.
MEMORANDUM
TO: EDA Finance Committee
CC: Patrick Klaers, City Administrator
Lori Johnson, Finance Director
FROM: Heidi Steinmetz, Assistant Director of Economic Development
DATE: August 17, 2005
SUBJECT: Consider Micro Loan Application: Alliance Machine, Inc.
Attachments
. .L\lliance I\lacIllne, Inc. :r~v1icro Loan .L~pplication including attachments
. TRF Projection \\1orksIleet
. E-mail message from Sid Inman of EWers & .L~ssociates, .L~ugust 11, 2005
. City of Elk Riv~er Business Subsidies Policy
Issue
The o\vners of Alliance 1vIacIllne, Inc. (patrick and Bryan Prov~o, fatller and son) l1a've
sublnitted tile attacl1ed application for an Industrial Incenti\Te Program I\!Iicro Loan in tlle
amount of $100,000 to be used for tlle constluction of a ne\v industrial/business park
building in Elk Ri,Ter. TIle loan is proposed to be suuctured as a participation loan \vitll TIle
Bank of Elk Ri\rer.
Background
Staff Ilas been assisting .L~lliance IvIaclllne since last fall to find a suitable site for the
relocation and expansion of tlle company's precision machining facility from I\!faple Gro\Te
to Elk Ri\rer.
Use of Tax Rebate Financing (TRF) or "Abatement" for the Project
Tile company has accepted tlle ED.L~'s proposal of a 1000/0 land \vrite-do\vn using City and
County TRF in the amount of $207,956 ($138,470 from tlle City and tlle same from tlle
County). Tile City Council \vill hold a public llearing and consider final appro.val of tlle use
ofTRF for tlus project on .L~ugust 15th.
Consider Ivlicro Loan .Application: ..t\lliance i\lacrune, Inc.
ED.A. Finance COffilmttce - .August 17,2005
Page 2 of 2
Belo\v is a current surmnary of tile .L~lliance 1,{achine project:
Nature of Business Ligl1t, precision machining of plastic and metal
components for national and international clients in the
aerospace, medical, defense and computer industries
City TRF Assistance $103,978 to Pro\To Enterprises, LLC \vho \villlease the
property to .L~lliance NXaclllne, Inc. (500/0 of tlle land cost)
TRF Years 10 (estimated)
Building Size 18,000 SF
Lot Size 2.84 acres to acoomodate a 10,000 SF expansion (see
attacl1ed site plan)
T obs Retained 30 ($20 a\Terage hourly \vage)
Jobs to be Created 9 ($15 minimuln Ilourly \vage)
Use of the Micro Loan Fund for this Project
TIle applicant proposes to use IYucro Loan funds to finance consuuction costs. TIle
applicant Ilas proposed tllat the ED.L~ take a second position on tlle real estate. Belo\v is a
summary of tlle project costs and proposed financing:
Project Costs
Land-2.84 i\.cres
Consuuction
Total
$207,956 (see attached TRF projection \~lorksI1eet)
$963,400 (see attacIled constluction statelnent)
$1,171,356
Proposed Project Financing (see attacl1ed bank proposal for details):
Bank Loan 1 $980,000
Bank Loan 2 $140,000
ED.L~ 1vIicro Loan $100,000
Total $1,220,000
Project "But For" Analysis
Sid Inman of Ehlers & Associates (tlle City's financial advisor) completed the "But For"
analysis for tlle use ofTRF for tlus project and reported to the ED.L~ on .L~ugust 8th that tlle
Alliance project met tlle "But For" test. I\Ir. Inman llas responded to tllls question \vitll the
attacIled e-mail message indicating tllat tlle use of 1vlicro Loan funds for tllls project \vould
change the "But For" analysis and result in a recommendation to the EDi\ that less TRF be
applied to tills proj ect..
Additional Information
Each company tllat recei\Tes a business subsidy in tlle State of IVlinnesota sllall be subject to a
subsidy agreement \'vitll tlle City of Elk River, \vlucll includes reporting provisions and
requirements set forth by tlle IvIN Business Subsidy La\v. TIle City's Business Subsidies
Policy is attacIled.
ELK RIVER ECONOMIC DEVELOPMENT
MICRO LOAN FUND POLICY & GUIDELINES
Re,;}sed June 2004
I. PURPOSE
TIle Economic Development .L\uthority for tlle City of Elk River (ED.L\) recognizes
tlle need to stimulate private sector investment into manufacturing facilities and
equipment in order to create ne\v jobs, boost productivity and retain existing jobs for
local residents. ~~dditionally, the need exists to encourage investment in tlle
expansion and/ or rellabilitation of commercial and retail buildings in order to
maintain tlle economic \riability of Elk River's central business district.
