Public Sector Financing Options

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1 Public Sector Financing Options 1. Bond Financing An obligation to repay debt in the form of certificates bearing long-term interest rates. A bond makes it possible for a company or government to borrow large sums of money in the public markets at lower rates of interest than traditional bank financing. ED Finance: Nancy Cobb 1

2 General Obligation Bonds G-O Full faith and credit of the Government Backed by the taxing power of the Issuer No Assets are required as Collateral Used for projects without a secure revenue stream Usually safest type of municipal bond Jefferson County ALA $4 billion Chapter 9 Bankruptcy Largest filing of its type in US History Industrial Revenue Bonds (IRB, IDB) Governmental Entity as a conduit issues bonds with proceeds financing capital improvements on behalf of a private company Bonds are repaid from revenues derived from the company that are pledged to the Development Authority. ED Finance: Nancy Cobb 2

3 Why should you issue an IRB? To encourage relocations/expansions of companies To provide jobs and expand economic opportunity Incentive to encourage a company to close the deal Non-Recourse Form of Financing No liability to the Public Entity Advantages to the Company: Replaces private $$ with public $$ Long-term maturities Low interest rates Up to 100% financing Tax Abatement ED Finance: Nancy Cobb 3

4 Tax Abatement Increasingly demanded by companies Provides Ad-Valorem property tax savings Bond-Financed Sale-Leaseback structure Title to the project is vested in the Dev Authority Company becomes the Lessee via Capital Lease PILOT Payment in Lieu of Taxes Lease structure includes phased-in approach to taxes Matter of negotiation between company & Dev Authority Pay Obligations Accounts Payable Invoices Debt Service Fund Working Capital Inventory - first use of cash Accounts Receivable Buy Fixed Assets Land/Building/M&E Can be a dangerous use of Cash Why? ED Finance: Nancy Cobb 4

5 Company X Company officials meet with you to discuss new facility Existing company seeking to expand to your region Light manufacturing to serve Southeast Interested in building a $15 million plant Investment will include $20 million in new equipment Company commits to create 150 jobs Desired location is in publicly owned Industrial Park Your initial due diligence is positive 70 Company X Prospect meets with Development Authority Makes presentation history, biz growth, needs Contingent upon the successful review /completion of internal Due Diligence process the DA is willing to: Bond-Financed Sale-Leaseback structure Terms include $35 million for 20 years / end for title Provide 25 acres within park + infrastructure The company will repay the bonds Company negotiates declining tax abatement over 10 years Company X accepts this offer for win-win deal ED Finance: Nancy Cobb 5

6 Public Sector Financing Options 1. Bond Financing 2. Federal Grants EDA U.S. ECONOMIC DEVELOPMENT ADMINISTRATION Funding Priorities Job Creation Advance Global Competiveness National Strategic Priorities (green energy) Environmentally-Sustainable Development Economically Distressed Communities Grant Award Limits Max of $2.0 million for construction Max of $100,000 for non-construction ED Finance: Nancy Cobb 6

7 EDA U.S. ECONOMIC DEVELOPMENT ADMINISTRATION Seattle Chicago Philadelphia Headquarters Denver Austin Atlanta EDA U.S. ECONOMIC DEVELOPMENT ADMINISTRATION Deadlines to Submit Applications March 09, 2012 June 08, 2012 September 14, 2012 = Must be submitted and ED Finance: Nancy Cobb 7

8 Employment incentive program (EIP) in Georgia Non-entitlement communities Cities Population < 50,000 Counties Population < 200,000 Must create jobs Targeted to low to moderate income Public Infrastructure, Rail Spurs Max of $500,000 Grants - Capitalization of revolving loan funds to Utilities Feasibility Studies, Technical assistance Maximum Grant for 2011 was $300K Loans - Zero interest loans to electric & telephone utilities Create jobs and sustainable economic development 77 ED Finance: Nancy Cobb 8

9 Awards made to Public Entities Supporting Small & Emerging Businesses Land, Buildings, M/E, Infrastructure Benefitting businesses 50 employees < $1 million in annual revenues Grants range from $10K to $500K Smaller projects under $100K given priority 78 Competitive Grants PROGRAM ACTIVITIES JOBS FUNDING $ EDA Land, Infrastructure YES $2,000,000 max Community Development Block Grant Public Infrastructure YES Low to Mod $500,000 Max USDA Rural Business Enterprise Grant Land, Buildings, Infrastructure Yes Rural Small Bus $100,000 Max ED Finance: Nancy Cobb 9

