An Introduction to ECONOMIC DEVELOPMENT Using CDBG WELCOME!

Course sponsor Training workshop sponsored by the NCDA Conducted by ICF International Carole Norris, Vice President, San Francisco Regional Office 1 1 1

Evaluation & Refinement Program Implementation THE PROCESS Economic Analysis Evaluation & Refinement Strategy Development Program Implementation 57 57 37

ECONOMIC ANALYSIS Assess qualitative and quantitative conditions Evaluate business and social environment Assess monetary, human, and physical resources & obstacles

STRATEGY DEVELOPMENT Choose priority outcomes and market sectors Determine how to direct your assistance: locational approach; minority business; sectoral approach Choose activities to match intended outcomes

IMPLEMENTATION Describe goals Written strategy summarizes plans and needs Action plan implements the strategy Plan is iterative and refined based on monitoring and evaluation

USING CDBG FOR ED CDBG Regulations Found at 24 CFR 570 1980s/early 1990s: the context for change ED edits published 1/5/95 Consolidated rule effective 11/9/95 Revised rule 4/29/96 8 7 8

KEY ED CHANGES Microenterprise eligibility category Job training flexibilities Public benefit standards for ED National objective criteria and presumptions Neighborhood Revitalization Strategies CDFI and CBDO flexibilities 28 8 28

ELIGIBLE ED ACTIVITIES Four major types: Special economic development (570.203) Microenterprise assistance (570.201(o)) Commercial rehabilitation (570.202) Assistance to CBDO (570.204) Section 108 and BEDI are special CDBG enabled ED options 29 21 29

SPECIAL ECONOMIC DEVELOPMENT 570.203 a) Commercial/industrial improvements by recipient or subrecipient b) Assistance to for-profit business c) Economic development services in conjunction with above activities (including job training) 30 22 30

MICROENTERPRISE 570.201(o) Financial assistance Technical assistance General support Training and TA to increase capacity of recipient/subrecipient to work with microenterprise businesses 31 23 31

MICROENTERPRISES DEFINED Five or fewer employees, including owner Commercial enterprise Existing business or persons developing microenterprises 32 32 24

COMMERCIAL REHAB 570.202 Limited types of rehab on commercial structures If for-profit owned, only exterior improvements or correction of code violations 33 25 33

CBDO ACTIVITIES 570.204 Neighborhood revitalization Community economic development Energy conservation 34 26 34

INELIGIBLE ACTIVITIES Buildings for conduct of government General government expenses Political or religious activities New housing construction Income payments Purchase of equipment Operations and maintenance (some exceptions for ED activities and CBDOs) 36 28 36

NATIONAL OBJECTIVES 570.208 All CDBG activities must either: (1) Benefit low and moderate income persons 70% of funds must be spent this way (2) Prevent slums and blight used only in specific area or for specific structure (3) Meet urgent needs only used in emergencies 11 9 11

NATIONAL OBJECTIVES LOW/MOD BENEFIT SLUM/BLIGHT URGENT NEED Area Benefit LOW/MOD BENEFIT Limited Clientele Housing Jobs Area SLUM/BLIGHT Spot URGENT NEED

LMI: AREA BENEFIT Activity that benefits all residents of area Where 51% of residents are LMI That is primarily residential That meets the needs of the residents Street improvements Water/sewer lines Commercial façade programs Upper-quartile exception, area benefit only

AREA BENEFIT Need to determine the area served by the business Need to determine whether the service area is Primarily residential 51% LMI Area will differ with various kinds of businesses…. examples

LMI: LIMITED CLIENTELE Activity that benefits specific population Presumed clientele; or Eligibility requirements limit participation to LMI; or Documentation that 51% participants are LMI; or Nature and location indicate LMI; or Removal of architectural barriers (some activities); Microenterprise activities with LMI owners; or Certain types of job training efforts. 14 10 14

LMI: HOUSING ACTIVITIES Permanent housing where 51% of occupants are LMI (based on HH inc!) Ownership or rental w/ ‘affordable’ rents Single-unit structure: LMI occupied 2 units: at least 1 occupied by LMI 3 + units: 51% or more LMI New, MF, non-elderly: 20% or more

HOUSING NATIONAL OBJECTIVE What type of businesses can meet this national objective?

