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7.3 EDSR 08-19-2024The 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 Economic Development Authority Item Number 7.3 Meeting Date August 19, 2024 Prepared By Brent O'Neil, Economic Development Director Item Description Subordination Agreements - Loan to Heritage Millwork Reviewed by Cal Portner Action Requested Approve, by motion, a resolution subordinating the EDA loan to Heritage Millwork in favor of First Bank Elk River and the Twin Cities-Metro Certified Development Company (TCM). Background/Discussion The EDA authorized a loan in the amount of $200,000 to Heritage Millwork, Inc. on June 17, 2024. This loan is part of the overall financing of Heritage's investment in a new Elk River facility, in which the project is receiving financing through First Bank, TCM and the City of Elk River. First Bank and TCM have requested the EDA subordinate its position on the loan. While it does create a third security position on the loan, it is common in situations in which the EDA is providing gap financing for the EDA to accept a subordinated position. In this instance, the EDA's position is secured through all personal property and equipment now owned or acquired and located at the facility. Financial Impact N/A Mission/Policy/Goal Attract new business development to Elk River to build the city's economic vibrancy, job offerings and tax base. Attachments 1. Subordination - Twin Cities Metro 2. Subordination - First Bank Elk River 3. Res 24-05 Resolution Approving Subordination Agreements Page 18 of 33 EQUIPMENT SUBORDINATION AGREEMENT Date: FOR VALUABLE CONSIDERATION, the undersigned hereby subordinates the lien on personal property located in (Sherburne County), Minnesota, described as follows: SEE ATTACHED EQUIPMENT LIST which is evidenced by a Security Agreement and UCC-1 Financing Statement dated, and filed for record on , as Filing Number in the office of the Secretary of State, to a lien evidenced by a Security Agreement and UCC-1 Financing Statement from Heritage Millwork, Inc. to Twin Cities-Metro Certified Development Company, assigned to the U.S. Small Business Administration in an amount not to exceed $4,824,000.00 filed for record in the office of the Secretary of State. Economic Development Authority of the City of Elk River ______________________________________ By: Its: President ______________________________________ By: Its: Executive Director Page 1 of 2 Page 19 of 33 STATE OF MINNESOTA ) )ss. COUNTY OF ) On this ________ day of , 2024, before me personally appeared , who being by me duly sworn, did depose and say that (s)he is the President of the Economic Development Authority of the City of Elk River described in and which executed the foregoing instrument; and that (s)he signed his name thereto by order of said public body corporate and politic of the State of Minnesota. Notary Public STATE OF MINNESOTA ) )ss. COUNTY OF ) On this ________ day of , 2024, before me personally appeared , who being by me duly sworn, did depose and say that (s)he is the Executive Director of the Economic Development Authority of the City of Elk River described in and which executed the foregoing instrument; and that (s)he signed his name thereto by order of said public body corporate and politic of the State of Minnesota. Notary Public Drafted By: Twin Cities-Metro CDC 3495 Vadnais Center Drive Vadnais Heights, Minnesota 55110 651-481-8081 Page 2 of 2 Page 20 of 33 DEBT SUBORDINATION AGREEMENT THIS DEBT SUBORDINATION AGREEMENT (this “Agreement”) is made and entered into as of the ___ day of August, 2024, by and among HERITAGE MILLWORK, INC., a Minnesota corporation (“OpCo”), JADE ELK PROPERTIES LLC, a Minnesota limited liability company (“HoldCo” and together with OpCo, collectively, “Borrowers”), the ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF ELK RIVER, a public body corporate and politic of the State of Minnesota (“Subordinated Creditor”), and FIRST BANK ELK RIVER, a Minnesota state banking corporation (“Senior Lender”). W I T N E S S E T H: WHEREAS, as a condition to entering into that certain Construction Loan Agreement dated as of even date herewith (the “Loan Agreement”), by and among Borrowers and Senior Lender, Senior Lender requires that Borrowers, and Subordinated Creditor enter into this Agreement; and WHEREAS, Subordinated Creditor acknowledges that the extensions of financial accommodations to Borrowers by Senior Lender are of value to Subordinated Creditor. