Economic Development TITLE Finance

Transcription

1 Economic Development TITLE Finance Tim Pickering, CEcD President & CEO, Interim Public Management January 15, 2019

2 Overview Role of Economic Development Agencies Public Sector Goals and Programs Government Based Financing Private Sector Lending Critical Business Elements Other State/Local Programs

3 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

4 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

5 Government Based Financing

6 Federal Financing Programs Housing & Urban Development ( US Department of Agriculture ( Community Development Financial Institutions Fund (US Treasury) ( Export Import Bank of the United States ( Economic Development Administration ( Small Business Administration (

7 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

8 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).

9 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

10 SBA Loan Programs Certified Development Company 504 7(a) Small Business Loans Microloans CAPLines Small Business Innovation Research (

11 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

12 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

13 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

14 Private Sector Lending

15 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

16 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

17 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

18 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

19 Equity Financing TYPES OF FINANCING Typical Application Higher Risk/Return Fast Growth Intellectual Property, Proprietary/Unique Product/Process Control of Operations Exit Strategy

20 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

21 Key Concept: Equity Instruments Angels Venture Capital Mezzanine Financing

22 Monitoring/Covenants Financial Statements Collateral Audits Borrowing Base Debt to Worth Liquidity Debt Reduction

23 The 4 C s Credit/History Cash Flow (Capacity to Repay) Collateral (Capital) Character

24 Critical Business Elements Business Plan Financial Ratios

25 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

26 Balance Sheet Assets: BROWN CORPORATION Balance Sheet December 31, 2009 Current Assets Cash $ 450,000 Marketable Securities (at cost) $ 850,000 Accounts Receivable $ 2,000,000 Inventory $ 2,700,000 Fixed Assets Total Current Assets $ 6,000,000 Land $ 450,000 Buildings $ 3,800,000 Machinery $ 950,000 Equipment $ 100,000 $ 5,300,000 Less: Depreciation $ 1,800,000 Liabilities: Net Fixed Assets $ 3,500,000 Total Assets $ 9,500,000 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

27 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

28 Financial Ratios The relationship between any two numbers derived from a firm s financial statements.

29 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 Current Assets D&B ave 1.5:1 Current Liabilities Quick Ratio (Acid Test) Focuses on the most liquid assets General 1:1 Current Assets - Inventory Current Liabilities

30 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 Total Liabilities Total Assets Higher the ratio, the more the company is financed with debt Total Liabilities Preferred ratio below 3:1 Equity

31 Operating Ratio *for tangible goods only not knowledge or service businesses Inventory Turnover Average number of times inventory was sold over the period Cost of Goods Sold for period Average Inventory for period Average Days Inventory Average number of days to sell inventory 365 Inventory Turnover Ratio

32 Receivables Turnover Number of times account receivables are turned over per year Receivables Turnover Ratio = Net sales Accounts Receivable

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34 Other State and Local Programs Competitive Edge Incubators Assessment Districts Development Authorities Incentives TIF

35 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

36 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%

37 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

38 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

39 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

40 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

41 2018 Overall Incentives Ranking Darker shades represent higher numbers of incentive programs. Source: tthe Council for Community and Economic Research.

42 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

43 Your Role Know Programs Federal, State, Local Build and Nurture Referral Network and Strategic Relationships Be Creative Don t Give Up