Subsequently, tlle purpose of tllls program is to provide lo\v interest, long-term (i.e.
greater than one year) loans as incenti\TeS for industrial development \v-itllln the City
of Elk River and to encourage commercial and retail business o\vners in tlle central
business district to rellabilitate tlleir existing buildings.
II. LOAN PROGRAMS
In order to meet the economic and community de\Telopment objecti'\les of tlle ED.L\,
t\vo distinct loan programs exist \vitllln tile 1{icro Loan Fund to promote business
grO\vtll in Elk Ri\rer.
Industrial Incentive Program
Purpose: TIle purpose of tile Industrial Incenti\Te Program is to encourage
industrial development tllat supports tlle tax base and brings quality
jobs to the city.
.L\mount:
Up to $100,000 of secondary financing not to exceed 200/0 of tlle
project cost.
Equity:
NIust have pri\rate-sector commitments for 500/0 of tlle project cost.
Borro\ver to prov-ide 100/0 or more of project fin all cing.
Rate:
FL"X:ed; 2 points belo\v the lo\vest prime rate publislled in
tile \'\!all Street Journal tile day tlle loan is closed, or 30/0, \vruclle"Ver is
greater.
Term:
Financing \Vitll a balloon payment in up to 5-years. Tile balloon
payment must not be longer tllan tlle balloon payment of the
pal1:icipating bank. Loans may be amortized up to the follo\ving
limits:
is-years on real estate uses;
lO-years on equipment uses.
Elk River Economic Development .;;\uthority
~,'ficro Loan Fund Policy & Guidelines
Revised June 2004
Page 2 of 8
Extension:
Criteria:
In dle event that tlle Borro\ver is unable to obtain conventional
financing to replace tIle }\ficro Loan at tile end of five years, tlle loan
may be extended up to t\vo additional years at a market rate of
in terest.
1. Borro\ver must be an industrial firm and create one ne\v
full-time job for each $20,000 loaned \vithin 2 years. Said jobs must
pay a minimum \vage of $10.00 per 110ur plus benefits. Loans in excess
of $75,000 s1lall meet tlle City's Business Subsidy Policy for ne\v job
and \vage goals, as \veil as location requirements.
2. Borro\ver must comply \vith tlle provisions of tile city's industrial
and business park zoning ordinances.
Redevelopment Financing Program
Purpose: Tile Redevelopment Financing Program is a'vailable to business and
property o\vners in tlle central business district (CBD) for the
rel1abilitation and restoration of tlleir buildings.
..:\mount:
Equity:
Rate:
Term:
Extension:
Criteria:
III. USES
Up to $50,000 of secondary financing (not to exceed 400/0 of the
project cost.
1-1ust 11a've private-sector commitments for SOO/o of tlle project cost.
Borro\ver to provide 100/0 or more of project financing.
FL'Xed; 2 points belo\v tile lo\vest prime rate published in the
\YJ all Street Journal tlle day the loan is closed, or 20/0, \"vluc11e"ver is
greater.
Financing \vitIl a balloon payment in up to 3-years. Loans may be
amortized up to tlle follo\ving limits:
is-years on real estate uses;
10-years on equipment uses.
In tlle e'vent tllat tlle Borro\ver is unable to obtain conventional
financing to replace the }\1icro Loan at tlle end of tllree years, the
loan may be extended up to t\vo additional years at a market rate of
interest.
1. .L\t a minimum, 200/0 of i)/Iicro Loan dollars must be used for the
impro\Tement of the building's fa<;ade.
2. Borro\ver must be located in the Central Business District
(see attached map).
1. Permitted Fund Uses:
a. Building construction
b. Land acquisition
Elk River Economic Development .A.uthority
~1icro Loan Fund Policy & Guidelines
Re,rised June 2004
Page 3 of 8
c. :J\faclllnery
d. Furniture, fi~tures, and equipment (FF&E)
e. Renovation and modetmzation of buildings
f. Extetlor renovation of retail, commercial and industrial buildings
g. Public infrastructure needed for economic development expansions
11. Investment real estate \vith a minimum of 500/0 of the space pre-leased
2. Ineligible Fund Uses:
a. Expenditures for tlle consuuction and/or renovation of residential units
b. \V orking capital
c. Refinancing of existing debt
d. Inventory
IV. BUSINESSES ELIGIBILITY
.tilly project meeting tlle above criteria, and located or proposed to be located \vithin
t11e city limits of Elk River as defined by tlus program, may be eligible for an
Economic De"velopment ]\'llcro Loan as further defmed herein:
. Business must be a for-profit corporation, partnerslup, or sole
proptletors1up.
. Business must be a slllall business as defined by tile Small Business
[\.dministration (SB.L\).
. Business must l1ave a positi\Te net \vorth.
. Religious, political, and pornographic enterprises are not eligible to use
the Economic Development :J\'Iicro Loan Fnnd.
