2016 Mark Barbash Financing Presentation Copy Colorado FINAL
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This document provides an overview of economic development financing. It discusses understanding the business and project, identifying private and public financing options, determining any financing gaps, and structuring deals. Private financing sources include banks, venture capital, and capital markets. Public programs include direct loans, loan guarantees, tax-exempt bonds, tax incentives, and intermediary programs. The document outlines steps in the financing process and principles for working with private and public financing.
2016 Mark Barbash Financing Presentation Copy Colorado FINAL
- 1. Colorado Basic Economic Development Course Economic Development Finance Mark Barbash, Senior Advisor Council of Development Finance Agencies mbarbash@cdfa.net Economic Development Consulting Mark.Barbash@gmail.com
- 2. Economic Development Financing • Financing as part of the Development Process • Private Financing & Working with Bankers • Economic Development Programs • Types of Public Sector Programs • Tax Incentives & Tax Increment Financing
- 3. Steps in the Development Financing Process 1. Understand the Business 2. Understand the Project 3. Identify Private Financing Options 4. Identify Public Financing Options 7. Close the Deal 5. Identify the Gap 6. Structure the Financing
- 4. Step One: Understand the Business • Assessing the Health of the Business • Lifeline of a Business • Money • Market • Management
- 5. Business Lifeline Start Up Fast Growth Stable Mature ? GROWTH R I S K
- 6. Business Management & Financial Condition Money • Sufficient Equity for growth • Emphasis on cash flow management Market • Well identified market • Good understanding of competition • Ability to respond to changes in the market Management • Necessary skills in R & D, production, financial management, inventory control, sales and marketing
- 7. Step Two: Understand the Project • How the Project will Benefit the Business • How the Project will Benefit the Community • Project Cost • Project Timetable • Project Documentation
- 8. How the Project Will Benefit the Business • Cost Efficiencies / Consolidation • Expanded Capacity to Meet Existing Sales or Market • Expanded Capacity to Meet New Sales or Market • Proximity to Markets, Suppliers or raw material • Proximity to key skills or technical capacity How will the project benefit the community? • Job creation/retention • High wage/high tech jobs • Location in an EZ or key development area • Industry cluster member • Part of key community initiative
- 9. Match the Use of Funds with the Source of Funds Fixed Assets Land & Building 10-20 Year Financing Equipment Equipment 7 – 10 Year Financing Infrastructure Road, Rail, Utilities, Connectivity Longer Term financing, Bonding, Tax Increment Financing, Grants Operations Inventory, Payroll Receivables, Payroll Shorter Term working capital, lines of credit Growth R & D, working capital, marketing, product development New equity investment, venture capital, permanent working capital loan
- 10. Project Development Issues • Cost: Be sure that all costs are identified, including infrastructure, moving, installation and carrying costs • Timetable: Pre-ordering of equipment, necessary environmental studies, site preparation: • Documentation: Appraisals, environmental assessments, engineering reports
- 11. Step Three: Understand Private Financing Options All lenders and investors are money managers – nothing more and nothing less -- with different goals for return on investment based upon their source of funding.
- 12. The Business Lifeline Determines Most Financing Options Start Up Fast Growth Stable Mature Personal Assets Seed Capital Venture Capital Conventional Lenders, Banks Capital Markets: Stocks/Bonds 30%+ VC 6.5%+ Bank 3.5 % Prime Preseed Capital Angel Investors 2.3 % Treas CrowdFunding Taxable & Tax Exempt Bonds
- 13. Private Investor / Lender Profiles Investors Risk Control Investment Seed Capital Individuals, Local funds, Foundation Extremely high, most lose money Informal process, Very high control Ownership, Out quickly to VC Venture Capital Managed VC funds & SBICs Very high (15 – 30%), 90% lose money Formal process, high control Ownership, Out 5–7 years through IPO Banks + Commercial banks and leasing cos. Medium to low or risk; Prime + Very formal process, low control Loans, leases per asset life, 3–20 yrs. Capital Markets Corporate/ Investment banks, insurance, REIT No risk, Treasury rate return Highly structured process, no control Loans, leases, bonds, based on asset life, 7 – 30 yrs.
