7.11.
CC Regular Session
- Meeting Date:
- 01/24/2017
- Submitted For:
- Patrick Brama
- By:
- Patrick Brama, Administrative Services
Information
Title:
Approve Request for Exemption to EDA Revolving Loan Fund Guidelines
Purpose/Background:
PURPOSE
Consider request from Ramsey business to allow for an "exception" to the EDA RLF Guidelines, related to minimum equity. More specifically, to allow for a reduction in the required minimum amount of business equity, from 10% down to 5%, only in situations in which the Small Business Administration (SBA) 504 Loan Program is being used by a Ramsey business. The SBA 504 Program requires a minimum 10% equity--and the current EDA RLF guidelines also require a minimum 10% equity--which doesn't allow the City RLF program to provide financing (not already provided by the SBA loan). Under the proposed policy exemption, the City RLF could be considered as part of the 10% owner's equity and all financing sources could be "stacked" together to create a complete financing package..
PROCESS
BACKGROUND
The intent of the EDA RLF program is to provide gap financing in situations in which conventional/ normal financing is not available for small/ medium sized businesses, to make good projects "GO." Please see attached EDA RLF guidelines for details. The SBA 504 Loan program is a very common financing solution for small/ medium sized businesses. Because of the 10% equity requirement in the EDA RLF guidelines, these two programs cannot stack.
APPLICANT/ BUSINESS
The business considering the EDA RLF is American Print & Digital. They are located of Radium Street in eastern Ramsey, just south of Bunker Lake Boulevard. They currently lease about 5,000 sf in a multi-tenant spec building. They are a "broker" style printing firm. Meaning, they don't work with end-user customers directly--they only work with brokers. Brokers sign contracts with American Print & Digital for work. They have 7 full-time employees. The business started in 2009 and has steadily grown year-after-year.
American Print & Digital needs room to grow, at least 10,000 sf total. They recently placed an order for a very expensive piece of equipment, which they already have enough orders to run for a minimum 6-hours per week, and expect at least 20-hours per week immediately when it's installed. The new piece of equipment allows them to expand their production capacity to larger runs, on physically larger pieces of material, and to produce product quicker/ cheaper.
Please see attached cover letter from American Print & Digital for details.
THE PROJECT
American Print & Digital has a purchase agreement in place for the former "All-Brite Printing" building located between Do-All Printing and Lano Equipment on US Highway 10 (6320 Highway 10). This building is just less than 15,000 sf, and is set up ideally for their operations. Some renovations are needed. This purchase will allow for expansion of their business, placement of their new machine, and room for small future expansion. Additionally, in the short term, American Print & Digital plans to sub-lease a small portion of the property until they need it (about 3,000 sf).
The project is about $1.4M total--in which American Print & Digital is seeking financing, with about $600,000 of the total project costs are the new machine. The Bank of Elk River has tentatively indicated they would fund 50%, the SBA (via the development corporation) has tentatively indicated they would fund 40%, and the owner has indicated they would like the EDA RLF to cover 5%, and for owner equity to be 5% (20 year term, Bank lien 1, SBA lien 2, City lien 3).
The owner is requesting 5% EDA RLF financing to allow equity dollars to be dedicated to ongoing business working capital needs. The printing industry requires a significant level of working capital to upgrade machines, repair machines, and purchase ever-changing software. It is not uncommon for these unexpected costs related to machines to cost several hundred thousand dollars. American Print & Digital can physically make the deal happen without without the EDA RLF. However, they want to be prudent/ smart about how they are growing their business planning--and they want to make sure they can digest their growth.
SBA 504 PROGRAM
Please follow this link: http://www.cmdcbusinessloans.com/tools-resources/sba-504-sba-7-a-comparison
Consider request from Ramsey business to allow for an "exception" to the EDA RLF Guidelines, related to minimum equity. More specifically, to allow for a reduction in the required minimum amount of business equity, from 10% down to 5%, only in situations in which the Small Business Administration (SBA) 504 Loan Program is being used by a Ramsey business. The SBA 504 Program requires a minimum 10% equity--and the current EDA RLF guidelines also require a minimum 10% equity--which doesn't allow the City RLF program to provide financing (not already provided by the SBA loan). Under the proposed policy exemption, the City RLF could be considered as part of the 10% owner's equity and all financing sources could be "stacked" together to create a complete financing package..
PROCESS
(1) The purpose of this case is to provide the applicant approval of their "exemption" request to the City's EDA Revolving Loan Fund Guidelines, related to minimum equity. The purpose of this case is not to award a loan.
(2) In February, a follow up case will be brought to the City Council. In February, a formal loan application from American Print & Digital, and the subsequent credit analysis/underwriting, will be brought back to the EDA and Council for consideration. The purpose of this future case is to consider awarding a loan.