V.MICRO LOAN FUND TERMS & CONDITIONS
1. Loan Structure
.L\ll ED.L\ Ivucro Loans \\.rill be structured as participation loans and \v-ill be serviced by
tlle project's primary lending institution. Such an arrangement allo\vs for the central
distribution and collection of funds and simplifies the financing process for all
parties involved. i\. participation agreement \v.ill be signed by t11e borro\ver, primary
lender and the ED.L~. TIle agreement \vill include tlle follo~ving provisions, among
others:
. If Borro\ver does not meet t11e job and \vage goals specified in t11e Subsidy
.L"1..greement, the interest rate ,vill change to 2 points abo\Te tlle participating
bank's rate, effective from tile t\vo year anni'versary of tlle loan closing.
Upon subsequent acrue,Tement of tlle jobs and \vage goals, tlle interest rate
\vill revert back to the rate \Vllen tile loan ~vas originated, effective from the
date of attainment of tlle job and \vage goals.
. If Borro\ver defaults on tlle loan, tlle EDI\ ~v.ill collect all furtller payments
during the default based on a pro-rata basis \Vitll tlle participating bank
excluding the distribution of proceeds resulting from tlle foreclosure on
colla teral.
Elk River Economic Development .A.uthority
J\Iicro Loan Fund Policy & Guidelines
Revised June 2004
Page 4 oE8
The ED~\ may require additional agreements to be signed by the borro"\ver (i.e.
security agreement, personal guarantees, job performance agreement).
2. Simultaneous Micro Loans
The simultaneous use of different 1\rficro Loan Fnnd Programs by anyone borro\ver
or for anyone project is prolubited.
3. Call of Loan
.L\ loan s11all become due and payable in full if a business relocates outside of the city
of Elk Ri\Ter prior to tlle maturity date of the ED..c\ loan.
4. Late Payment Charge
..:\ late payment charge of up to 80/0 of the installment amount may be enforced.
VI. REGULATION FOR NEW CONSTRUCTION AND IMPROVEMENTS
..:\11 buildings \vhicll public funds \vW be used for consuuction or renovation are to
be brougllt into conformance \vith city codes and policies. Repairs may include tlle
follo\ving systems and portions of real property:
a. 1\.Jecllanicallleating, plumbing, and electrical
b. Structural; including tlle facade of the structure and energy related
imprO\lements.
c. Hook-up to city services (i.e. \v.ater, se\ver)
VII. LOAN SECURITY AND GUARANTEES
.L\pplicant must be able to secure tlle loan by pro\riding the ED.l\ \\ritll a minimum of
a subordinate mortgage upon tlle building and/ or assets or otller approved collateral.
.L\pplicant must demonstrate the financial means to repay the loans, as determined by
tlle Economic De,relopment .L\utllOrity.
Wllene,rer possible, personal guarantees \vill be made part of any loan agreement.
VIII. TIMING OF PROJECT EXPENSES
No project sllould commence until tlle Elk River Economic Development .L\uthority
11as approved the loan application. .L\ny costs incurred prior to tlle appro"val of tlle
loan application are generally not eligible expenditures.
No building construction sllould commence until tlle required City permits are
secured.
TIle applicant \vill be responsible for all legal, recording, and otller fees required for
protection of a security interest in the loan, payable by a 1 0/0 processing fee, \,duch is
paid at tile time of application.
IX. PROCEDURAL GUIDELINES FOR APPLICATION AND APPROVAL
1. ..:\11 applicants slla11 first contact a primary lending institution to determine if
additional equity is needed, and if so, ho\v. much.
Elk River Economic Development .;;\uthority
l\ficro Loan Fund Policy & Guidelines
Revised June 2004 Page 5 of 8
2. The applicant and the primary lender shall tllen meet \vitll City Staff to obtain
information about the 1.ficro Loan program, discuss the project, and obtain
application forms.
3. TIle applicant sllall complete and submit an application form to the City, along
\vith a processing fee of 1 % of the loan request. (TIle fee is used to cover
processing expenses and will be returned if application is denied.) Tile applicant
must pro\ride evidence of their ability to meet the equity requirements or provide
a letter of commitment for con.~lentional financing from the primary lending
institution.
4. The application \vill be re,rie\ved by the City staff to determine if it conforms to
all City policies and ordinances and to consider the follo\ving:
a. TIle availability and applicability of otller governmental grants and/or
loan programs.
b. \'\!11ether the proposed project \vill result in conformance \Vitll building
and zoning codes.
c. \Xl1lether it is desirous and in tlle best interests of tlle public to pro\ride
funding for the project.