10 Public Sector Financing Options 1. Bond Financing 2. Federal Grants 3. Federal Low interest loans 81 ED Finance: Nancy Cobb 10

11 Provide Long-term Financing matching life of the asset Provide Low down payment Increases investor s rate of return on equity Reserves working capital Provide Reasonable Long-Term Financing Cost Encourages long-term strategy and thinking 82 Purpose Long term financing to benefit small businesses Reduces risk taken by the lender and borrower Portfolio 7(a) has the largest portfolio of loan opportunities of any economic development financing program ED Finance: Nancy Cobb 11

12 Provides guarantees for loans from financial institutions Financial institution must certify that it would only make loan IF SBA guarantees it. Loan guarantee of up to 85%, up to $5 million Real estate, machinery & equipment, furniture & fixtures, working capital, and inventory 84 Borrower applies directly to a commercial lender Key Advantages Extended repayment options 25 years for Land & Buildings 10 years for Working Capital Interest Rate Negotiable - but is pegged to the Prime Rate ED Finance: Nancy Cobb 12

13 Loans originate with one of 270 nonprofit development companies licensed by the SBA. Provides long-term fixed rate capital to acquire real estate & buildings, machinery & equipment NO.. Working capital, inventory, refinancing Loan Terms 10 to 20 years MAX 86 Maximum Loan Amount - $5 million Requires funds from three sources 50% - Conventional lender / first mortgage borrower repays the loan has deed or lien on property >100% of loan 40% - CDC debenture bond sales (SBA guaranteed) borrower pays bi-annual interest to CDC 10% - minimum from borrower **See State List of 504 CDCs 87 ED Finance: Nancy Cobb 13

14 88 Create jobs and Stimulate rural economies Working capital, M/E, Buildings, R/E Certain types of debt refinancing $25M max aggregate loan amount to one borrower Sliding scale on guarantees (80, 70, 60%) Rural areas, population of less than 50, ED Finance: Nancy Cobb 14

15 PROGRAM ACTIVITIES % of Loan Guarantee SBA 7A Requires Lender Participation LOAN PROGRAM COMPARISON Fixed Assets, Working Capital Refinancing Up to 85% Loan Terms FUNDING $ 25 yrs- Assets 10 yrs-for Working Capital Max of 2.75% above Prime $5,000,000 MAX SBA 504 Requires Bank & CDC Fixed Assets 50%-Bank 40%-CDC 10%-Borrower 10 to 20 years Fixed Monthly by Market Rate $5,000,000 MAX USDA Business & Industry (B&I) Requires Lender participation Fixed Assets, Working capital Inventory 80% - $5 MM 70% - $10 MM 60% - >$10MM 30 years- R/E 15 years- M/E 7 years- Working Capital Rate Negotiated $25 Million -MAX Case Studies ED Finance: Nancy Cobb 15

16 Project A Successful Entrepreneur A is a successful entrepreneur in a mid size city. A realizes to continue success-must grow business. A needs to invest in expensive machinery/equip A wants to maximize return on equity investment Entrepreneur A is worried about depleting cash reserves during a period of rapid growth. ED Finance: Nancy Cobb 16

17 Entrepreneur A is considering purchase of a new machine for $250,000 The machine will produce a new line of products yielding a profit of $75,000 annually Should A purchase the machine with $250K available cash (100% Equity Financing) What would ROI be in this scenario? $75,000 / $250,000 ROI = 30% A s bank offers a $125K Loan at 6% A can purchase machine with $125K Cash and $125K Debt Financing The debt will cost $7,500 interest annually After deducting interest expense from $75K profit, the profit left is $67,500 What is the ROI? $67,500 \ $125,000 = 54% ROI ED Finance: Nancy Cobb 17

18 Why has ROI increased? A Replaced equity $$ with debt dollars at 6% Result is that Return on remaining equity has increased by 24 percent (from 30 to 54%) With no leverage and $250K of equity, A can purchase 1 machine generating $75K in profit With 50% financial leverage and fully investing $250K, entrepreneur can opt for 2 machines Financial leverage allows A to increase profits Opts to Purchase Two Machines $250,000 Equity 50% $250,000 Bank Loan 50% $500,000- M/E $67,500 X 2 = $135,000 Increase in Profits Financial Leverage allowed A to increase profits by $135K by employing $250K Equity matched with equal amount of debt. ED Finance: Nancy Cobb 18

