The Basic Course - Mark Barbash

Transcript

1. New Mexico Basic Economic
   Development Course
   August 14, 2020
   Economic Development Finance
   Mark Barbash
   Ohio Economic Development Institute
   John Glenn College, The Ohio State University
   Mark.Barbash@gmail.com
   

   View Slide

2. Objective
   Understand private and public financing sources
   to assist businesses in meeting their financing
   needs for projects that meet your economic
   development goals.
   

   View Slide

3. Overview
   • Finance
   ➢Financing as Part of the Development Process
   ➢Business Growth & Financing
   ➢Understanding Private Sector Financing
   ➢Identifying the Financing Gap
   ➢Understanding Public Sector Financing
   

   View Slide

4. 1. Understand the
   Business
   2. Understand the
   Project
   3. Understand the
   Private Financing
   4. Understand the
   Public Financing
   6. Close
   the
   Deal
   5. Identify
   the
   Financing
   Gap and
   Structure
   the
   Financing
   Steps in the Development Financing
   Process
   

   View Slide

5. Understanding the Project
   

   View Slide

6. • Land & Building
   • Machinery & Equipment
   • Demolition, Cleanup
   Direct Project
   Costs
   • Working Capital
   • Growth Financing
   • Research & Development
   Operating
   Needs
   • Site acquisition & Improvement
   • Utilities (sewer, water, power)
   • Roadways
   Infrastructure
   

   View Slide

7. Understanding Private Sector
   Financing
   

   View Slide

8. Business Growth and Financing
   Start Up
   Fast
   Growth
   Stable Mature
   30%+ VC
   5.1%+ Bank
   3.2 % Prime
   2.7 % Treas
   Seed Capital
   Venture
   Capital
   Banks &
   Commercial
   Capital
   Markets
   

   View Slide

9. Start Up
   Fast
   Growth
   Stable Mature
   30%+ VC
   5.1%+ Bank
   3.2 % Prime
   2.7 % Treas
   Personal Assets
   Preseed
   Capital
   Seed Capital
   Venture Capital
   Angel Investors
   Conventional Lenders, Banks
   Stock & Bonds (Capital Markets)
   On Line / Alternative Lenders
   Factoring
   Junk Bonds
   Business Growth and Financing
   

   View Slide

10. Most capital for
    private sector
    investment comes
    from private
    sector lenders, not
    from public sector
    programs.
    Source: Mortgage Bankers Association, Federal Reserve, Wells Fargo Securities
    

    View Slide

11. PRIVATE INVESTORS / FINANCING
    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, profitability, and
    management goals.
    Private sector investors and lenders have no
    obligation to look at your project.
    

    View Slide

12. Well, what about the Community
    Reinvestment Act?
    

    View Slide

13. Private Financing / Investor Profiles
    Investors Risk Control Investment
    Seed
    Capital
    Individuals,
    Local funds,
    Foundation
    Extremely high
    (20 – 30%),
    most deals lose
    money
    More 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,
    Debt, Out 5–7
    years through
    IPO
    Banks + Commercial
    banks and
    leasing cos.
    Medium to low
    or 0 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
    based on
    asset life, 7 –
    30 yrs.
    

    View Slide

14. Banks provide
    most of the
    financing for
    business growth.
    Insurance
    companies provide
    financing for real
    estate projects
    Source: Mortgage Bankers Association, Federal Reserve, Wells Fargo Securities
    

    View Slide

15. How a bank looks at a
    business loan project
    • Cash Flow: Is there sufficient (excess) cash flow from
    business operations to make loan payments (and cover
    working capital)?
    • Collateral: Is there sufficient collateral to pay off the
    outstanding bank loan if the project fails? Project
    collateral / personal guarantees / secondary collateral
    • Credit: Does the business have an acceptable history
    of making loan payments and paying suppliers
    • Character: Do the business and business owner have a
    reputation for honesty?
    