5. The ED~\ Finance Committee and ED.i\ Commissioners \vill revie\v each
application in terms of its consistency \~vith tlle goals of tlle Gro\vth
1.fanagement, Strategic, and Economic Development Plans and in relation to tlle
project's overall impact on tlle community's economy. Rede\relopment Loan
applications \vill also be revie\\red by an HRr\. member in conjunction \vith tlle
ED.L\ Finance Committee.
They \vill also evaluate tlle project application in telms of tlle follo\ving:
a. Project Design - E\raluation of project design \vill include
re,rie\v of proposed activities, time lines and a capacity to implement.
b. Financial Feasibility - .L\vailability of funds, private involvement, financial
packaging and cost effectiveness.
. .L\ppropriate ratio of private funds to 1ficro Loan funds.
. Sufficient casll flo\v~ to cover proposed debt service as
demonstrated by financial statements and projections.
. Business must s110\v a positive net \v~orth.
. Letter of Commitment from applicant pledging to complete tlle
project during proposed project duration, if tlle loan application
is approved.
Elk River Economic Development ..:'-\uthority
1Iicro Loan Fund Policy & Guidelines
Re'vised June 2004
Page 6 of8
. Letter of Commitment from otller financing sources stating
terms and conditions of their participation in tile project if
applicable.
. Sufficient collateral.
c. .L"1.ll other information as required in the application and/ or additional
information as may be requested by the Economic Development
.L"1. u tll 0 ri ty .
d. Project compliance \vith all city codes and policies.
e. Program Objectives - In addition to quality job and \,rage
creation/ retention requirements, tlle applicant must meet all :Nficro Loan
Fnnd criteria and demonstrate 110\v tlle proposed activities \vill meet at
least one of tlle follo\ving objectives:
. The project contributes to the fulfillment of tlle city's approv~ed
and adopted economic de\Telopment and/ or rede\ielopment
plans.
. The project prevents or eliminates slums and bligl1t.
. TIle project increases tlle local tax base.
. TIle project brings a structure into compliance \Vitll an existing
building code violation.
6. .t1.. \vritten request for an extension shall be accompanied by a copy of current
financial statements and a $500 upfront processing fee. TIle processing fee is
used to cover processing expenses and \v-ill be returned if request is denied. TIle
application for an extension beyond tlle original term sllould include a letter of
denial from a conventional lender. Refinancing \vill not be allo\"ved solely for the
purpose of reducing the interest rate due to 10\~ler market interest rates.
7. Tile ED.L~ Finance Committee \vill recommend tlle approval, denial, or request a
resubmission. .L'1.. recommendation from the Finance Committee \vill be
fonvarded to tlle ED.L\ for final action.
x. LOAN POLICY REVIEW
TIle above criteria \vill be revie\ved on an annual basis to ensure tllat the policies
reflected in tlus document are consistent \v-ith the economic de\ielopment goals set
fortll by tlle City.
Elk River Economic Development .r\.uthority
:l\1icro Loan Fund Policy & Guidelines
Re'vlsed June 2004
Page 7 of 8
XI. COMPLIANCE WITH STATE STATUTES
Eacll company receiving assistance in excess of $75,000 from tlle ED.[\.. 1'llcro Loan
Frmd shall be subject to tlle provisions and requirements set forth by l\;Iinnesota
State Statute 116J.993 and tlle City's Business Subsidy Policy summarized belo\v:
Progress Reports
TIle borro\ver shall file a report annually for t\~vo years after tlle closing of tlle loan or
until all goals set fOl*tll in tlle application lla've been meet, \,dllch ever is later. Repol1s
sllall be completed using the format drafted by the State of J\finnesota and shall be
filed \Vitll tlle City in lvlarcll of eacll year for the previous year.
Maintain Facility
The borro\,rer agrees to maintain and operate its facility at the site \vhere tlle loan is
used for a period of 5-years after the date tlle loan is closed.
Goal Attainment
In addition to attaining or exceeding the jobs and \,rages goals set forth in Section IV
of the .l\pplication, the borro\ver agrees to achieve at least one of tlle goals for
community de\telopment set fortll in Section IX, part 5, subdivision (e) of the I\'llcro
Loan Fund Policy.
Redevelopment loans in tlle Central Business District are exempt from job creation
and \vage goals stated in Section IX, part 5, subdivision (e) provided the loan amount
does not exceed 500/0 of the project cost.
Failure to Comply
Businesses failing to comply \Vitll the abo.ve provisions \v.ill be subject to fines,
repayment requirements in accordance \Vitll the state statute, and be deemed
ineligible by tlle State to receive any loans or grants from public entities for a period
of 5-years.
XII. RIGHT OF REFUSAL
TIle Elk River Economic Development ..A..uthority may deny any project \,dllch it
deems inappropriate according to the guidelines established in tllls docrunent.
Elk River Economic Development ~'-\.uthol":ity
rVllCl"O Loan Fund Policy & Guidelines
Re\;.sed June 2004
Page 80f8