economic development finance title€¦ · new markets tax credit (nmtc) program arizona basic...

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January 23, 2018 Arizona Basic Economic Development Course

Economic Development Finance

Tim Pickering, CEcD President & CEO, Interim Public Management

Overview

Arizona Basic Economic Development Course

Role of Economic Development Agencies

Public Sector Goals and Programs

Government Based Financing

Private Sector Lending

Critical Business Elements

Other State/Local Programs

Role of Economic Development Agencies


Understand Business Finance Basics

Knowledge of Government Tools –

Federal, State, Local, Other

Knowledge of Private Sector Programs and

Service Providers

Public Sector Goals & Programs


Business Recruitment, Retention & Expansion

Job Creation

Neighborhood Development

Stabilize and Increase Tax Revenues

Bridge Capital Gaps of Private Sector

Apply State and Local Incentives

Government Based Financing


Federal Financing Programs


Housing & Urban Development (www.hud.gov)

US Department of Agriculture (www.usda.gov)

Community Development Financial Institutions Fund

(US Treasury) (www.cdfifund.gov)

Export – Import Bank of the United States (www.exim.gov)

Economic Development Administration (www.eda.gov)

Small Business Administration (www.sba.gov)

http://www.hud.gov/

http://www.usda.gov/

http://www.cdfifund.gov/

http://www.exim.gov/

http://www.eda.gov/

http://www.sba.gov/

New Markets Tax Credit (NMTC) Program U.S. Department of Treasury

Community Development Financial Institutions Fund


Community Development Entities (CDE’s) Primary mission of service Low Income Communities (LIC’s); distressed communities Maintains accountability to residents of LIC’s Certified CDE by Community Development Financial Institutions Fund

Examples of project uses include Loans and investments in business and real estate projects Financial counseling School construction “Transitional housing” office Rehabilitating vacant properties as office, retail, mixed-use or community/cultural facilities

39% federal income tax credit over a 7-year period to investors

New Markets Tax Credit (NMTC) Program


NMTC was created in 2000 by Congress to incentivize investment in economically disadvantaged areas by providing services and creating jobs in low income communities (NMTC qualified census tracts)

Primarily used to finance commercial, industrial, community facilities, and mixed use projects. NMTC’s are monetized equal to 39% (First 3 years at 5%; Final 4 years at 6%) of the total allocation granted to the CDE (community development entity).

Economic Development Administration U.S. Department of Commerce


EDA targets attracting private capital investment and creating higher-skill, higher-wage jobs in those communities and regions that are suffering from economic distress

EDA Investment Programs: Public Works Economic Adjustment Trade Adjustment Assistance Partnership Planning University Centers Research and National Technical Assistance Local Technical Assistance

SBA Loan Programs


Certified Development Company 504

7(a) Small Business Loans

Microloans

CAPLines

Small Business Innovation Research (www.sbir.gov)

http://www.sbir.gov/

CDC/504 Loan Program (Commercial Real Estate & Equipment)


Long-term financing “Brick and mortar” financing with long-term, fixed-rate financing to acquire major fixed assets (Real Estate/ Machinery) for expansion or modernization Typically, a 504:

A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost A loan secured from a CDC with a junior lien covering up to 40 percent of the total cost A contribution from the borrower of 10 percent equity

7(a) Loan Program (General Purpose)


SBA’s primary and most flexible loan program

Designed for start-up /existing small businesses

Examples of Uses:

Working capital (Up to 7 years)

Obtaining new equipment (<10 years)

Acquiring new buildings or land (<25 years)

Guarantees loans for up to 90% of participating lenders.

Loan Amounts

$5 million Maximum

Microloan Program


Small (up to $50,000) short-term loans for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment.

Start-up or expansion

Private Sector Lending


Key Practices Financing Needs in Start Up/Growth


Start ups Typically self finance with too much debt and too little equity (increasing risk for failure/repayment of loans) Commercial banks rarely finance start ups

Growth Company Needs

Short Term Financing Cyclical or Seasonal Demands Small Business Contracting Sharp Sustained Increase in Sales Expansion into International Markets – Export Financing Mature Firms

Key Practices: Financing Methods Debt and Equity


Private Sector Lending Options

Debt Financing Banks, S&L, Credit Union, Insurance Co, Pension Funds, Mortgage Co, Industrial Revenue Bonds

Equity Financing Friends & Relatives, Angel Investors, Venture Capital, Private or Corporate Investors, Stock

Debt Financing Key Terms: Types of Debt Loans


Recourse Assets to secure the loan

Nonrecourse

No assets from borrower to secure the loan

Secured Loans backed by collateral Less than one year, used for working capital

Accounts Receivable Financing, Inventory Loans, Time or Lease Sales

3-7 years Term Loans, Construction Loans

Debt Financing Advantages/Disadvantages


Advantages Lower Cost to Borrower Interest Costs are Tax Deductible Fixed Payment Amounts Ownership Interest Not Diluted

Disadvantages Regular Payments Raises Break Even Point Not Permanent Capital Requires Strong Balance Sheet Adequate Cash Flow

Equity Financing TYPES OF FINANCING


Typical Application

Higher Risk/Return

Fast Growth

Intellectual Property, Proprietary/Unique Product/Process

Control of Operations

Exit Strategy

Equity Financing Advantages/Disadvantages


Advantages Capital Investment with No Repayment Schedule or Obligation No Security, No Guarantee of Repayment

Disadvantages

Higher Rate of Return (15-60%) in Exchange for Risk Loss of Control of Operations – Investors Hold Partial Ownership and/or Stock

Key Concept: Equity Instruments


Angels

Venture Capital

Mezzanine Financing

Monitoring/Covenants


Financial Statements

Collateral Audits

Borrowing Base

Debt to Worth

Liquidity

Debt Reduction

The 4 C’s


Credit/History

Cash Flow (Capacity to Repay)