    View Slide

16. Types of
    Borrowers
    Prefer existing businesses, with strong management,
    established supply chain and customer base. Some banks have
    preferred industries
    Amount of
    Loan:
    Lower loan amounts for riskier businesses; Concern about
    “single purpose” collateral or environmental contamination.
    Concerned about special purpose equipment; Value ≠ Cost
    Use of
    Funds:
    Real Estate acquisition, renovation or new construction;
    Equipment, Working Capital, Growth, Infrastructure, Site
    Development
    Interest
    Rate:
    Priced off prime rate; Prime + based on bank profits, risk;
    Higher interest rates for higher risk businesses or projects
    Fixed or
    Variable:
    Prefer variable rate financing; Fixed rate financing based upon
    additional guarantees, strength of business or assets
    Term of
    Loan:
    Term based on asset life; Real Estate: 10 years; Equipment: 7
    years; Longer Amortization (ie: 10/20)
    Equity: Generally minimum equity towards project of 25%; Higher
    equity requirement based on collateral value, business risk,
    Lower equity if additional collateral pledged
    Collateral: First lien or mortgage position; Personal guarantees;
    “abundance of caution” collateral
    16
    

    View Slide

17. Types of
    Borrowers
    Existing growing businesses
    Amount of
    Loan:
    Maximum: 75% Loan to Value
    Use of
    Funds:
    Prefer real estate and equipment
    Repayment Cash flow from operating business
    Fixed or
    Variable:
    Variable, Prime +; Today’s Prime: 3.25%;
    SBA Maximum: Prime + 2 ¾;
    Term of
    Loan:
    Real Estate: 10 Years; Equipment: 7 Years; Potential for Shorter
    term with longer amortization; ie: Term: 10 Years; Amortization
    Schedule: 20 years
    Equity: 25%
    Collateral: First lien or mortgage; Personal guarantees from
    owners 17
    

    View Slide

18. Is there a financing gap?
    • Capital Gap: Insufficient debt (and equity) to support the
    project cost?
    • Cash Flow Gap: Insufficient cash generated to pay debt
    service on financing (Thin margin, Start up, Turnarounds,
    working capital)
    • Collateral Gap: Cash flow is sufficient to make payments,
    but the collateral doesn’t support the amount of the
    private sector financing (service, tech businesses)
    • Credit Gap: Start up business with insufficient history to
    support private financing (start ups, turnarounds)
    • Character Gap
    

    View Slide

19. How a bank looks at a
    real estate loan project
    • Cash Flow: Is there sufficient (excess) cash flow from
    leasing space (rent roll) to make debt service and
    investor payments?
    • Collateral: Is there sufficient collateral to pay off the
    outstanding bank loan if the project fails? Project
    collateral / personal guarantees / secondary collateral
    • Credit: Does the developer have an acceptable history
    and how strong is the neighborhood?
    • Character: Does the developer / owner have a
    reputation for honesty?
    

    View Slide

20. Difference between business financing &
    real estate financing
    • Motivation: Real estate projects tend to be for
    investments purposes. Business projects tend to provide
    assets for operating a business.
    • An investor’s Return on Investment is a critical part of
    real estate financing.
    • Repayment on real estate projects comes from leasing
    cash flow. Repayment for business loans comes from
    operating profits.
    • Collateral / Security: Real estate loans tend to be non-
    resource loans to a developer (no personal guarantee).
    Most business loans require a personal guarantee.
    • Real estate financing tends to start with construction
    financing which is “taken out” with permanent financing
    on stabilization. Business financing will use interim
    financing to acquire assets, followed by a term loan.
    

    View Slide

21. Rules for Working with Bankers
    The Donald Trump Rule
    The George Steinbrenner Rule
    The Berlitz Rule
    The Al Capone’s Safe Rule
    The Herb Cohen Rule
    The Robert Baden-Powell Rule
    The Henry S. Potter Rule
    The Don Quixote Rule
    The Elephant Rule
    

    View Slide

22. The Donald Trump Rule
    You Never Know what it’s
    worth until you try to sell it
    Banks make loans based on
    value, not based on cost
    Rules for Working with Bankers
    

    View Slide

23. The George
    Steinbrenner Rule
    You can’t tell the players
    without a scorecard
    Bank Mergers,
    Acquisition
    Rules for Working with Bankers
    