(2) In February, a follow up case will be brought to the City Council. In February, a formal loan application from American Print & Digital, and the subsequent credit analysis/underwriting, will be brought back to the EDA and Council for consideration. The purpose of this future case is to consider awarding a loan.
BACKGROUND
The intent of the EDA RLF program is to provide gap financing in situations in which conventional/ normal financing is not available for small/ medium sized businesses, to make good projects "GO." Please see attached EDA RLF guidelines for details. The SBA 504 Loan program is a very common financing solution for small/ medium sized businesses. Because of the 10% equity requirement in the EDA RLF guidelines, these two programs cannot stack.
NOTE: the SBA 504 Loan Program considers the EDA RLF as equity. Also, it should be noted, staff has received this general concern/ request in the past from other Ramsey businesses--this is not uncommon.
APPLICANT/ BUSINESS
The business considering the EDA RLF is American Print & Digital. They are located of Radium Street in eastern Ramsey, just south of Bunker Lake Boulevard. They currently lease about 5,000 sf in a multi-tenant spec building. They are a "broker" style printing firm. Meaning, they don't work with end-user customers directly--they only work with brokers. Brokers sign contracts with American Print & Digital for work. They have 7 full-time employees. The business started in 2009 and has steadily grown year-after-year.
American Print & Digital needs room to grow, at least 10,000 sf total. They recently placed an order for a very expensive piece of equipment, which they already have enough orders to run for a minimum 6-hours per week, and expect at least 20-hours per week immediately when it's installed. The new piece of equipment allows them to expand their production capacity to larger runs, on physically larger pieces of material, and to produce product quicker/ cheaper.
Please see attached cover letter from American Print & Digital for details.
THE PROJECT
American Print & Digital has a purchase agreement in place for the former "All-Brite Printing" building located between Do-All Printing and Lano Equipment on US Highway 10 (6320 Highway 10). This building is just less than 15,000 sf, and is set up ideally for their operations. Some renovations are needed. This purchase will allow for expansion of their business, placement of their new machine, and room for small future expansion. Additionally, in the short term, American Print & Digital plans to sub-lease a small portion of the property until they need it (about 3,000 sf).
The project is about $1.4M total--in which American Print & Digital is seeking financing, with about $600,000 of the total project costs are the new machine. The Bank of Elk River has tentatively indicated they would fund 50%, the SBA (via the development corporation) has tentatively indicated they would fund 40%, and the owner has indicated they would like the EDA RLF to cover 5%, and for owner equity to be 5% (20 year term, Bank lien 1, SBA lien 2, City lien 3).
The owner is requesting 5% EDA RLF financing to allow equity dollars to be dedicated to ongoing business working capital needs. The printing industry requires a significant level of working capital to upgrade machines, repair machines, and purchase ever-changing software. It is not uncommon for these unexpected costs related to machines to cost several hundred thousand dollars. American Print & Digital can physically make the deal happen without without the EDA RLF. However, they want to be prudent/ smart about how they are growing their business planning--and they want to make sure they can digest their growth.
NOTE: a common pit-fall for quickly growing small businesses is to not have enough money available in working capital, and outstrip their ability to digest their growth (i.e. they don't have enough working capital to pay for short term expenses incurred as a result of their quick growth). This can happen by putting too much equity into the upfront project, and not leaving dollars for working capital. American Print & Digital is attempting to avoid this potential problem via this request to the City.
SBA 504 PROGRAM
Please follow this link: http://www.cmdcbusinessloans.com/tools-resources/sba-504-sba-7-a-comparison
Notification:
Observations/Alternatives:
The EDA RLF has an adopted set of "Guidelines" which are attached to this case. These guidelines were adopted in 2005. It's staff understanding, only one EDA RLF loan has been made in the past decade (about 26K for equipment to Koru Fitness). Staff believes the EDA RLF has been used sparingly for two major reasons:
(1) The guidelines require a minimum 3% interest rate. Since the great recession, interest rates available through private banking institutions have been very low. Additionally, traditional economic activity has been relatively sparse, until recently. As a result of these items, demand for this program has been low.
(2) Small businesses commonly use the SBA 504 loan program. That program doesn't stack well with the EDA RLF program. As a result, businesses often cannot use the EDA RLF program.
With the above information in mind, and the request from American Print & Digital in-hand, staff believes it might be worth it for the EDA to consider a exception and/ or amendment to the EDA RLF Guidelines. More specifically, to allow for equity to dip down to 5% in situations in which the SBA 504 Loan Program is being used by a business.
