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
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
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?
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
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
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
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
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.
