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5.0 EDSR 02-12-2007ITEM# 5. fiver MEMORANDUM TO: Economic Development Authority CC: Tim Simon, Finance Director FROM: Heidi Steinmetz, Assistant Director of Economic Development DATE: February 12, 2007 SUBJECT: Consider Micro Loan for Daddy-O's Cafe Attachments • Staff report to Finance Committee dated January 25, 2007 • Finance Committee Minutes dated January 25, 2007 • City of Elk River Micro Loan Fund Policy (last amended in November 2006) • Applicant's financial statements (EDA Commissioners only) Issue On January 25`h, the Finance Committee reviewed a Micro Loan application from Jeff Krueger of Daddy-O's Cafe. Mr. Krueger would like to use the funds to refinance existing debt. See the attached staff report to the Finance Committee. The Committee recommends, as detailed in the attached January 25~' minutes, that the EDA consider awarding Daddy-O's Cafe a $25,000 Downtown Business Revitalization Program Micro Loan. The attached Micro Loan Policy was amended in November 2006 to include the Downtown Business Revitalization Program. The Committee also asked that the EDA review Daddy-O's financial statements, however since MN State Statute 13.591 does not allow this information to be distributed to the general public, the information cannot be included in the EDA's public meeting packet. Therefore, this information is included for EDA Commissioners only as a separate enclosure. Jeff Krueger was encouraged to attend the EDA meeting. Consider Micro Loan Application for Jcff Krueger February 12, 2007 L;DA Meeting Page 2 of 2 Action Requested Staff requests that the EDA consider approval of the application from Jeff Krueger for a $25,000 Downtown Business Revitalization Program Micro Loan to Daddy-O's Cafe per the recommendation of the Finance Committee with the following terms: Rate 3% fixed Term 2 ears Securi Personal Guarantee Structure Direct loan from EDA ver MEMORANDUM TO: EDA Finance Committee CC: Tim Simon, Finance Director & Lori Stich, Accountant FROM: Heidi Steinmetz, Assistant Director of Economic Development DATE: January 25, 2007 SUBJECT: Consider Micro Loan Request: Daddy-O's Cafe Attachments • Application and related attachment -Daddy-O's Cafe • Pages 3-4 of the September 18, 2006 City Council Minutes • Pages 4-5 of the November 20, 2006 City Council Minutes • City of Elk River Micro Loan Fund Policy (last amended in November 2006) • Proposed amortization schedule Issue Staff has received the attached $25,000 Downtown Business Revitalization Program Micro Loan application from Jeff Krueger, property and business owner of Daddy-O's Cafe located in downtown Elk River. Mr. Krueger would hke to use the funds to refinance existing debt. Mr. Krueger is the first to apply for this program, which is a new Micro Loan program as of November of 2006. See the attached September 18`'' and November 20`'' City Council minutes for background information regarding the intent and approval of the program. Mr. Krueger satisfies the Downtown Business Revitalization Loan Program criteria set forth on page four of the attached Micro Loan Fund Policy. He plans to attend the Finance Committee meeting to answer any questions. Business Background 1966 -restaurant established and originally named Taco Town, Brooklyn Center, MN 1974 -Jeff Krueger became an employee of Taco Town 1980 -Jeff Krueger purchased the business 1983 -restaurant name changed to Little Brooklyn 1995 -restaurant name changed to Daddy-O's Cafe and Jeff Krueger purchased building/became landlord of tenants occupying 709 Main Street in Elk River 1998 -Daddy-O's relocated from Brooklyn Center to 709 Main Street in Elk River Consider Micro Loan Request: Daddy-O's Cafe January 25 2007, ED~~ Finance Committee Meeting Page 2 of 2 Staff Recommendation Staff recommends that the Finance Committee consider a recommendation that the EDA approve the $25,000 Downtown Business Revitalization Loan to Daddy-O's Cafe at a fixed interest rate of 3% to be paid back within 2 years with a personal guarantee. The proposed amortization schedule is attached. Next Step The Finance Committee's recommendation will be brought to the EDA for final action at its February 12, 2007 Regular Meeting at 5:30 p.m. MEETING OF THE EDA FINANCE COMMITTEE HELD AT THE ELK RIVER CITY HALL THURSDAY, JANUARY 25, 2007 Members Present: Chris Carlson, Cliff Lundberg, Paul Motin, Dave Rymanowski and Dan Tveite Members Absent: Tom McNair and Larry Toth (HRA Representative) Staff Present: Community Development Director Scott Clark, Finance Director Tim Simon and Assistant Director of Economic Development Heidi Stcisimetz 1. Accent August 17. 