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. As used herein, the following capitalized terms shall have the following meanings: “Event of Default” shall have the meaning given to such term in the Loan Agreement. “Senior Claim” shall mean all of Borrowers’ indebtedness, liabilities and obligations to Senior Lender now existing or hereafter arising, direct or indirect, absolute or contingent, joint or several, whether as maker, endorser, surety, guarantor or otherwise, as well as the notes or other instruments evidencing the same, and any extensions, renewals, restatements or refinancings thereof, including, without limitation, the obligations of Borrowers to Senior Lender under the Loan Agreement and the documents related thereto. “Subordinated Claim” shall mean all of Borrowers’ indebtedness, liabilities and obligations to Subordinated Creditor, now existing or hereafter arising, direct or indirect, absolute or contingent, joint or several, whether as maker, endorser, surety, guarantor or otherwise, as well as the notes or other instruments evidencing the same, and any extensions, renewals, restatements or refinancings thereof, including, without limitation, the obligations of OpCo to the Subordinated Creditor under and in respect of the Subordinated Loan. “Subordinated Loan” shall mean any and all indebtedness of OpCo to Subordinated Creditor, whether or not evidenced by a promissory note or other debt instrument, including without limitation all indebtedness evidenced by the Subordinated Note. Page 21 of 33 - 2 - “Subordinated Note” shall mean that certain Promissory Note dated August ___, 2024, in the original principal amount of $200,000.00, given by OpCo to Subordinated Creditor, a copy of which is attached hereto as Exhibit A. 2. Limitations on Payment. Subordinated Creditor will not receive, or take action to collect or enforce, payment from OpCo, and OpCo will not make payment to Subordinated Creditor of the Subordinated Claim or any part thereof, without the prior written consent of Senior Lender; provided that so long as no Event of Default has occurred and is continuing, OpCo may pay, and Subordinated Creditor may collect and retain, scheduled payments, but not prepayments, under the Subordinated Note when due. Upon the occurrence and during the continuance of an Event of Default, OpCo shall not make, and Subordinated Creditor shall not accept, payments of any kind toward the Subordinated Claim. Except for the collection of regularly scheduled principal and interest payments as set forth herein, Subordinated Creditor will not, without the prior written consent of Senior Lender, receive or take any action to collect or enforce, payment of the Subordinated Claim or any part thereof from any trustee in bankruptcy, receiver, or other liquidator of any part of OpCo’s property, or from any other person. Until payment in full of the Senior Claim, any payment received by Subordinated Creditor following the occurrence and during the continuance of an Event of Default shall promptly be delivered to Senior Lender for application to the Senior Claim, in such order as Senior Lender shall elect. 3. Priority of Security Interest. Any now existing or hereafter arising security interest in Borrowers’ now owned or hereafter acquired property held from time to time by Senior Lender shall have priority in all respects as to any now existing or hereafter arising security interests in Borrowers’ now owned or hereafter acquired property held from time to time by Subordinated Creditor. The priorities specified herein are applicable irrespective of the time or order of attachment or perfection of security interests or the time or order of filing of financing statements or the giving or failure to give notice of the acquisition or expected acquisition of any security interest by Senior Lender or Subordinated Creditor. 