- 14. Financing Principles: How a Bank Manages Risk Lower Loan to Value Less bank exposure in event of liquidation, ensures owner commitment, higher equity required Variable Rates & Higher Fees Higher rate = Higher Risk, Bank profitability, Link income to market, higher debt service costs Shorter Term Loans Reduces risk over time Personal Guarantees Additional collateral / security in event of liquidation, ensures owner commitment
- 15. Basic Financing Principles: What a Business Needs in Financing Higher Loan to Value Decreases cash for down payment, Preserve cash equity for working capital needed for growth Fixed rates, lower fees Fixed rates provide for regular loan payment amounts, makes cash flow management easier Longer Term Loans Match Loan Term with Life of Asset; Longer term = lower debt service costs Non-Recourse Loans No personal guarantee preserves assets for additional borrowing
- 16. Bank Needs vs. Business Needs Bank Needs Business Needs Lower Loan to Value Higher Loan to Value Variable Rates & Higher Fees Fixed Rate and Lower Fees Shorter Term Loans Longer Term Loans Personal Guarantees Non Recourse Loans
- 17. The Nine Rules for Working with Private (Bank) Financing 1. The Donald Trump / Bernie Sanders Rule 2. The Al Capone’s Safe Rule 3. The Henry F. Potter Rule 4. The George Steinbrenner Rule 5. The Herb Cohen Rule 6. The Berlitz Rule 7. The Scouts Rule 8. The Elephant Rule 9. The Don Quixote Rule
- 18. The Nine Rules for Working with Private (Bank) Financing 1. You don’t know what its worth till you try to sell it 2. You never know what you will find under ground 3. Cash flow is key 4. You can’t tell the players without a scorecard 5. Every deal is a negotiation 6. Learn how to talk the language 7. Be prepared 8. Elephants never forget 9. Don’t tilt at windmills.
- 19. The Nine Rules for Working with Private (Bank) Financing 1. Banks make loans based on value, not cost 2. Banks are wary of environmental contamination 3. Banks make loans to get paid, not to be liquidated 4. Mergers and acquisitions have changed banking 5. Know how to be a good negotiator 6. Understand how banks make decisions 7. Always be prepared with the facts and arguments 8. Bankers never forget. Be honest, direct & helpful 9. Don’t ask for a loan you know a bank won’t make
- 20. Step Four: Understand the Public Sector Financing • Purpose of Public Sector Programs • Types of Public Sector Programs • Tax Incentives and TIFs • Taxable and Tax Exempt Bonds • Joint Economic Development Zones + • Selecting the Public Sector Program • Rules for Working with Public Sector Programs
- 21. Purpose of Public Sector Programs • Achieve social or economic goals – Create or retain jobs – Assist specific groups of citizens or neighborhoods • Leverage bank financing • Reduce bank risk • Finance non-bankable businesses • Provide incentives for targeted investments
- 22. Types of Financing Programs • Direct Loans • Loan Guarantees • Bonds: Taxable and Tax-Exempt • Tax Increment Financing • Tax Incentives • Intermediary Programs • Hybrid Programs
- 23. Direct Loans • Finance 30-50% of a Project Cost • Fixed Interest Rates • Terms Equal to or Longer than the Bank • Loan is Subordinated to the Bank • Reduced Business Equity Requirement (10%) • Generally for Fixed Assets Only • SBA 504 • Community Development Block Grants • Intermediary Programs depending on local structure • Revolving Loan Funds
- 24. How a Direct Loan Makes the Deal Better… Bank 75% Equity 25% Bank 50% Equity 10% Public 40% Bank Only Public/Private
- 25. Sources of Debt Capital in Colorado • Community banks make up 45% of all small business loans made by banks • Community banks make up 93% of all banks, but… • Community Banks hold 13% of all bank assets
- 26. A Word about Crowdfunding…
- 27. Reg A+ of the Jobs Act
- 28. Loan Guarantees • Guaranty of Bank’s Loan • Bank’s Rate and Term • Guaranty up to 85% of Bank Loan • Can Finance Working Capital • Alternative: Provide secured deposit • SBA 7(a) • SBA Community Advantage • Collateral Enhancement Program • Capital Access • USDA Business and Industry Loan Program
- 29. Public Sector Programs Start Up Fast Growth Stable Mature 30%+ VC 6.5%+ Bank 3.5 % Prime 2.3 % Treas SBA 504 SBA 7(a) Guarantee Tax Exempt / Taxable Bonds USDA B & I Collateral Enhancement/Cap Access CDBG / Revolving Loan Funds
- 30. Step Five: Determine the Gap and Structure the Deal 1. Can the available private sector financing support the entire project? 2. If not, what is causing the gap? 3. Utilize the public sector program that most efficiently and effectively fill the gap 4. Make sure that the private financing and the public sector programs are compatible.
