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3.6. EDSR 05-11-2009~j City of Elk -~-. River REQUEST FOR ACTION To Item Number Economic Develo ment Authori Agenda Section Meeting Date Prepared by May 11, 2009 Annie Deckert, Economic Develo ment Assistant Item Description Reviewed by Consider Amendment to Micro Loan Terms -Nicole's Salon Catherine Mehelich, Director of Economic Develo ment Reviewed by Action Requested The EDA is asked to consider the EDA Finance Committee's recommendation for approval of a 1-year extension on the Nicole's Finishing Touch Salon, Inc. micro loan at a 3.0% interest rate with the following conditions: • a reduction of the current monthly payment of $687.61 to $250.00 • a balloon payment due on January 8, 2012 (at which time an extension can be considered if necessary) Background/Discussion The attached staff report to the EDA Finance Committee and Apri127, 2009 committee meeting minutes provide background regarding the amendment to Micro Loan terms request. In addition, EDA Commissioners Motin and Tveite both serve on the EDA Finance Committee and may provide additional comments regarding the committee's review and recommendation. Financial Impact The EDA Micro Loan Fund has a current cash balance of approximately $787,991. The principal balance due on the Nicole's Finishing Touch Salon, Inc. micro loan is $14, 050.19. Attachments • EDA Finance Committee Meeting Minutes dated Apri127, 2009. • EDA Micro Loan Fund Policy and Guidelines • Staff report to EDA Finance Committee re: Nicole's Finishing Touch Salon, Inc. Micro Loan Extension Request, Apri127, 2009 Action Motion by Second by Vote Follow Up MEETING OF THE EDA FINANCE COMMITTEE HELD AT THE ELK RIVER CITY HALL MONDAY, APRIL 27, 2009 Members Present: Cliff Lundberg, Paul Motin, Nate Oval, Larry Toth, Dan Tveite and Chris Carlson Members Absent: None Staff Present: Director of Economic Development Catherine Mehelich, Economic Development Assistant Annie Deckert Accept EDA Finance Committee Minutes Motion by Tveite, second by Toth to accept the December 18, 2008 EDA Finance Committee Minutes as presented. The motion carried 6-0. Ms. Mehelich welcomed new Finance Committee member, Nate Oval, representing The Bank of Elk River. 2. Discuss Micro Loan Reduest• Nicole's Finishing Touch Salon, Inc Ms. Mehelich summarized the Micro Loan restructuring request from Nicole's Finishing Touch Salon, Inc. She indicated staff's concerns regarding placing additional securities and/or setting additional expectations for the loan. The original terms of the loan were fora 2-year term, 3% fixed rate, direct loan with the EDA, and secured by a personal guaranty from the owner. In January of 2009, following review and recommendation from the Finance Committee, the EDA approved a 1-year extension on the loan terms in order to reduce the monthly payment to assist the business cash flow. The applicant, Nicole Fox, along with her step-father, Joe Brandenburg, are requesting EDA consideration of restructuring the micro loan payments to an amount which can be realistically handled by the business's strained cash flow. Mr. Brandenburg has indicated to staff that Ms. Fox can handle a monthly payment of $250. Ms. Mehelich inquired about the current balances of the bank loans. Mr. Oval indicated the combined balance of the SBA and build-out loan were approximately $100,000. He also stated that Ms. Fox had attended a Business Network International (BNI) meeting with him, and has been working on her marketing efforts by meeting weekly with Stephanie Danielson, realtor for the residential portion of the Bluff's building. Mr. Brandenburg, stepfather to Ms. Nicole Fox, owner of Nicole's Finishing Touch Salon, Inc, provided an update on the status and future plans for the business. Mr. Brandenburg indicated the empty building, current state of economy and unexpected build-out costs and City fees have made it difficult to survive. He stated that they have worked with The Bank of Elk River to lower the interest rate and lengthen the term of their loans. They have also worked with MinnWest bank to lower her monthly rent payments. Mr. Brandenburg informed the committee that he has purchased Ms. Fox new equipment to offer additional services and have replaced prior employees with new employees which better fit the salon and increase the marketability of the business. They have also restructured employees pay-scales to assist the cash flow. He indicated that he had replaced her prior financial tracking system with a new system, which would accurately track her cash flow, providing a better picture on how the business is doing. At this time, Nicole has made several lifestyle adjustments to accommodate her cash flow situation. Mr. Brandenburg indicated Ms. Fox is extremely active in donating gift cards and services to several