4. Senior Lender Priority. In the event of the bankruptcy of, or the appointment of a trustee, receiver or other representative or liquidator for any of the property of Borrowers, or in the event Borrowers shall become the subject of any proceeding of any character under any federal or state bankruptcy or insolvency act or law, all monies and other property allocated or allocable to the Subordinated Claim and which would be payable or deliverable to Subordinated Creditor in the absence of the provisions of this Agreement shall be paid and delivered directly to Senior Lender for application by Senior Lender to the Senior Claim, in such order as Senior Lender shall elect, until full payment of the Senior Claim with the excess, if any, to be paid to Subordinated Creditor, regardless of whether Subordinated Creditor or Senior Lender or both file a claim on behalf of the Subordinated Claim in any such proceeding. Senior Lender is hereby irrevocably appointed attorney-in-fact for Subordinated Creditor with full power to act in the place and stead of Subordinated Creditor in all matters relating to or affecting the Subordinated Claim, until full payment of all Senior Claims, including the right to make, present, file and vote such proofs of claim against any Borrower on account of all or any part of said Subordinated Claim, as Senior Lender may deem advisable and to receive and collect any and all dividends or other payments (“Dividends”) made thereon and to apply the same on account of the Senior Claim. Subordinated Creditor will execute and deliver to Senior Lender such instruments as may be required by Senior Lender to enforce any and all such Subordinated Claim, to effectuate the Page 22 of 33 - 3 - aforesaid power of attorney and to effect collection of any and all Dividends which may be made at any time on account thereof. As collateral securing payment of the Senior Claim, Subordinated Creditor hereby transfers and assigns to Senior Lender the Subordinated Claim and all collateral security and guaranties therefor to which Subordinated Creditor may be entitled. Senior Lender may file one or more financing statements concerning any security interest hereby created without the signature of Subordinated Creditor. 5. Pay Over of Monies. In the event that Subordinated Creditor receives any payment or property on the Subordinated Claim in violation of the terms of this Agreement, such payments shall be held in trust by Subordinated Creditor and Subordinated Creditor will forthwith pay over or deliver the same to Senior Lender to be held by Senior Lender as cash collateral securing the Senior Claim. 6. Undertakings Unaffected. Subordinated Creditor’s undertakings herein shall not be affected or impaired by (a) any neglect or omission on the part of Senior Lender to look to or to preserve any collateral at any time securing payment of the Senior Claim, or (b) any act on the part of Senior Lender in releasing, cancelling or surrendering all or part of such collateral, or in extending the time for payment with respect to all or any part of the Senior Claim or such collateral, or in enforcing or realizing upon such collateral. No notice whatsoever need be given to Subordinated Creditor at any time of the Senior Claim or the amount or amounts thereof, whether now existing or hereafter arising, or any increase or decrease therein, or any payments thereof, or with respect to any collateral, or in any other respect. 7. Limitation on Transfer. Subordinated Creditor will not assign, pledge or otherwise transfer, or permit or suffer to be assigned, pledged or otherwise transferred, or execute any power of attorney with respect to, the Subordinated Claim or any part thereof, unless such assignee, pledger or transferee agrees in writing to be bound by the terms and conditions of this Agreement. 8. Legend and No Amendment. Each note or other instrument evidencing the Subordinated Claim shall forthwith if now outstanding and otherwise upon issuance be stamped or otherwise noted in writing upon the face thereof by Subordinated Creditor with a notation reading substantially as follows: “This note or instrument is subject to a Debt Subordination Agreement dated August ___, 2024, among maker and payee thereof, Jade Elk Properties, LLC, a Minnesota limited liability company, and First Bank Elk River, a Minnesota state banking corporation, which is made a part hereof by reference.” No instrument or note evidencing the Subordinated Claim or any part thereof shall be amended or modified in any manner without the prior written consent of Senior Lender. 9. Acceleration. In the event of any breach of this Agreement, Senior Lender shall have the right, at its option, and in addition to any other rights Senior Lender may have, to declare the Senior Claim immediately due and payable without notice or demand. Page 23 of 33 - 4 - 10. No Commitment to Extend Credit. Nothing herein creates, or implies the existence of, any commitment on the part of Senior Lender or Subordinated Creditor to extend credit to Borrowers. 