    View Slide

24. The Berlitz Rule
    Talk the Banker’s
    Language
    Understand terms,
    process and basic credit
    Rules for Working with Bankers
    

    View Slide

25. The Al Capone’s Safe Rule
    You never know what you’re
    going to find underground
    Banks are reluctant to lend
    on contaminated property
    Rules for Working with Bankers
    

    View Slide

26. The Herb Cohen Rule
    “You Can Negotiate
    Anything”
    Every interaction with
    a bank is a negotiation
    Rules for Working with Bankers
    

    View Slide

27. The Robert Baden-
    Powell Rule
    “Be Prepared”
    Be prepared for your
    meeting with the banker
    Rules for Working with Bankers
    

    View Slide

28. The Henry S. Potter
    Rule
    It’s a Wonderful Life
    Banks make loans to be
    repaid, not to liquidate
    Rules for Working with Bankers
    

    View Slide

29. The Don Quixote Rule
    Don’t Tilt at Windmills
    Don’t ask a bank to do
    something you know they
    can’t do.
    Rules for Working with Bankers
    

    View Slide

30. The Elephant Rule
    Main characteristic of
    an elephant…
    Bankers never forget.
    Rules for Working with Bankers
    

    View Slide

31. Understanding Public Sector
    Financing
    

    View Slide

32. Understand Public Sector Financing
    • Purpose of Public Sector Programs
    • Types of Public Sector Programs
    • Taxable and Tax-Exempt Bonds
    • Selecting the Public Sector Program
    • Rules for Working with Public Sector Programs
    

    View Slide

33. Purpose of Public Sector Progams
    • Meet public purpose goals: Job creation, job
    retention, place-based development, equity,
    other social goals
    • Reduce cash flow needs of business to
    preserve cash for working capital or growth
    capital
    • Fill capital gaps in the face of non-bankable
    projects
    • Encourage banks to lend in the face of
    financing gaps
    

    View Slide

34. Types of Public Sector Financing Programs
    • Direct Loans
    • Loan Guarantees
    • Bonds: Taxable and Tax-Exempt
    • Tax Increment Financing (TIF)
    • Intermediary Programs: New Markets Tax
    Credits, CDBG, CDFI
    

    View Slide

35. Public Sector Financing
    Start Up
    Fast
    Growth
    Stable Mature
    ?
    SBA 504 Direct Loan
    SBA 7A Loan Guarantee
    USDA B & I
    Collateral Enhancement / Capital Access
    This chart does not include COVID related stimulus financing
    Revolving Loan Funds
    

    View Slide

36. How public sector programs help fill the
    financing gap
    • Loan Guarantees
    – Guarantee riskier credits or lower value collateral
    – Increase borrowing capacity
    – Does not necessarily get lower rate or longer term
    • Direct Loans
    – Lower down payment financing to preserve cash for working
    capital
    – Long Term Financing to stretch out payments
    – Fixed Rate Financing to provide predictable cash flow
    – Lower rate financing to reduce the cost of borrowing
    – Increased Borrowing Capacity
    – Fill Capital Gap between Debt, Equity & Project Cost
    • Bonds:
    – Bring lower rate and long-term financing through capital market
    bond financing (tax exempt or taxable)
    

    View Slide

37. 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
    • Local Revolving Loan
    Funds
    

    View Slide

38. 50 / 40 / 10
    

    View Slide

39. How a Direct Loan Makes the Deal Better…
    Bank
    75%
    Equity
    25%
    Bank
    50%
    Equity 10%
    Public
    40%
    Bank Only Public/Private
    75% Loan to
    Value Ratio
    First Mortgage
    Market Rate
    Variable Rate
    Shorter Term
    25% Equity
    Bank Loan
    1st Mortgage
    Variable Rate
    Direct Loan
    Longer Term
    Lower Rate
    2nd Mortgage
    Fixed Rate
    10% Equity
    

    View Slide

40. 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 Assistance
    Program
    • USDA Business and
    Industry Loan Program
    