- 31. Financing Gaps Cash Flow Gap Insufficient cash to make debt service payments on ALL financing Collateral Gap The collateral doesn’t support the amount of private debt needed Capital Gap General inability to raise adequate capital for project (either debt or equity) Credit Gap Start Up Business, Based on projections, Industry issues Character Gap
- 32. Filling the Financing Gaps Cash Flow Gap Substitute longer term financing for shorter term financing; Substitute lower rate financing for higher rate financing; Add loss reserve account or cash flow guarantee Collateral Gap Add secondary collateral; Add subordinated debt; Reduce project cost; Capital Gap Reduce project cost; Obtain subordinated financing that will take greater risk Credit Gap Use loan guarantee program; reduce debt and increase equity; secondary guarantees; bring in partners Character Gap
- 33. How public sector programs help fill the financing gap • Provide guarantee of risky credits • Make up for undervalued collateral • Provide better terms: rate, term, fixed, collateral • Lower down payment to preserve cash • Reduced debt service needs thru longer term, lower rate • Increased borrowing capacity • Bring lower rate and long term financing through capital market bond financing (tax exempt or taxable)
- 34. Step Six: Close the Deal • Project Management • Monitoring progress by team members • Developing a timetable • Most public / private projects fail at the deal closing stage • Why do public/private projects fall apart?
- 35. PUBLIC SECTOR AND NONPROFIT DEVELOPING FINANCING PROGAMS
- 36. More about Public Financing Tools • Direct Loans • Loan Guarantees • Bonds (Taxable and Tax Exempt) • Tax Increment Financing (TIF) • Tax Incentives • Intermediary Programs • CDFIs
- 37. Bonds A Bond is a Loan
- 38. Bonds Debt (Bond) issued by local or state authority Generally larger projects for stable companies Underwritten and “sold” by Investment Banking Firm Purchased by capital markets investors Better credit companies or backed by Letter of credit
- 39. Some Key Points about Bonds • The better the rating, the lower the interest rate • Improve the rating through a letter of credit or some sort of guarantee • Right now, little difference between taxable and tax exempt rates • Tax exempt bonds have higher fees because of the tax complications • Complicated process lengthens bond timeframe
- 40. Taxable and Tax-Exempt Bonds Taxable Bonds • Can be used for almost any purpose • Lenders pay tax on interest income • No interest savings to the borrower other than the lower national market rates • Better credits, larger issuances Tax Exempt Bonds • Public-benefit projects • Jobs, housing, education, student loans, government, • Lenders of tax exempt bonds pay no income tax on interest earned • Savings passed on to the borrower in the form of lower interest rates • High “cost of issuance”
- 41. Bond Programs • Stand alone Industrial Revenue Bonds • Port or Redevelopment Authority Bonds • Air Quality Bonds • Water Development Bonds • PACE Financing
- 42. Incentives • Purpose: Reduce “cost of doing business” or provide incentive • Governed by State Law • Mostly abatement of real property tax • Income Tax Credits or Income Tax “refunds” • Public purpose (job creation or retention, investment) • Impact on other local taxing authorities (schools) make abatements controversial • Property Tax Abatement • Job Creation Tax Credits • Job Retention Tax Credits • Income Tax Refunds/Rebates • Sales Tax Refunds/Rebates • Closing Grants
- 43. Smart Incentives Principles • Performance Based • Accountability • Transparency • Cost / Benefit Analysis • Triple Bottom Line Analysis • “But For…”
- 44. Tax Increment Financing Tax revenue is “frozen” at beginning of TIF period When new investment is made, property values typically increase Increased property taxes above the base (increment) are diverted to… …Fund public improvements included in the TIF legislation “Increment” can be used directly or to pay off Bonds issued
- 45. 45 Payments to taxing districts frozen @ start of TIF Period
- 46. Issues with Tax Increment Financing • TIF districts are usually in growing areas with increased residents, businesses • Funds are diverted from other taxing authorities: schools, parks, community services • Property owners payments continue, redirected to TIF needs • Governed by State Law
- 47. Intermediary Programs • Funds or tax credits allocated to intermediary • Intermediary takes responsibility for policy, underwriting, marketing, processing and management of funds • Intermediary assumes responsibility for funds management and repayment of funds to the government, if a loan • EB 5 Financing • SBA Microloan • CDBG • New Markets Tax Credits • Community Development Financial Institutions • USDA Intermediary Relending • SBA Intermediary Program
- 48. Community Development Financial Institutions • Federal “seal of approval” that a nonprofit is community based and does good deeds • Provides access to a range of resources: – Banks like CDFI’s as investment vehicles – CDFI Fund: Financial Assistance, Technical Assistance, Healthy Foods, Bank Enterprise Awards • www.cdfifund.gov
- 49. Variations on a Theme
- 50. How to Determine If Its A Real Deal on the First Visit 1. Are they willing to provide business and personal financial statements? 2. Are they willing to provide references? 3. How do they respond to challenging “devil’s advocate” questions? 4. Is their answer always “Someone Else is in Charge?” and do they blame everyone else for their problems? 5. Do they expect “free money?” 6. Do they have a realistic assessment of the market, competition and job creation potential? 7. Are they willing to spend money up front?