Here is a preview of what the EDA RLF would look like in this scenario:
(1) The guidelines require a minimum 3% interest rate. Since the great recession, interest rates available through private banking institutions have been very low. Additionally, traditional economic activity has been relatively sparse, until recently. As a result of these items, demand for this program has been low.
(2) Small businesses commonly use the SBA 504 loan program. That program doesn't stack well with the EDA RLF program. As a result, businesses often cannot use the EDA RLF program.
With the above information in mind, and the request from American Print & Digital in-hand, staff believes it might be worth it for the EDA to consider a exception and/ or amendment to the EDA RLF Guidelines. More specifically, to allow for equity to dip down to 5% in situations in which the SBA 504 Loan Program is being used by a business.
Here is a preview of what the EDA RLF would look like in this scenario:
50% Bank
40% SBA
5% EDA RLF*
5% Owner Equity
*10 year term, third lien, about $70,000.
NOTE: staff has received conflicting information on the minimum required term for the EDA RLF. Staff has the perspective to attempt to minimize the city's loan term. There is a chance the EDA RLF will be required to match the SBA 20 year term. In that scenario, we would also need to have an exception to our EDA RLF Guidelines on maximum loan term (from 15 years to the SBA required 20). This question (RE term) will be answered if/when an actual application is brought forward (i.e. February).
40% SBA
5% EDA RLF*
5% Owner Equity
*10 year term, third lien, about $70,000.
NOTE: staff has received conflicting information on the minimum required term for the EDA RLF. Staff has the perspective to attempt to minimize the city's loan term. There is a chance the EDA RLF will be required to match the SBA 20 year term. In that scenario, we would also need to have an exception to our EDA RLF Guidelines on maximum loan term (from 15 years to the SBA required 20). This question (RE term) will be answered if/when an actual application is brought forward (i.e. February).
Funding Source:
EDA RLF: about $300,000 balance.
Recommendation:
ACG/ STAFF RECOMMENDATION
Attached to this case is a MEMO/ recommendation from ACG/ Mike Mulrooney (the City's Economic Development Consultant). Generally speaking, both staff and ACG are comfortable with this policy exception. However, we would note the items below, and importance of good credit analysis (this policy exception isn't a loan approval).
On the plus side:
- This amendment would allow for use of these dollars in more traditional economic development scenarios (i.e. the commonly used SBA 504 situations). This fund is not used often today.
- This scenario still requires 5% owner equity--some level of owner equity is always highly recommended in any project.
- This still requires strict underwriting, and a credit-worthy tenant--this is always highly recommended, and would be by staff/ ACG for this loan.
On the minus side:
- This puts the city in a greater position of risk (lower equity means greater chance of not being paid back in the event of a default).*
- The city's position would be third in SBA deals (which again, puts the city in a higher position of risk)*
*NOTE: these items are not unique to this specific situation. The very essence of why the City EDA RLF exists--is to cover financing gaps that the private sector would not normally fund alone (i.e. riskier situations). The question here is shades of grey/ or various levels of comfort RE risk tolerance for the City. Are we okay with 5% equity rather than 10% on SBA deals--both are generally risky levels of equity--one is more risky.
EDA RECOMMENDATION
The EDA supported this exemption by a 5-0-1 vote on 01/10/2017. EDA Member Hardin abstained, as he is an employee of the Bank representing this project. The EDA felt the purpose of this program was to help Ramsey businesses. The program is very rarely used. Generally, this appears to be a reasonable request/ opportunity to expand the ability to use this program. The EDA will still rely heavily on the underwriting process to determine if the applicant is credit worthy. The EDA believes some level of equity is needed in any project the City was involved with--in this specific scenario, 5% appears to be reasonable. The EDA has requested staff bring back a future case to update the EDA Revolving Loan Fund Policy.
Action:
Motion to:
Allow for an exception to the EDA RLF Guidelines, to allow for minimum equity, in the amount of 5%, for American Print & Digital.
Allow for an exception to the EDA RLF Guidelines, to allow for minimum equity, in the amount of 5%, for American Print & Digital.
Process for American Print & Digital:
(1) EDA consider allowing policy exception (01/12/2017)
(2) City Council consider allowing policy exception (01/24/2017)
(3) EDA consider application/ underwriting/ awarding loan (02/09/2017)
(4) City Council consider application/ underwriting/ awarding loan (02/14/2017)
Attachments
Form Review
| Inbox | Reviewed By | Date |
|---|---|---|
| Kurt Ulrich | Kurt Ulrich | 01/19/2017 03:57 PM |
- Form Started By:
- Patrick Brama
- Started On:
- 01/18/2017 02:52 PM
- Final Approval Date:
- 01/19/2017