JOB CREATION & RETENTION Must create or retain jobs 51% of jobs must be held by or available to LMI persons Most common national objective for economic development 16 11 16

JOB RULES Permanent FTE basis, no temporary jobs For each business: 51% of jobs must be held by or available to LMI persons Can aggregate jobs if: Property development only (incubator) Loans are provided by a CDFI 16 11 16

LMI PRESUMPTION Job can be presumed LMI if either: Job holder resides in Census tract with 20% poverty & general distress; Census tract with 30% poverty, CBD, & general distress; EZ/EC area; or Census tract/block group with 70% LMI. Business and job located in Census tract with 20% poverty and general distress; Census tract with 30% poverty, CBD, and general distress; or EZ/EC area. 17 12 17

JOBS “AVAILABLE TO” LMI No special skills/education beyond HS required, or if so, business will train Ensure that LMI persons receive first consideration Must have a written agreement Reasonable application process, pool of applicants, and no logistical barriers 18 13 18

JOBS “HELD BY” LMI 51% of the FTE jobs must be held by LMI persons Must document income of LMI persons or evidence of presumption Can use self-certification from person Must have a written agreement with business 19 14 19

ACTIVITIES THAT RETAIN JOBS Document that jobs would be lost without CDBG and that: Job currently held by LMI person; or Job expected to turn over in 2 years and will be filled by/available to LMI person 20 15 20

SLUM AND BLIGHT: AREA Area must meet state/local definition Substantial number of deteriorated buildings/ all infrastructure in disrepair Activity must address these conditions Occasionally used for ED when working in specified renewal area 22 17

SLUM & BLIGHT: SPOT Activities that address specific condition Acquisition, clearance, relocation, historic preservation, building rehab Rehab limited to public health and safety May rarely use for ED given limited eligible activities 23 18

URGENT NEED 570.208 (c) Activities that alleviate emergency conditions Threat to health/welfare of the community Recently became urgent Inability of recipient to finance the activity on their own No other means of funding

PUBLIC BENEFIT STANDARDS Measures $ cost in CDBG funds against benefits derived # Jobs or LMI persons served used as “benefit” criteria Grant or loan, does not matter Applies to 570.203 activities, some 570.204 activities, and infrastructure undertaken as jobs activity 40 30 40

INDIVIDUAL STANDARDS Create/retain 1 Job per $50,000 CDBG funds OR Goods and services to 1 LMI person per $1,000 CDBG 42 32 42

AGGREGATE STANDARDS Create/retain 1 Job per $35,000 CDBG funds OR Goods and services to 1 LMI person per $350 CDBG 41 31 41

APPLYING INDIVIDUAL STANDARDS If activity creates jobs and provides goods/services, qualifies as long as it passes at least one criteria Applied at time of obligation 44 34 44

APPLYING AGGREGATE STANDARDS All activities obligated during any program year Categorize each activity as either jobs or goods/ services! But meet both criteria! Some job activities may be excluded: Unemployed Homeless Low-skill, LMI w/ clear advancement Highly distressed or NRS areas 43 33 43

ADMINISTERING ENTITIES Options: Grantee staff Subrecipients CBDOs Contractors CDFIs

CBDO -- DEFINITION Association or corporation organized under state law to engage in community development w/i jurisdiction Primary purpose is the improvement of service area May be nonprofit or for profit (under certain circumstances) 51% of governing body is LMI or representative Not a public agency Governing body is nominated by membership Assets do not revert to grantee Free to contract for goods and services 35 27 35

OTHER ADMINISTRATIVE ISSUES Compliance with OMB Circulars Grantee and subrecipients Ensure proper use/accounting for program income Comply with other Federal requirements

SMALL BUSINESS DEVELOPMENT Development of small business is important activity for economy and many grantees Two types: Micro business Small business Existing Start-ups

WHAT IS A SMALL BUSINESS? Relative Typical thresholds Number of employees Project size Sales Net profit after tax; net worth