community events, silent auctions and area schools. Ms. Fox indicated that she did have a business plan when she opened her business; however, with the current unpredictability of the economy, it was tough to maintain an accurate plan. She also indicated that her prior financial tracking system was not accurate and made it difficult to gauge how her business EDr~ Finance Committee Minutes Apri127, 2009 Page2of2 Page 2 was doing. Ms. Fox stated she has looked at the operation of other salons and is trying to offer services and market herself in ways the others do not, in efforts to set herself apart from the rest. Mr. Brandenburg and Ms. Fox were excused from the meeting following this discussion. Discussion by the committee included working with Nicole's to allow her to stay in business and reducing her monthly payment down to $250.00, with a balloon payment due at the end of the current loan term, January 8, 2011. The committee recommended extending the loan term 1 year, keeping the monthly payments at $250.00, with a balloon payment due January 8, 2012. It was the consensus of the committee to extend the term of the loan 1 year, and reduce the current monthly payments of $687.61 to $250.00 with a balloon payment due January 8, 2012 in which an extension can be considered if neccessary. The interest would remain the same, at 3%. MOVED BY TVIETE AND SECONDED BY TOTH, THE FINANCE COMMITTEE RECOMMENDS THAT THE EDA CONSIDER APPROVING A 1-YEAR EXTENSION ON NICOLE'S FINISHING TOUCH SALON, INC. LOAN AT A 3% INTEREST, A REDUCTION OF THE CURRENT MONTHLY PAYMENT OF $687.61 TO $250.00 WITH A BALLOON PAYMENT DUE ON JANUARY 8, 2012. THE MOTION CARRIED 6-0. 3. Other Business Ms. Mehelich informed the Committee that Dave Rymanowski was no longer with First National Bank, therefore the committee may want to replace him with a representative from First National Bank. Committee member Motin requested staff to research and report on the City's SAC/WAC rates in comparison to surrounding communities. 4. Closing The EDA Finance Committee meeting ended at 8:20 a.m. Respectfully submitted by, Annie Deckert Economic Development Assistant S:\EDA\Micro Loan Fund\Finance Committee\2009\Minutes\4.27.09 minutes.doc 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 River, MN 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. Micro 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 are 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 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 fox 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 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 for 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. Micro Loan Fund Policy & Guidelines Page 4 of 14 Amended November 2006 • 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 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 improvements. 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 axe generally not eligible expenditures. No building construction should commence until the required City permits are secured. Micro Loan Fund Policy & Guidelines Page 5 of 14 Amended November 2006 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 City, 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. 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. Micro Loan Fund Policy & Guidelines Page 6 of 14 Amended November 2006 • 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. 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. Micro Loan Fund Policy & Guidelines Page 7 of 14 Amended November 2006 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 ELK RIVER ECONOMIC DEVELOPMENT MICRO LOAN FUND APPLICATION I. CONTACT INFORMATION Legal Name of Business: Address: City /State /Zip Contact Person(s) Business Phone Home Phone Email Check One: Proprietor Corporation Partnership Social Security No. Federal ID # II. NATURE OF LOAN REQUEST Which Micro-Loan Program are you applying for? State ID # Industrial Incentive Program Rehabiliation Financing Program Downtown Business Revitalization Loan Program 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 Refinancing existing debt Other Micro Loan Fund Application Page 9 of 14 Amended November 2006 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: III. 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: Micro Loan Fund Application Page 10 of 14 Amended November 2006 Proposed Sources of Financing SOURCE NAME Bank Loan Bank Loan Other Private Funds Applicant Contribution Other Fed Grant/Loan State Grant/Loan EDA Micro Loan Tax Increment Financing Tax Abatement Total Financing Collateral Assignments TERMS AMOUNT Lien Description of Collateral Position To Bank 1 To Bank 2 To Private Sources To Other Sources To Federal Govt To State To EDA Micro Loan Micro Loan Fund Application Page 11 of 14 Amended November 2006 Value of Collateral Book Value Cost Existing Liens Land $ $ $ Buildings $ $ $ Machinery & Equip. $ $ $ Other $ $ $ Other $ $ $ IV. JOB & WAGE GOALS Present # of Employees Total Payroll Jobs To Be Created* Please r)YOVlde the fn~~ntx~ina infnrm~ti"n .,n ;.,}~~ _ w~.