2006 EDA Finance Committee Minutes The August 17, 2006 EDA Finance Committee Minutes were accepted. 2. Introductions/Meeting Time The City's new Finance Director Tim Simon was in attendance in order to meet the Finance Committee members and learn more about the Micro Loan Program. Assistant Director of Economic Development Heidi Steinmetz asked the Committee whether or not the 7:OOam meeting time worked well for Committee members. The Committee indicated that they do not have a problem with the 7:00am time; however Committee member Dave Rymanowski suggested that perhaps the Committee should meet. later m the day so that it is more convenient for applicants to attend. Consider Micro Loan Application: Daddy-O's Cafe Ms. Steinmetz summarized the $25,000 EDA Micro Loan application from Jeff Krueger of Daddy- O's Cafe. Since this application was the first Downtown Business Revitalization Loan Program application, she provided an overview of how the program was developed and approved by the EDA and City Council in November of 2006. The primary purpose of the program is to offer existing downtown business owners in the Downtown District ashort-term, low interest operating loan that could be used toward working capital, cash flow, business sustainability and capital expenditiir~s. i~'fs. Steinmetz also provided die history and future plans of Daddy-O's Cafe. She also distributed an e-snail from Committee member Tom McNair stating his support of the .;application. Mr. Krueger was not in attendance. Committee member Paul Motin asked that the EDA review Daddy-O's financial statements since the statements were not <ir~~ilable at the meeting. Community Development Director Scott Clark and Ms. Steinmetz indicated that they would have to double check the MN State Statute regarding whether or not this information is public or private. If it is private, only EDA Commissioners would be allowed to review the statements. MOVED BY PAUL MOTIN AND SECONDED BY DAN TVEITE, THE FINANCE COMMITTEE RECOMMENDS THAT THE EDA CONSIDER APPROVING THE LOAN REQUEST TO DADDY-O'S CAFE WITH THE FOLLOWING TERMS: RATE 3% FIXED TERM 2 YEARS SECURITY PERSONAL GUARANTEE STRUCTURE DIRECT LOAN FROM EDA EDA Finance Committee iVlinutes Page 2 January 25, 2007 THE MOTION CARRIED 5-0. 4. Micro Loan Portfolio Report The report was distributed to the Committee. Committee member Paul Moon inquired as to whether or not all of the loan payments are current. Ms. Steinmetz stated "yes". Committee member Chris Carlson asked that future reports include this information. 5. C10Sing The EDA Finance Committee meeting ended at 7:25 a.m. Respectfully submitted by, ~~ ~~~ Heidi Steinmetz Assistant Director of Economic Development City of El: The Light Industrial Hub of the Northwest Metro Economic Development Micro Loan Fund Policy & Guidelines And Application Amended: November 2006 Amended: May 2006 Amended: June 2004 Adopted: September 1999 City of Elk River Economic Development Division 13065 Orono Parkway Elk Rivex, NIN 55330 763.635.1040 ELK RIVER ECONOMIC DEVELOPMENT MICRO LOAN FUND POLICY & GUIDELINES I. PURPOSE The Economic Development Authority for the City of Elk River (EDA) recognizes the need to stimulate private sector investment into manufacturing 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 Elk River's Downtown District . Subsequently, the purpose of this program is to provide low interest, long-term (i.e. greater than one year) loans as incentives for industrial development within the City of Elk River and to encourage commercial and retail business owners in the Downtown District to rehabilitate their existing buildings. II. LOAN PROGRAMS In order to meet the economic and community development objectives of the EDA, two distinct loan programs exist within the Micro Loan Fund to promote business growth in Elk River. Industrial Incentive Program Purpose: The purpose of the Industrial Incentive Program is to encourage industrial and high technology business development that supports the tax base and brings quality jobs to the city. Amount: Up to $100,000 of secondary financing not to exceed 20% of the 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; 2 points below the lowest prime rate published in the Wall Street Journal the day the loan is closed, or 3%, whichever is greater. Term: Financing with a balloon payment in 5-years. The balloon payment must not be longer than the balloon payment of the participating bank. 