SMALL BUSINESS AND ECONOMIC DEVELOPMENT Business attraction Focus on Fortune 1000 Birch Report Importance of small and medium sized businesses Business Retention

CDBG ASSISTANCE TO SMALL BUSINESS Typically done under 570.203, Special Economic Development Permits wide range of assistance to for profit entities Includes financial assistance (direct loans, guarantees, equity, leases, etc.) and TA Triggers public benefit considerations

TECHNICAL ASSISTANCE Helps reduce risk Often focused on business plan development or legal and accounting issues Often offered in conjunction with financial assistance Critical to programs directed to start-ups

PROVIDING TA UNDER CDBG As part of special economic development Caveat: public benefit Public service Through a CBDO Public benefit

FINANCIAL ASSISTANCE Usually done under Special Economic Development Grants Loans Guarantees May meet several different national objectives

SMALL BUSINESS PROGRAMS -- OTHER SOURCES Small Business Administration and partners: Small Business Development Centers Service Corps of Retired Executives Business Information Centers Small Business Institutes Women's Demonstration Program Women's Network for Entrepreneurial Training Minority Enterprise Network 143 102 143

MICROENTERPRISE ASSISTANCE CDBG can fund micro enterprise loans Microenterprise = Owners or persons who work toward developing business Commercial enterprise with employees (including owner) 570.201(o) 153 99

NATIONAL OBJECTIVE Limited clientele if the owner is LMI Otherwise: Job creation/retention Presumptions Possibly under LMI area benefit or area slum and blight

WHAT IS MICRO BUSINESS ASSISTANCE? Assistance to small companies Funding Technical Assistance Training Support Services (such as childcare or transportation)

CDBG RULES II Can do TA and training to increase capacity of recipient/subrecipient to do micro programs No limit on amount or type of CDBG loan/grant to micro Not subject to public benefit test if separate program Owner not required to be LMI but remember national objective

KEY STEPS IN SETTING UP A SMALL BUSINESS PROGRAM Define program objectives What do you want to achieve? Know your target market Geographic area Who or what targeted?

KEY STEPS II Determine technical and credit needs Other sources of financing Types of credit needed Develop lending program Underwriting criteria Administrative procedures Loan criteria and fees

KEY STEPS III Design TA and training Offer in conjunction with financing Ensure program has funding and implement Monitor and evaluate progress

SUMMARY: MICRO AND SMALL BUSINESS ENTERPRISES TA is an important element Labor intensive High transaction costs Separate Micro Loan Program from other economic development revolving loan fund 104

SUMMARY: MICRO AND SMALL BUSINESS ENTERPRISES II Beware closing costs Many prospects for one funded deal Ensure the venture has a reasonable chance of success 105

WHAT ARE BUSINESS INCUBATORS? Typically facility where businesses share expertise and costs Offer access to expertise and services through: Shared office space Research or manufacturing space Business support Common equipment Mentoring Joint marketing Incubators without walls 145 107 145

INCENTIVES Lower break-even point Reduced rent Shared services, facilities and equipment Peer reinforcement TA

FINANCIAL BURDEN Incubator is a specialized real estate transaction Cash flow must fund operating expenses, capital expenditures and debt service Successful incubators balance real estate realities with enhancing survival of fledgling businesses Keep capital costs low as possible

USE OF CDBG Fund construction/development Provide assistance to businesses locating within incubator 146 109 146

FUNDING INCUBATOR CONSTRUCTION Typically under special economic development eligibility category Remember public benefit test! 147 110

FUNDING BUSINESSES WITHIN INCUBATORS Typically under microenterprise (570.201) Must meet the tests for this assistance May do other types of business assistance under special ED (570.203) 148 111

CLUSTER INCUBATORS May focus on a particular industry Fosters information sharing, alliances, promoting identity Examples: software; food; health care; advanced technology 149 108 149

EVALUATING INCUBATOR APPLICATIONS Evidence of need and support Qualified management Cluster concentration within the community Ability to leverage Plan for self-sufficiency 150 114 150