Collateral (Capital)

Character

Critical Business Elements


Business Plan

Financial Ratios

Key Financial Documents: Business Finance


Financial Statements Balance Sheet

Financial position of a business at a single point in time (vs a period of time) Assets, Liabilities, and Equity

Income Statement (or Profit Loss Statement) Summary of income, expenses and profit Over a specific period of time

Statement of Cash Flows Cash receipts and payments

Break-Even Analysis Capital Requirements

BROWN CORPORATION

Balance Sheet

December 31, 2009

Assets:

Current Assets

Cash $ 450,000

Marketable Securities (at cost) $ 850,000

Accounts Receivable $ 2,000,000

Inventory $ 2,700,000

Total Current Assets $ 6,000,000

Fixed Assets

Land $ 450,000

Buildings $ 3,800,000

Machinery $ 950,000

Equipment $ 100,000

$ 5,300,000

Less: Depreciation $ 1,800,000

Net Fixed Assets $ 3,500,000

Total Assets $ 9,500,000

Liabilities:

Current Liabilities

Accounts Payable $ 1,000,000

Notes Payable $ 600,000

Wages Payable $ 250,000

Taxes Payable $ 450,000

Total Current Liabilities $ 2,300,000

Long-Term Liabilities

Mortgages $ 3,000,000

Total Liabilities $ 5,300,000

Owner's Equity

Common Stock $ 500,000

Accumulated Retained Earnings $ 3,700,000

Total Equity (Net Worth) $ 4,200,000

Total Liabilities and Equity $ 9,500,000

Balance Sheet

Income Statement

BROWN CORPORATION

Income Statement

For the Period Ending December 31, 2009

Net Sales $ 14,000,000

Cost of Sales

Materials $ 4,000,000

Labor $ 3,000,000

Overhead $ 3,500,000

Total Cost of Goods Sold $ 10,500,000

Gross Profit $ 3,500,000

Less Expenses:

Selling and Administration $ 450,000

Supplies $ 50,000

Total Expenses $ 500,000

Profit from Sales $ 3,000,000

Taxes $ 1,500,000

Net Profit $ 1,500,000

Financial Ratios


The relationship between any two numbers derived from a firm’s financial statements.

Liquidity Ratios


Measures the availability of cash to pay debt

Current Ratio The higher the ratio, the more solvent the business, ratios vary by industry D&B ave 1.5:1

Quick Ratio (Acid Test) Focuses on the most liquid assets General 1:1

Current Assets

Current Liabilities

Current Assets - Inventory

Current Liabilities

Debt Ratio


Measures the ability to repay long-term debt

Debt Ratio Evaluation of how safe a loan is – the ability of a lender to recoup its investments The lower the ratio the better the risk 60% or lower

Debt-to-Equity Ratio Higher the ratio, the more the company is financed with debt Preferred ratio below 3:1

Total Liabilities

Total Assets

Total Liabilities

Equity

Operating Ratio *for tangible goods only – not knowledge or service businesses


Inventory Turnover Average number of times inventory was sold over the period

Average Days Inventory Average number of days to sell inventory

Cost of Goods Sold for period

Average Inventory for period

365

Inventory Turnover Ratio

Receivables Turnover


Number of times account receivables are turned over per year

Receivables Net sales

Turnover Ratio = Accounts Receivable

Other State and Local Programs


Competitive Edge

Incubators

Assessment Districts

Development Authorities

Incentives

TIF

Economic Incentive Programs


Job Tax Credit Investment Tax Credit Property Tax Reduction Job Training Grant Payroll Rebate Cash Grant/Closing Fund Sales/Use Tax Exemption or Rebate Trade & Export Promotion Grant

Foreign Trade Zone (FTZ)


Federal program Created to incentivize companies to stay and grow in the U.S. Qualifying companies must import components or products from outside the U.S. Primary benefit nationwide is a reduction on duties and fees associated with importing components and products. Arizona has added benefit: real and personal property tax reduction of approximately 75%

Military Reuse Zone (MRZ)


Arizona program Created in 1992 to lessen the impact of military base closures Two MRZs in Arizona: Mesa and Goodyear To qualify, company must be in aviation / aerospace industry Benefits include:

Tax credits Transaction privilege tax exemptions Real and personal property tax reduction

Government Property Lease Excise Tax (GPLET)


Arizona program Created in 1996; revised in 2010 Municipalities leverage tax mechanism for economic development Central Business District (CBD) Benefits include:

Eight year property tax abatement Reduced lease rate structure for 25 years

Tax Increment Financing (TIF)


Public financing method for redevelopment and community improvement projects State of California invented tax increment financing in 1952 Original Property Tax revenue is based on assessed valuation of property before any redevelopment After development takes place, property is assessed again Additional tax money from increased valuation from pre-improvement status is the revenue used to pay off bonds for improvements in the TIF district

Tax Increment Financing (TIF)


Most effective when goals are: Reduce severe blight Direct public resources to a specific community plan/policy Address environmental remediation, or Finance infrastructure

Source: CBRE Economic Incentives Group

2014 Overall Incentives Ranking

Top Site Selection Factors 2016 Corporate Real Estate Executive Survey


1. Availability of Skilled Labor 2. Highway Accessibility 3. Quality of Life 4. Occupancy OR Construction Costs 5. Available Buildings 6. Labor Costs 7. Corporate Tax Rate 8. Proximity to Major Markets 9. State and Local Incentives 10. Energy Availability and Costs

Source: Area Development Online, Q1 2016

Your Role


Know Programs – Federal, State, Local

Build and Nurture Referral Network and

Strategic Relationships

Be Creative

Don’t Give Up