~l_:._ n ob Title Number of Jobs Average Hourly Wage Annual Salary Are the Jobs Permanent or Temporary? Expected Hiring Date ~Tfl __ =V0.== 1J LVl 1~J~,J 1c~cuuV11 (JIlly, please explain m business Ylan. 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 eluninates slums and blight. The project increases the local tax base. The project brings a structure into compliance with an existing building code violation. Micro Loan Fund Application Page 12 of 14 Amended November 2006 IV. PROJECT CONTACTS Attorney Name Address Phone Accountant Name Address Phone Financing Sources Menders, partners, etc 1 Name Address Phone Name Address Phone Parent Compan Name Address Phone Others Name Address Phone Name Address Micro Loan Fund Application Page 13 of 14 Amended November 2006 V. 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 Two Years C) Financial Projections for Two Years D) Resume of Owner/Management E) Personal Financial Statements of Proprietor, Parrners, 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) Fee (1 % of amount of loan request). VI. 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. APPLICANT SIGNA BY DATE Micro Loan Fund Application Page 14 of 14 Amended November 2006 fiver MEMORANDUM TO: EDA Finance Committee FROM: Catherine Mehelich, Director of Economic Development DATE: April 27, 2009 SUBJECT: Discuss Micro Loan with Nicole's Finishing Touch Salon, Inc. Attachments • Letter from Joseph Brandenburg and Nicole Fox, dated Apri17, 2009 • Current Amortization Schedule -Nicole's Finishing Touch Salon, Inc. • Sample Extended Amortization Schedule • Downtown Business Revitalization Micro Loan Program Issue Nicole Fox, owner of Nicole's Finishing Touch Salon, Inc. and her stepfather Joseph Brandenburg have requested the Finance Committee's consideration of restructuring the existing Micro Loan. The Finance Committee is asked to review and provide a recommendation to the EDA regarding the request. Background In January 2008, the EDA awarded a $25,000 Micro Loan at 3% interest to Nicole's Finishing Touch Salon, Inc. under the Downtown Business Revitalization Program. Ms. Fox indicated the loan would be used to increase advertising and other promotional activities to assist overcome negative impacts of their delay in relocating their business from Otsego to the Bluffs during the construction. The original terms of the loan were fora 2-year term, 3% fixed rate, direct loan with the EDA, and secured by a personal guaranty from the owner. In January 2009, following review and recommendation of the Finance Committee, the EDA approved a 1-year extension on the loan terms in order to reduce the monthly payment amount to assist the business cash flow (see attached December 18, 2008 Finance Committee minutes for details). Recently staff has had discussions with Joseph Brandenburg, representing his stepdaughter Nicole Fox, along with his submittal of the attached letter offering a significant pay off on Discuss Micro Loan with Nicole's Finishing Touch Salon, Inc. April 27, 2009 EDA Finance Committee Page 2 of 2 the remaining loan balance. Mr. Brandenburg had indicated to staff in follow up discussions that he has withdrawn this offer and has requested the EDA's consideration of restructuring the micro loan payments to an amount that can be realistically handled by the business's strained cash flow. The attached extended amortization schedule is one of the options that allows fora 1-year extension on the amortization schedule and reduces the monthly payment to $462.92. Mr. Brandenburg has indicated to staff that he believes that the cash flow can only handle monthly payments of $250. Staff has not been provided any financial statements for review or to support the options for discussions. The Committee may wish to consider any additional securities or performance expectations by the business and its owner related to restructuring the loan. During this time staff has shared information and encouraged their participation in the business planning services available for free through the Small Business Development Center (SBDC), as well as the joint marketing activities with River's Edge Downtown Business Association. The principal balance due on the loan as of April 15, 2009 is $14,050.19. Both individuals have been invited to attend the meeting to discuss the request. Following any questions and answers with the applicant, they will be excused during the Finance Committee's discussion and recommendation. The Finance Committee's recommendation will be considered for final action by the EDA at its May 11, 2009 regular meeting.