11. Continuing Nature of Subordination. This Agreement shall be irrevocable and shall continue effective until the Subordinated Loan shall have been paid in full. This is a continuing agreement of subordination and Senior Lender may continue, at any time and without notice to Subordinated Creditor, to extend credit or other financial accommodations and loan monies to or for the benefit of Borrowers on the faith hereof. 12. Successors and Assigns. This Agreement is binding not only upon Subordinated Creditor and Borrowers, but also upon the heirs, representative, successors and assigns of each of them, and is enforceable not only by Senior Lender but also by its successors and any assignee of or participant in the Senior Claim, but shall not inure to the benefit of or be enforceable by any other party or subordinate the Subordinated Claim to any claim other than the Senior Claim. 13. GOVERNING LAW. THIS AGREEMENT SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF MINNESOTA. 14. Section Titles; Gender. The section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. The singular form of any word used in this Agreement shall include the masculine and feminine forms, and vice versa. 15. Notices. Except as otherwise expressly provided herein, any notice required or desired to be served, given or delivered hereunder shall be in writing and shall be deemed to have been validly served, given or delivered upon receipt when personally delivered or sent by facsimile transmission or overnight courier, or when duly deposited in the United States mails, certified or registered, with proper postage prepaid, addressed to the party to be notified as follows: If to Borrowers: Heritage Millwork, Inc. Jade Elk Properties, LLC _____________ _____________ If to Subordinated Creditor: Economic Development Authority of the City of Elk River 13065 Orono Parkway Elk River, Minnesota 55330 If to Senior Lender: First Bank Elk River 812 Main Street Elk River, Minnesota 55330 Page 24 of 33 - 5 - 16. Counterparts: This Subordination Agreement may be executed in any number of counterparts, each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same document. IN WITNESS WHEREOF, the parties have executed this Subordination Agreement as of the day and year first above written. 11750.42 29440186v1 [SIGNATURE PAGES TO FOLLOW.] Page 25 of 33 [SIGNATURE PAGE TO DEBT SUBORDINATION AGREEMENT] BORROWERS: HERITAGE MILLWORK, INC., a Minnesota corporation By: _________________________ Name: ___________________ Its: ______________________ STATE OF MINNESOTA ) ) ss COUNTY OF ___________ ) The foregoing instrument was acknowledged before me this ____ day of August, 2024, by _____________, the ___________ of Heritage Millwork, Inc., a Minnesota corporation, for an on behalf of said corporation. Notary Public Page 26 of 33 [SIGNATURE PAGE TO DEBT SUBORDINATION AGREEMENT] JADE ELK PROPERTIES LLC, a Minnesota limited liability company By: _________________________ Patrick Menth Its: Vice President STATE OF MINNESOTA ) ) ss COUNTY OF ___________ ) The foregoing instrument was acknowledged before me this ____ day of August, 2024, by Patrick Menth, the Vice President of Jade Elk Properties LLC, a Minnesota limited liability company, for an on behalf of said limited liability company. Notary Public Page 27 of 33 [SIGNATURE PAGE TO DEBT SUBORDINATION AGREEMENT] SUBORDINATED CREDITOR: ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF ELK RIVER, a public body corporate and politic of the State of Minnesota By: ______________________ Name: _________________ Its: ____________________ STATE OF MINNESOTA ) ) ss COUNTY OF ___________ ) The foregoing instrument was acknowledged before me this ____ day of August, 2024, by the Economic Development Authority of the City of Elk River, a public body corporate and politic of the State of Minnesota, for and on behalf of said public body. Notary Public Page 28 of 33 [SIGNATURE PAGE TO DEBT SUBORDINATION AGREEMENT] SENIOR LENDER: FIRST BANK ELK RIVER, a Minnesota state banking corporation By: Scott D. Fritz Its: Executive Vice President Page 29 of 33 EXHIBIT A FORM OF SUBORDINATED NOTE [Attached] Page 30 of 33 ECONOMIC DEVELOPMENT AUTHORITY OF THE CITY OF ELK RIVER SHERBURNE COUNTY STATE OF MINNESOTA RESOLUTION NO. 24-05 RESOLUTION APPROVING