Economic Development Finance TITLE€¦ · New Markets Tax Credit (NMTC) Program Arizona Basic...
Transcript of Economic Development Finance TITLE€¦ · New Markets Tax Credit (NMTC) Program Arizona Basic...
TITLE
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
Arizona Basic Economic Development Course
Understand Business Finance Basics
Knowledge of Government Tools –
Federal, State, Local, Other
Knowledge of Private Sector Programs and
Service Providers
Public Sector Goals & Programs
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
Federal Financing Programs
Arizona Basic Economic Development Course
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)
New Markets Tax Credit (NMTC) Program U.S. Department of Treasury
Community Development Financial Institutions Fund
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
Certified Development Company 504
7(a) Small Business Loans
Microloans
CAPLines
Small Business Innovation Research (www.sbir.gov)
CDC/504 Loan Program (Commercial Real Estate & Equipment)
Arizona Basic Economic Development Course
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)
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
Key Practices Financing Needs in Start Up/Growth
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
Typical Application
Higher Risk/Return
Fast Growth
Intellectual Property, Proprietary/Unique Product/Process
Control of Operations
Exit Strategy
Equity Financing Advantages/Disadvantages
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
Angels
Venture Capital
Mezzanine Financing
Monitoring/Covenants
Arizona Basic Economic Development Course
Financial Statements
Collateral Audits
Borrowing Base
Debt to Worth
Liquidity
Debt Reduction
The 4 C’s
Arizona Basic Economic Development Course
Credit/History
Cash Flow (Capacity to Repay)
Collateral (Capital)
Character
Critical Business Elements
Arizona Basic Economic Development Course
Business Plan
Financial Ratios
Key Financial Documents: Business Finance
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
The relationship between any two numbers derived from a firm’s financial statements.
Liquidity Ratios
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
Number of times account receivables are turned over per year
Receivables Net sales
Turnover Ratio = Accounts Receivable
Arizona Basic Economic Development Course
Other State and Local Programs
Arizona Basic Economic Development Course
Competitive Edge
Incubators
Assessment Districts
Development Authorities
Incentives
TIF
Economic Incentive Programs
Arizona Basic Economic Development Course
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)
Arizona Basic Economic Development Course
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 Basic Economic Development Course
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 Basic Economic Development Course
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)
Arizona Basic Economic Development Course
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)
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
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
Arizona Basic Economic Development Course
Know Programs – Federal, State, Local
Build and Nurture Referral Network and
Strategic Relationships
Be Creative
Don’t Give Up