INCUBATOR DEVELOPMENT Prepare a feasibility analysis Locate site Do financials and marketing plan Identify resources Develop 151 113 151

INCUBATOR RESULTS Enhanced employment & earnings Expanded networking New business formations 152 115 152

SUMMARY: INCUBATORS TA is important Business in incubator may need financing assistance Ultimately, incubator is a real estate deal Facility may need operating subsidies Complete total analysis before funding acquisition 116

JOB TRAINING & OTHER PUBLIC SERVICES What is it? CDBG Rules Structuring and supporting job training 156 118 156

WHAT IS JOB TRAINING? Help unemployed or under-employed gain skills in demand in the labor market Frequently linked to job placement TA and entrepreneurial training to owner of micro-enterprise

HOW IS JOB TRAINING ELIGIBLE UNDER CDBG? Public service -- 570.201(e) As part of special economic development project -- 570.203 (c) By CBDO -- 570.204 As part of micro-enterprise efforts -- 570.201(o)

IF UNDERTAKE TRAINING AS PUBLIC SERVICE Qualify under LMI limited clientele: Document family size and income & ensure that 51% are LMI persons; Limit to only LMI persons; Serve only a presumed group; or Document based on location (very difficult) 162 124

IF UNDERTAKE TRAINING AS PART OF SPECIAL ED Qualify under EITHER: LMI Jobs, if clear connection to jobs being created or retained; OR LMI Limited Clientele, if CDBG is provided to business to pay only for training & the % of total project costs paid with CDBG is < % of LMI persons trained; 162 124

WHO CAN UNDERTAKE JOB TRAINING? Grantee Other government agencies Subrecipients Businesses CBDOs 163 125

TYPES OF JOB TRAINING PROGRAMS Job search assistance Short-term classroom training Long-term classroom training Subsidized employment

KEY STEPS IN SETTING UP A JOB TRAINING PROGRAM Conduct a needs assessment Identify employment opportunities Form partnerships Address barriers Can provide subsistence payments as a loan to people in job training programs

KEY STEPS II Develop “soft skills” training Create a flexible program Define performance measures Consider other funding sources

SUMMARY: JOB TRAINING Link training to skills that employers need Unemployed persons may need training in areas not directly related to performing the job Punctuality Dressing appropriately Interviewing Dealing with conflict Absences Enforce provisions related to job creation in loan agreements 128

OTHER PUBLIC SERVICES HELPFUL TO ED May wish to consider other services such as: Child care Transportation Crime prevention 164 126

PUBLIC SERVICE REQUIREMENTS New service or increase in existing service previously funded with local or state $ (no substituting) Level funding is OK once CDBG is in CDBG can substitute for private or other Federal $ 158 121 158

PUBLIC SERVICES CAP 15% of grant allocation plus 15% of last year’s program income Public services carried out by subrecipients are included in the cap However…. there are flexibilities!!! 160 122

FLEXIBILITY TA, training, support to microenterprises (570.201(o) Special economic development (570.203 (c)) -- Services in connection with eligible special ED activities, including training for persons filling jobs CBDO job training/placement/support activities that increase economic opportunities (570.204(b)) Any CBDO service under a Neighborhood Revitalization Strategy (570.204(b)) Any job training done by a CBDO 161 123 161

LARGE SCALE PROJECTS AND INFRASTRUCTURE Covers: What is commercial/industrial development CDBG Rules Key steps 156 129 156

WHAT ARE LARGE SCALE PROJECTS? Activities such as: Retail centers Office buildings and other commercial manufacturing/industrial facilities Public commercial development Infrastructure related to ED

TYPICAL CHARACTERISTICS 1. Large financial investment 2. Large impact 3. Real estate development 4. Multiple financing 5. Large scale infrastructure

BE ACTIVE Projects are complicated Screen early Risk Eligibility Consistency with public policy

ACTIVE (CON’D) Identify appropriate form of public participation Negotiate Know the cost of commitments before making them

MANAGE THE PROCESS Develop project schedule Prepare task list with due dates and responsibilities Commit to writing and revise as needed Keep all vested parties informed Ensure benefits are commensurate with public participation Ensure benefits materialize

CDBG ROLES Financing Lease Ancillary facilities Assist with equipment or working capital Services Infrastructure

CDBG AND LARGE SCALE DEVELOPMENT Typical Section 108 activity May also do under special economic development (570.203) Community-Based Development Organizations (570.204) Commercial Rehab (570.202) Infrastructure as part of economic development project (570.201)

SPECIAL ECONOMIC DEVELOPMENT ACTIVITIES Acquisition, construction, reconstruction, rehabilitation or installation by recipient or subrecipient Assistance to for profit Economic development services Remember public benefit test!