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 obtain conventional financing to replace the Micro Loan at the end of five years, the loan may be extended up to two additional years at a market rate of interest. iVlicro Loan Fund Policy & Guidelines Page 2 of 14 Amended November 2006 Criteria: 1. Borrower must be an industrial or high technology firm and create one new full-time job for each $20,000 loaned within 2 years. Said jobs must pay a minimum wage of $10.00 per hour excluding benefits required by law. Loans in excess of $75,000 shall meet the attached 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 the multiple sources of public financing axe requested (e.g. Micro Loan and Tax Increment Financing) job creation goals shall not be double-counted. 2. Borrower must comply with the provisions of the city's Industrial and Business Park zoning ordinances as applicable. Downtown Rehabilitation Financing Program Purpose: The Downtown Rehabilitation Financing Program is available to business and property owners in the Downtown District (DD) for the rehabilitation and restoration of their buildings. Amount: Up to $75,000 of secondary financing (not to exceed 40% of the 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 2%. 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 obtain conventional financing to replace the Micro Loan at the end of five years, the loan may be extended up to two additional years at a market rate of interest. Criteria: 1. At a minimum, 20% of Micro Loan dollars must be used for the improvement of the building facades. 2. Rehabilitation loans in the Downtown District are exempt from job creation and wage goals since the loan amount does not exceed $75,000 and does not qualify as a business subsidy by state law. 3. Borrower must be located in the Downtown District (DD) (see attached map). Micro Loan Fund Policy & Guidelines Page 3 of 14 Amended November 2006 Downtown Business Revitalization Loan Program Purpose: The Downtown Business Revitalization Loan Program is available to existing downtown business owners in the Downtown District (DD) as a short-term, low interest operating loan that could be used toward working capital, cash flow, business sustainability and capital expenditures. Amount: Up to $25,000. Rate: 3%. Term: 2-years. Criteria: 1. Personal guarantee of the Borrower will be required. 2. Personal financial statements of the Borrower will be required. 3. Applications to be accepted until December 31, 2007. 4. In addition to the permitted fund uses listed in Section II(1) of the Micro Loan Fund Policy, the Permitted Fund Uses for this specific program includes working capital, refinancing of existing debt, and inventory. 5. Borrower must be an established downtown business owner located in the Downtown District (DD) as of April 10, 2006. III. USES 1. Permitted Fund Uses: a. Building construction b. Land acquisition c. Machinery d. Furniture, fixtures, and equipment (FF&E) e. Renovation and modernization of buildings £ Exterior renovation of retail, commercial and industrial buildings g. Public infrastructure needed for economic development expansions h. Investment real estate with a minimum of 50% of the space pre-leased 2. Ineligible Fund Uses: a. Expenditures for the construction and/or renovation of residential units b. Working capital c. Refinancing of existing debt d. Inventory Micro Loan Fund Policy & Guidelines Page 4 of 14 Amended November 2006 IV. BUSINESSES ELIGIBILITY Any project meeting the above criteria, and located or proposed to be located within the city limits of Elk River as defined by this program, may be eligible fox an Economic Development Micro Loan as further defined herein: • Business must be afor-profit corporation, partnership, or sole proprietorship. • Business must be a small business as defined by the Small Business Administration (SBA). • Business must have a positive net worth. • Religious, political, and pornographic enterprises are not eligible to use the Economic Development Micro Loan Fund. V. MICRO LOAN FUND TERMS & CONDITIONS 1. Loan Structure All Economic Development Micro Loans will be structured as participation loans and will be serviced by the project's primary lending institution. Such an arrangement allows for the central distribution and collection of funds and simplifies the financing process for all parties involved. A participation agreement will be signed by the borrower, primary lender and the EDA. The agreement will include the following provisions, among others: If Borrower does not meet the job and wage goals specified in the Subsidy Agreement, the interest rate will change to 2 points above the participating bank's rate, effective from the two year anniversary of the loan closing. Upon subsequent achievement of the jobs and wage goals, the interest rate will revert back to the rate when the loan was originated, effective from the date of attainment of the job and wage goals. • If Borrower defaults on the loan, the EDA will collect all further payments during the default based on a pro-rata basis with the participating bank excluding the distribution of proceeds resulting from the foreclosure on collateral. The EDA may require additional agreements to be signed by the borrower (i.e. security agreement, personal guarantees, subsidy agreement). 