19 Waste Away Services, LLC. Start-up Company Purchase of residential trash containers Provides trash pickup services for city and county residents Current employment: 2 /create 1 new job UPDATE 2006 Start-up residential trash Co. 2 employees & 5 customers Receives Loan Guarantee Purchases truck / containers Starts commercial service. Adds one employee Increase to 300 customers 2007 Adds portable restroom service nd OneGeorgia ESB Further expansion Six Employees 1,800 customers / 3 counties ED Finance: Nancy Cobb 19

20 Project B International BioMass Project ED Finance: Nancy Cobb 20

21 Private Investment of $150 million Site location must be within wood basket area 75 new jobs within 24 months Undetermined # of indirect jobs via logging, etc. Indirect Impact via Contracts with Wood Owners 750,000 Tons Wood Pellets to Europe Company is # 1 German-based utility company Stock traded on Frankfurt Stock Exchange #60 on Forbes Global Acres of Land for Facility Site clearing and grading All utilities: electricity, water, sewer, gas Waiver of tap-in fees, building fees, permits Access to Rail & Port Rail Spur from property to mainline Tax Abatement negotiable ED Finance: Nancy Cobb 21

22 300 Acres of Land available County commits to site clearing/grading City commits to water/sewer/gas Electrical utility commits to electricity All tap on fees waived Rural County Population 35,000 Per Capita Income (PCI) $16,476 PCI rank w/national average 63% Unemployment Rate 10.5% ED Finance: Nancy Cobb 22

23 Project is +/- 1 mile from mainline railroad Railroad requires two switches to be installed Preliminary cost estimate is $2.1 million You are encouraged to apply for grants No single funding source will cover rail spur EDA Grant - Federal $ 1,317,070 CDBG/EIP Grant Federal $ 500,000 EDGE Grant - State incentive $ 342,743 TOTAL $ 2,159,813 ED Finance: Nancy Cobb 23

24 Okefenokee Area DA EDGE Award $342,743 Grant Rail Infrastructure to support world s largest wood pellet plant Partnership between RWE Innogy of Germany & BMC of Sweden 750,000 tons wood pellets annually Fuel pellets shipped to Europe Strong regional impact 25 counties through contracts with forest owners - additional jobs in logging, trucking Interstate competition: NC, SC 75 new jobs in 2 yrs Private investment: $150 MM Requirement for $342,743 EDGE Grant: Execution of Performance & Accountability Agreement Tri-Party Signature Must meet 70% weighted average: Jobs and Private Investment ED Finance: Nancy Cobb 24

25 Project A 700 Jobs Customer Care Center Private Investment of +/-$25 million Company has global presence & strong liquidity Company will build a new 78,000 SF Facility Company commits to700 new jobs within 24 months Employees enjoy a comprehensive benefits Package Company serves 27 million US mobile customers Competitive project with multiple states ED Finance: Nancy Cobb 25

26 Available Land for Facility Some Assistance with Site clearing and grading All utilities: electricity, water, sewer, fiber Commitment to issue Industrial Revenue Bonds 20 Year Tax Abatement Evidence of Redundant Fiber Connectivity Land for construction of facility County commits to site $100K Industrial Revenue Bond capacity Redundant Fiber Connectivity 20 year Tax Abatement $2.6 Million $1.5 Million But For Incentive Grant ED Finance: Nancy Cobb 26

27 Land Acquisition $ 2 Million Building Construction Machinery/Equipment Estimated Project cost $14 Million $ 10 Million $26 Million Draft an MOU with these particulars: Seek State Incentive Grant of $1,500,000 for Equipment Authority will issue $8 Million Industrial Revenue Bond Authority & Company execute Lease Agreement $8 Million in Equipment Lease expires in January 2029 Lease payments equal to debt service on bonds Authority provides 20 year of phased tax abatement ~ $2.6 million ED Finance: Nancy Cobb 27