SUBORDINATION AGREEMENTS RELATED TO THE HERITAGE MILLWORK PROJECT WHEREAS, the Economic Development Authority of the City of Elk River (the “Authority”) has approved a Loan Agreement (the “EDA Loan Agreement”) with Heritage Millwork, Inc., a Minnesota corporation (the “Borrower”), pursuant to which the Authority has agreed to provide the Borrower with a loan in the principal amount of $200,000 (the “EDA Loan”) to assist with purchasing equipment in connection with the acquisition, construction and equipping of an approximately 110,000 square foot industrial warehouse facility for use in the Borrower’s manufacturing business located in the City of Elk River, Minnesota (the “Project”); and WHEREAS, to finance the Project, the Borrower is receiving (i) a loan (the “Bank Loan”) from First Bank Elk River, a Minnesota state banking corporation (the “Bank”), and (ii) a loan (the “SBA Loan” and, together with the Bank Loan, the “Priority Loans”) from Twin Cities-Metro Certified Development Company, a Minnesota nonprofit corporation (the “SBA Lender” and, together with the Bank, the “Lenders”), assigned to the U.S. Small Business Administration and the Lenders require that as a condition of giving the Borrower the Priority Loans, the Authority subordinate their rights under the EDA Loan Agreement and related documents pursuant to (i) a certain Debt Subordination Agreement by and between the Authority, the Borrower, Jade Elk Properties LLC, a Minnesota limited liability company, and the Bank (the “Bank Subordination Agreement”), a form of which is presented to the Board of Commissioners of the Authority (the “Board”), and (ii) a certain Equipment Subordination Agreement, made by the Authority for the benefit of the SBA Lender (the “SBA Subordination Agreement” and, together with the Bank Subordination Agreement, the “Subordination Agreements”), a form of which is presented to the Board; and NOW, THEREFORE, BE IT RESOLVED by the Board of Commissioners of the Elk River Economic Development Authority as follows: 1. The Authority hereby approves the Subordination Agreements, substantially in accordance with the terms set forth in the form presented to the Board, together with any related documents necessary in connection therewith, including without limitation all documents, exhibits, certifications or consents referenced in or attached to the Subordination Agreements (collectively, the “Lender Documents”) and hereby authorizes the President and the Executive Director to negotiate the final terms thereof and, in their discretion and at such time as they may deem appropriate, to execute the Lender Documents on behalf of the Authority, and to carry out, on behalf of the Authority, the Authority’s obligations thereunder when all conditions precedent thereto have been satisfied. 2. The approval hereby given to the Lender Documents includes approval of such additional details therein as may be necessary and appropriate and such modifications thereof, deletions therefrom and additions thereto as may be necessary and appropriate and approved by legal counsel to the Authority and by the officers authorized herein to execute said documents prior to their execution; and said officers are hereby authorized to approve said changes on behalf of the Authority. The execution of any instrument by the appropriate officers of the Authority herein authorized shall be conclusive evidence of the approval of such document in accordance with the terms hereof. This Resolution shall not constitute an offer and the Lender Page 31 of 33 EL185\79\970406.v1 Documents shall not be effective until the date of execution thereof as provided herein. In the event of absence or disability of the officers, any of the documents authorized by this Resolution to be executed may be executed without further act or authorization of the Board by any duly designated acting official, or by such other officer or officers of the Board as, in the opinion of the Authority’s Attorney, may act in their behalf. 3. Upon execution and delivery of the Lender Documents, the officers and employees of the Authority are hereby authorized and directed to take or cause to be taken such actions as may be necessary on behalf of the Authority to implement the Lender Documents. Approved this August 19, 2024, by the Board of Commissioners of the Economic Development Authority of the City of Elk River. President ATTEST: Secretary Page 32 of 33