2. Simultaneous Micro Loans The simultaneous use of different Micro Loan Fund Programs by any one borrower or for any one project is prohibited. 3. 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. 4. Late Payment Charge Micro Loan Fund Policy & Guidelines Page 5 of 14 Amended November 2006 A late payment charge of 8% of the installment amount may be enforced. VI. 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. Repairs may include the following systems and portions of real property: a. Mechanical heating, plumbing, and electrical b. Structural; including the facade of the structure and energy related unprovements. c. Hook-up to city services (i.e. water, sewer) d. ADA (Americans with Disabilities Act) improvements VII. 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. Applicant must demonstrate the financial means to repay the loans, as determined by the Economic Development Authority. Whenever possible, personal guarantees will be made part of any loan agreement. VIII. TIMING OF PROJECT EXPENSES No project should commence until the Elk River Economic Development Authority has approved the loan application. Any costs incurred prior to the approval of the loan application are generally 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 anon-refundable 1 processing fee, which is paid at the time of application. IX. 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. 2. The applicant and the primary lender shall then meet with City Staff to obtain information about the Micro Loan program, discuss the project, and obtain application forms. 3. The applicant shall complete and submit an application form to the Ciry, along with a processing fee of 1% of the loan request. (The fee is used to cover processing expenses and will be returned only if application is denied.) The applicant must provide evidence of their ability to meet the equity requirements or provide a letter of commitment for conventional financing from the primary lending institution. Micro Loan Fund Policy & Guidelines Page 6 of 14 Amended November 2006 4. 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 loan 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. 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. Rehabilitation Loan applications will also be reviewed by an HRA member in conjunction with the EDA Finance Committee. They will also 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. b. Financial Feasibility -Availability of funds, private involvement, financial packaging and cost effectiveness. • Appropriate ratio of private funds to Micro Loan funds. • Sufficient cash flow to cover proposed debt service as demonstrated by financial statements and projections. • Business must show a positive net worth. • 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 Authority. d. Project compliance with all city codes and policies. :Micro Loan Fund Policy & Guidelines Page 7 of 14 Amended November 2006 e. Program Objectives - In addition to quality job and wage creation/retention requirements, the applicant must meet all Micro Loan 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. 6. 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 and will be returned if request is denied. The application for an extension beyond the original term should include a letter of denial from a conventional lender. Refinancing will not be allowed solely for the purpose of reducing the interest rate due to lower market interest rates. 7. 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 final action. X. LOAN 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. XI. RIGHT OF REFUSAL The Elk River Economic Development Authority may deny any project which it deems inappropriate according to the guidelines established in this document. XII. COMPLIANCE WITH MN BUSINESS SUBSIDY LAW Each company receiving assistance in excess of $75,000 from the EDA Micro Loan Fund shall be subject to the provisions and requirements set forth by Minnesota State Statute 116J.993 and the attached City of Elk River Business Subsidy Policy. Micro Loan Fund Policy & Guidelines Page 8 of 14 Amended November 2006