OTHER ELIGIBLE ACTIVITIES Community-based development organizations can undertake under certain circumstances Limitations of nonprofits as developers of large scale projects Capacity Financial resources Commercial rehab may be possible under limited conditions

WHAT IS INFRASTRUCTURE? Non-housing activities Public works Transportation facilities Water, sewer, drainage Community facilities Parks, recreational facilities, senior centers Neighborhood service centers Social services buildings

TYPICAL ED INFRASTRUCTURE ACTIVITIES Roads, streets, sewers that are: Leading to business location Within an industrial park On a business site Special rules when doing infrastructure as an ED activity Public Benefit Standards Apply if CDBG expenditure is more than $10,000/job

SECTION 108 AND LARGE SCALE DEVELOPMENT Eligible activities Sample projects Neighborhood shopping center Grocery store Mixed use-retail and housing rehab Industrial expansion Infrastructure

NATIONAL OBJECTIVE Job creation/retention Area benefit Area slum blight VERY FEW under spot slum blight

COST BENEFIT ANALYSIS Assess risk Determine amount of public participation- all costs Calculate benefit stream Jobs Tax increments Payments Relate risk and cost to benefits over time

KEY STEPS IN DESIGNING LARGE SCALE PROJECTS Decide if want to target neighborhoods Ensure potential projects meet HUD criteria Choose projects that are generators Assess and control lending risks Screen early

SUMMARY: LARGE SCALE PROJECTS Manage the process Be active Don’t forget “singles” 134

FINANCING ECONOMIC DEVELOPMENT PROJECTS Covers: Financing options Revolving loan funds Other economic development programs Role of CDFIs 121 77 121

METHODS OF FINANCING CDBG is very flexible Grants Debt Guarantees Equity Sale/ lease of assets Remember! All special ED projects must meet public benefit test

INVESTMENT THRESHOLDS Business loans Amount down Monthly payment Developer deals Return on equity

INCENTIVE VARIABLES Availability Term Interest rate Percentage of financing

PROGRAM VARIABLES FOR COMMUNITY Risk Amount of funds available Niche program wishes to address Leverage Goals, benchmarks Staff

GRANTS Cash contribution or principal reduction Plus: Easy to administer May be only available $$ source Minus: Resources not replenished Business commitment? Politics

GRANT EXAMPLES Interest subsidy/ principal reduction Rehabilitation rebate

DEBT OPTIONS Direct loans Subordinated loans Tandem loans Repayment structure Self amortizing Contingent payment Partial or full forgiveness

AMORTIZING DIRECT LOANS Loans that are paid back over time Plus: Ensures business commitment Extends resource Interest can multiply impact Minus: Need loan processing/servicing skills Must have default procedures May not be financially feasible

CONTINGENT PAYMENT LOANS Part or all of repayment depends on future events, usually performance Example Caveats Use simple, quantifiable measures Avoid “net” thresholds Requires constant monitoring Forgiveness is inverse concept More common for housing loans

LOAN GUARANTEE Pledge loan repayment in event of default Example Variables Percentage of guarantee Priority of loss Timing of payment Leveraged guarantee

LOAN GUARANTEES (Cont’d.) Plus: Lender more willing/flexible Not necessarily cost CDBG funds Minus: Can be difficult to structure Underwriting can be risky

EQUITY Definition “Near”equity Advantages Disadvantages Exit strategy Lack of borrower recourse, fear of failure