28 DA of Richmond County Communications Equipment 78,000 SF customer care facility 4 th largest wireless carrier Received 4,000 job applications 700 new jobs Total project cost: $25.5M Project T 1,000 New Jobs Data Solutions Center ED Finance: Nancy Cobb 28

29 Private Investment of +/-$30 million Company will build a new 160,000 SF Facility Company commits to 1,000 new jobs within 2 years Employees enjoy a comprehensive benefits Package Inbound Client Support Center Company has global presence & strong liquidity Competitive project with multiple states Local and state incentives will be critical Location in Mountain Time Zone (to serve West coast) Low probability of natural disaster in the region Bilingual Population Available Land for Facility $$$ for a Workforce Training Program $$$ to assist with Capital Investment Costs ED Finance: Nancy Cobb 29

30 Highly Skilled, Bilingual Labor Pool $900,000 for a Workforce Development Program Tax Abatement from City of $50K for 5 years $3 Million State Incentive Grant Available Land for construction of facility Redundant Fiber Connectivity Land Acquisition $ 3 Million Building Construction Machinery/Equipment Estimated Project cost $20 Million $ 7 Million $30 Million ED Finance: Nancy Cobb 30

31 Incentive Grant $3,000,000 Workforce Skills Dev Fund $1,000,000 Tax Abatement from City $ 250,000 Sales Tax Refunds under $1,000,000 Enterprise Zone regulation $5,250,000 EL PASO, TEXAS Texas Enterprise Fund 12 3 ED Finance: Nancy Cobb 31

32 Project T Manufacturing Distribution Center Private Investment of $10 million 150 new jobs within 24 months HQ in Texas; expanding into Southeastern USA Privately owned successful business >25 years Solid B&B report, strong cash reserves Mfg flatbed utility, equipment and dump trailers Used to transport automobiles and heavy equipment ED Finance: Nancy Cobb 32

33 50 acres +/- 200,000 SF existing building(s) preferred Close proximity to Interstate All utilities: electricity, sewer, water, gas Waiver of tap-in fees, building fees, permits Property tax abatement Industrial revenue Bond Financing Two buildings on 56 acres of land near I-75 City waivers on water/sewer/gas fees Possible low interest loan on M&E Possible incentive grant for site clearing Issue $10 Million Industrial Revenue Bonds Tax abatement Negotiate for PILOT (Payment in Lieu of Taxes) ED Finance: Nancy Cobb 33

34 Rural County Population 22,000 Per Capita Income (PCI) $14,695 Unemployment Rate 10.6% Living Below Poverty 27.8% Draft an MOU with these particulars: Seek State Incentive Grant of $400,000 for site clearing Seek a $500,000 low interest loan for M&E Jobs fit profile for CDBG / EIP loan Apply for 3% EIP loan on behalf of company Issue $10 Million IRB on behalf of company Lease period and amount to equal IRB ED Finance: Nancy Cobb 34

35 EIP Grant - Federal $ 500,000 EDGE Grant - State incentive $ 360,000 Local Investment $ 200,000 Project T $10,000,000 TOTAL $11,060,000 EDGE Award Crisp County-Cordele IDA $360,000 Grant Site Preparation / 178,000 SF Manufacturing & Distribution facilities Located on 56 acres in Cordele Industrial Park Big Tex Trailer Manufacturing Began operations in 1981 Produces flatbed utility, equipment and dump trailers Interstate competition: FL, SC Total project cost: $11M 150 new jobs in two years ED Finance: Nancy Cobb 35

36 Exempt from Ad Valorem Taxes during 10-year lease period, ending December 31, 2019 Company will make PILOT as follows 0% - 1 st 7 years 60% - year 8 80% - year 9 100% - year 10 o As percent of normal taxes that would normally be owed o Clawback Agreement Executed o Must maintain 70% weighted average of jobs/investment Fiscal Challenges State / Local / Federal Global Economic Conditions Need for consistent policies in Washington, DC Long Term Investment Policies 13 3 ED Finance: Nancy Cobb 36

37 The US economy appears to be growing fast enough to bring unemployment below 8% this year. Hiring is up; despite weak prices, housing appears to be firm; and Europe's debt crisis seems less threatening. We expect real GDP to grow 2.5% this year. The chief threat to the outlook comes from gasoline prices which have risen sharply since the fall. Moody s Analytics March 06, 2012 ED Finance: Nancy Cobb 37