- 51. Rules for Economic Development Professionals 1. Allow the business to tell their story…once 2. Don’t waste time with a dog 3. Not all projects can fit with public sector programs 4. Let the program people represent their program 5. Don’t overpromise what the program can deliver 6. Don’t pile on government programs 7. Explain the strings up front 8. Find a cooperative lender 9. Keep written records of your activities 10. Be prepared to do the paperwork 11. If it sounds too good to be true, it probably is
- 53. Questions ?
- 54. Thank you.
- 55. Contact information Mark Barbash Council of Development Finance Agencies mbarbash@cdfa.net Mark.barbash@gmail.com (614) 774-7599
- 57. Key questions to ask about project costs 1. Is the site landlocked? Is there room to grow? 2. Are there any potential environmental issues which could drive up cost? 3. Does the site have adequate infrastructure? Sanitary sewer, storm sewer, water, electricity, natural gas, transportation, fibreoptic, etc. 4. Does the site have appropriate zoning for the desired use? What is the community process for changing zoning? 5. Is there evidence of any historic significance for the site or any existing structures?
- 58. Questions to ask about the project timetable 1. Does the developer have site control? If an option exists, when does the option expire and what are the terms for renewal? 2. Has an environmental assessment been completed and have all issues been identified? 3. How far in advance does equipment have to be ordered? Does payment have to be made on advance orders? 4. What is the projected time for site preparation? Construction? 5. Does the general contractor have experience with this type of project in this type of community?
- 59. Key questions to ask about project documentation 1. Has an appraisal been completed on any real estate or equipment project? 2. Has an engineering assessment of existing and needed infrastructure been completed? 3. Has an environmental assessment or Phase I been completed which shows any remediation that must be completed? 4. Has an engineering assessment on existing buildings been completed to assure that there are no structural issues? 5. Have detailed and documented project cost estimate been done by a third party?
- 60. Some questions to ask on an “Incentive” Project 1. Does your ED organization have a goal for incentive projects? What kinds of projects do you want to incentivize? 2. Is your community in competition with another city? Where is that city? Is it in the same marketplace? 3. What is the wage level for jobs to be created? 4. What is the cost-benefit analysis for the project? Will you get more than you spend in the long run? 5. What is the track record of the company being assisted in asking for and meeting the terms of other incentive projects?
- 61. Why do public / private deals crash? • Failure on the part of the public sector lender to understand the level of risk it is willing to take • The public sector program cannot deliver fast enough • The public sector program cannot be flexible enough • Unrealistic expectations of how government programs can help • Failure to obtain support from every appropriate level necessary for public sector program approval • Failure on the part of the public sector lender to take INFORMED risk
- 62. Why do projects fail? • Money: – Inadequate working capital to finance growth needs – Project costs escalate beyond the business’ ability to afford the project. – The financial strength of the business deteriorates, causing the lender to withdraw its commitment (either temporarily or permanently). • Market: – Defined too broadly – Expanding into an unfamiliar or inappropriate business line • Management: – Inadequate business skills among principals – Expanding too fast – Project Issues: Problems with site requirements, costs, etc.