    View Slide

41. Private Activity Bonds
    (A Bond is a Loan)
    • Debt authorized by local
    authorities
    • Underwritten by
    investment banking firms
    • Purchased typically by
    national capital market
    investors
    • Complex structures that
    can include interest, fees
    and penalties
    • Larger Projects
    • Better Credit Companies
    • Backed by Insurance or
    Letter of Credit
    • Higher fees for investment
    bankers, trustees, attorneys,
    financial advisors
    • Issuing a bond is NOT the
    same as SELLING a bond
    • Longer amortization, shorter
    terms, callable, refundable
    

    View Slide

42. 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
    • Different pool of investors
    than tax-exempt bonds
    Tax Exempt Bonds
    • Finance public-benefit
    projects
    • Job creation, housing,
    education, government,
    student loans
    • 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
    • Typically very high “cost
    of issuance”
    

    View Slide

43. Intermediary Programs
    • Government provides funds
    or allocates tax credits to
    local economic development
    for relending
    • Local group takes
    responsibility for policy,
    underwriting, marketing,
    processing and management
    of funds
    • Local group assumes
    responsibility for funds
    management and
    repayment of funds to the
    government, if a loan
    • EB 5 Financing
    • SBA 504
    • SBA Microloan
    • CDBG
    • New Markets Tax Credits
    • Community Development
    Financial Institutions
    • USDA Intermediary Relending
    • SBA Intermediary Program
    

    View Slide

44. New Markets Tax Credits
    • Funds provided through
    sale of “tax credit” by
    US Treasury
    • Credit purchased by
    investors (banks) to
    offset income
    • Projects sponsored by
    CDFI / CDE
    • Projects funded must
    meet community
    development goals
    • Typically finance larger
    real estate projects;
    some operating
    businesses & RLFs
    • 20 – 30% of project cost
    • Complicated structure
    using intermediary
    • Competitive allocation
    of tax credits
    • Funds generally
    invested for a period of
    7 years
    

    View Slide

45. Opportunity Zones
    • Funded through capital
    gains tax exemption /
    deferral for funds
    invested in qualified
    projects
    • OZ designated by states
    based upon distress
    • No requirement for job
    creation or retention or
    community benefit
    • Invested through
    “qualified opportunity
    fund”
    • Larger real estate
    projects
    • Some operating
    businesses
    • Investment takes the
    form of equity
    • Generally required to
    stay in a project for at
    least 10 years to get full
    benefit
    

    View Slide

46. Tax Increment Financing
    • Redirect new taxes generated from new
    development into a fund to pay for infrastructure
    • Up to 75% of Property taxes primarily, state gross
    receipts tax
    • Funds can be used directly to pay for costs or to
    pay debt service on bonds to finance
    infrastructure
    • Requires spending plan
    • Generally 25-year term
    • Biggest Challenge: Interim financing needed
    

    View Slide

47. View Slide

48. COVID Related Financing Programs
    • Federal
    – SBA PPP
    – SBA
    – Main Street
    – CDBG
    – Economic Development
    Administration
    • Local
    – Stimulus vs. Lending
    – Pay for expenses
    – Must reemploy
    – Expand CDBG RLFs
    – Expand EDA RLFs
    

    View Slide

49. The “Is it a dog” Checklist
    ✓Will they share company financials and tax
    returns?
    ✓Do they expect “free money”?
    ✓Is their answer always “It’s someone else’s
    job”
    ✓Is their answer always “it’s someone else's
    problem?”
    ✓Are they willing to spend more money to help
    make the deal happen?
    

    View Slide

50. Rules for Public Sector Financing
    1. Allow the business to tell their story … once
    2. Get to know the program people; Let the
    program people represent their program
    3. Explain the strings up front
    4. Don’t pile on programs
    5. Be prepared to do the paperwork
    6. It ALWAYS takes longer
    7. Underwrite like a bank … but don’t act like a
    bank
    8. …
    

    View Slide

51. 8. Take Risk
    Informed
    

    View Slide

52. Mark Barbash
    Ohio Economic Development Institute
    (614) 774-7599
    www.linkedin.com/in/markbarbash
    mbarbash@ohioeda.com
    mark.Barbash@gmail.com
    

    View Slide