PURCHASE AND SALE OR LEASE Entity purchases asset and sells or leases asset to borrower at a negotiated price Advantages Reduce equity investment May lower cash flow burden Disadvantages Subordination issues of ground leases Requires specific skills

WHAT IS AN RLF? FUND A source of money which usually is a loan LOAN Proceeds of fund are used to make loans usually to small and medium size businesses REVOLVING The small business loans are repaid and reloaned. With interest, the fund can increase and become an endowment. 82

TYPICAL BORROWERS Existing businesses Start-up ventures Developers Nonprofits Micro businesses 136 83 136

SOURCES OF CAPITAL CDBG EZ/EC Small Business Administration Economic Development Administration Department of Agriculture Private lender CRA activities Nonprofits and foundations 137 84 137

CDBG RULES FOR RLF Must be separate, interest bearing fund Payments to account used for similar activities Interest earned by RLF loans is program income Interest earned while RLF funds in bank must be remitted to Treasury 138 85 138

STEPS -- DEFINE MARKET AND CONDUCT CLIENT SCAN Confer with professionals and borrowers to identify the market Bankers Realtors Economic development personnel Trade associations Local officials Small business groups or associations What gap in funding exists? Understand existing efforts Who will the effort serve? 86

STEPS -- SELECT RLF ATTRIBUTES & FUNDING Borrowers Minimum/maximum loan amounts Minimum leverage Cost per job Minimum equity requirements 87

STEPS: SELECT RLF ATTRIBUTES & FUNDING SOURCES Determine loan: Rate Maturity Subordination General liens Underwriting criteria Seek funds that will capitalize the RLF 88

STEPS-- SELECT ADMINISTERING ENTITY Who will administer the program? City Existing nonprofit New organization Does staff have the necessary skills to implement? 93

STEPS-- DEVELOP ORGANIZATIONAL PROCEDURES Determine roles of board, loan committee, etc. Role of elected officials? Is operating budget reasonable? 94

STEPS-- MARKETING AND IMPLEMENTATION Establish systems for delivery Marketing Screening Application Approval Closing Disbursement Portfolio Management 96

STEPS-- MAKE AND SERVICE LOANS Loan based on procedures Review periodically and adjust 97

SECTION 108 BASICS Covers: General program overview Section 108 process Advantages 77 45 77

WHAT IS IT? Method of expanding funds by using future CDBG grant as collateral to borrow: (1) Community applies to HUD (2) Based on community’s pledge, HUD issues notes (3) $$$ from sale of notes used for Section 108 eligible project (4) Notes are repaid

CHARACTERISTICS OF SUCCESSFUL COMMUNITIES Utilize “systems” approach Screen early Acknowledge, assess and manage risk

PROGRAM UNIQUENESS Risk Not “sophisticated grantsmanship” If 3rd party does not repay, locality must Escalates cost/benefit analysis Leverage potential

SOURCES OF REPAYMENT Pledge of future CDBG entitlement Program income “Additional security”

UNDERWRITING GUIDELINES Credit Reform Act OMB establishes loss reserve (“credit subsidy”) Guidelines (low risk) reflect loss reserve funded Additional security

FORMS OF ADDITIONAL SECURITY Specific liens General liens Tax increment Portfolio income Parking revenue Leases Non tax revenue Assets

OVERVIEW OF DELIVERY Screen project Submit application Approval Close Disburse Service

PROGRAM PARAMETERS Maximum loan = 5 times annual entitlement Maximum loan term = 20 years

ELIGIBLE APPLICANTS Entitlements Non-Entitlements through the State

ELIGIBLE ACTIVITIES Acquisition Rehab of publicly owned property Clearance, demolition, site prep Economic development activities Housing rehab Finance costs Infrastructure/public facilities 95 52 95

PROGRAM REQUIREMENTS National objectives Other Federal requirements (relocation, Davis Bacon, environmental, etc.) Public benefit test for economic development 70% rule Certifications 94 55 94

INELIGIBLE ACTIVITIES Construction of governmental buildings Non-federal share Long term planning

THE SECTION 108 GUARANTEE HUD Guarantee Interim Lender Guarantee Pledge of CDBG Funds Investors Locality 79 79 48

LEVELS OF TRANSACTION # 1 Communities borrow from investors via notes #2 Communities undertake activities or re-lend

LEVEL #1 TRANSACTION HUD CDBG PLEDGE INVESTORS $ LOCALITY 91 49 91

LEVEL #2 TRANSACTION HUD CDBG PLEDGE THIRD $ LOCALITY INVESTORS $ PARTY INVESTORS $ LOCALITY $ 92 92 50

PLAYERS AND THEIR ROLES Community HUD Underwriter Fiscal Agent Private Investors Third Party Borrowers

TYPICAL USES Industrial expansion RLF Retail Incubator Office Housing rehab

ADVANTAGES OF SECTION 108 Leverage CDBG Avoid referendum -- Not a general obligation Receive funds now (no pay as you go) Spread costs Avoid private benefits restrictions Access funds at AAA rate Fixed rate 89 58 89

INTERIM LOANS Public offering usually once a year Interim loan available until public offering Must close Level # 1 transaction Fiscal Agent makes interim loan Interest rate: 90 LIBOR + 20 basis points HUD guarantees obligation

BROWNFIELD ECONOMIC DEVELOPMENT INITIATIVE Competitive grant program Stimulate and promote economic development Assist with the redevelopment of abandoned and underused industrial and commercial facilities Burdened by real or potential environment contamination

BEDI PURPOSE Spur the return of brownfields to productive economic use Provides financial assistance or security to improve the viability of a project financed with Section 108 loan guarantee

ELIGIBLE BEDI ACTIVITIES Land Writedowns Site remediation costs Funding reserves Over-collateralizing the Section 108 loan Direct enhancement of security for Section 108 loan Low interest rate loan to for-profit business

BEDI All activities must meet a national objective Minimum BEDI to Section 108 ratio is 1:1 Maximum grant amount is $1million

UNDERWRITING Covers: Important components Underwriting criteria HUD criteria 176 137 176

UNDERWRITING DEFINED Underwriting is the process for determining project risk and evaluating rewards Public underwriting differs from private Within CDBG, portions of this analysis are known as “appropriateness evaluation” 177 138

UNDERWRITING Business loans Definition Example Real estate loans 178 139 178

UNDERWRITING CRITERIA Business loans Ability to repay Collateral Commitment to project Balance sheet analysis Management experience Character 179 140 179

ABILITY TO REPAY DCR = CASH FLOW DEBT SERVICE 1.25 = $100,000 $80,000 1.25 = $100,000 $80,000 180 141 180

DCR GUIDELINES The higher the better Use known cash flow or a conservative estimate Generally private lenders want a DCR between 1.2 and 1.3 Limit the number of deals with DCR <1.1 Avoid deals with DCR <1 181 142 181

COLLATERAL Loan to value = Loan amount Value/Cost of assets securing the loan .80 = $1,000,000 $1,250,000 182 143 182

WHAT IS VALUE? Fair market value Cost Liquidation value Salvage value Value in use Replacement value Investment cost 183 144 183

ACCEPTABLE LOAN TO VALUE RATIO HUD has no requirement but generally 80% Loan to value is matter of judgment No definite standards Do not exceed 100% loan to value 184 145 184

RULES OF THUMB FOR LOAN TO VALUE Commercial buildings (80%) Home mortgage (80%) Machinery and equipment (50-70%) SBA 504 (90%) Inventory (50-80%) Receivables (80%) 185 146 185

LOAN TO VALUE GUIDELINES The lower the better Loan portfolios should have only a few loans with a loan to value more than 90% Cash flow is more important than collateral Lenders avoid projects with a loan to value over 100% 186 147 186

COMMITMENT Commitment by owners is critical! Owner guarantee may be proportional to interest 187 148

BALANCE SHEET Look at soundness: Collection of receivables Payment of bills Management of inventory Owner bleeding the company? Cash relative to needs 188 149

MANAGEMENT Must be experienced in all areas of business Should have direct or transferable skills 189 150

CHARACTER Favorable credit history Good & fair reputation No recent bankruptcy Clean criminal report 190 151

SMALL START-UPS Likely to have a higher default rate Look for: Business plan Borrower commitment Personality Niche 191 152

UNDERWRITING CRITERIA Real Estate Ability to repay Collateral Commitment to project Experience of development team Character 192 153 192

ABILITY TO REPAY DCR = NOI Debt Service Usually conventional lenders look at 1.25 - 1.3 Usually public lenders look at 1.1 - 1.15 193 154

COLLATERAL Use Loan to Value Ratio Appraiser normally determines value Be certain to carefully review appraisal Generally LTV ranges from 75% to 90% 194 155

COMMITMENT TO PROJECT Ways to show commitment Completion guarantee Recourse Deferral of development fee Guarantee cash flow shortfalls Equity 195 156

EXPERIENCE & CHARACTER Be certain development team has significant similar experience Developer should have good credit and be reputable 196 157

FINANCIAL ANALYSIS (UNDERWRITING) Recommended, not mandatory Reasonable costs Commitment of other financing sources Necessity of assistance (non-substitution) Feasibility of project Reasonable financial terms/return CDBG funds disbursed pro-rata 201 162 201

REASONABLENESS OF PROPOSED PROJECT COSTS Risks: Inflated costs Understated costs Excessive fees Contribution: Independent quotes Scrutiny of budget Cost certification Retainage 202 163 202

COMMITMENT, NON-SUBSTITUTION, PRO-RATA DRAW DOWN CDBG funds may be contingent upon other financing No substitution of private funds with CDBG CDBG funds should be disbursed at a rate no greater than other sources of funds 203 164 203

IDENTIFYING NEED FOR PUBLIC FUNDS: GAPS Financing gap Rate of return gap Locational gap 204 165 204

FINANCING GAP + Reasonable cost - Conventional debt - Other debt - Conventional equity = Financing gap 205 166 205

RATE OF RETURN + Reasonable cost Market rate of return - Conventional debt Equity needed + Benefits to investors + Equity Invested Market rate of return gap? = Project rate of return 206 167 206

LOCATIONAL GAP + Cost of project in location X - Cost of project in location Y = “Locational” gap 207 168 207

PROJECT FEASIBILITY AND RETURN Terms of CDBG loan reflect the ability to repay without threatening the success of project Project is financially feasible with assistance Terms don’t over-subsidize private participation (undue enrichment) Terms of CDBG loan affect conventional debt and equity 208 169 208

SUBSIDIZING PARTICIPATION Use public funds to balance interest of those participating Example of participants in investor deals: developer lender investors Repayment terms of public funds are structured such that each receives a market (but not above) yield/fee 209 170 209

GETTING STARTED Who should undertake the program? How much will it cost? Where and how will the program occur? How will it be “sold”? What records must be kept? How well are strategic objectives met?

WHO WILL MANAGE & IMPLEMENT? Grantees have options: Staff Subrecipients CBDOs CDFIs Third Party Contractors 214 175

WHAT WILL IT COST? Estimate likely revenues from service delivery and miscellaneous sources Evaluate operating expenses carefully If new to economic development, consider Business Plan and a start-up budget 222 183 222

WHERE & HOW? Help guide program decisions Plan should include: Overview of goals & objectives Description of eligible participants Description of services Overview of industry targets if any Overview of selection process

WHERE & HOW (LENDING) Managing the loan: Packaging the loan Underwriting Legal counsel Disbursement methods Business counseling

HOW WILL IT BE SOLD? Develop a roll-out strategy & schedule: Step-by-step timetables Technical assistance hurdle Milestones Assignment of marketing responsibility

MARKETING Develop a marketing plan! Tools include: Advertising, billboards, brochures, endorsements, direct mail, editorials, networking, community meetings, news conferences, news releases, newsletters, posters, public speaking, PSAs, events, trade fairs, videos Look for ways to save on marketing costs 223 184 223

RECORDKEEPING Important element! Must be well-thought out and efficient How? Who? What? 229 190 229

COORDINATING WITH OTHER PLANS Consolidated Plan Plans by other organizations & agencies Neighborhood Revitalization Strategy 64 40 64