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5. Resolution 4780 - Community Development Revolving Loan Fund ProgramR fi nrlfw��� FROM: SUBJECT: MEETING DATE: BACKGROUND: The Honorable Mayor Pamela B. Kennedy and City Council Susan Moyer, Community Development Director Chris A. Kukulski, City Manager Resolution to Establish an Economic Development Revolving Loan Fund for Business Retention and Expansion April 7, 2003 Funding is available through application to Rural Development and CDBG Economic Development Block Grant sources that can create a revolving loan fund for small business retention and expansion. These funds are intended to stimulate economic development activity by assisting the private sector where a funding gap exists and alternative sources of public and private financing are not adequate. The City of Kalispell and the Community Development Department, if approved by Council, will be to assist businesses by making appropriate long-term, fixed rate financing available at reasonable interest rates by providing improvements in support of Economic Development activities. Additionally, the Community Development Department will be eligible to receive administrative grant funds to implement and run this program; thus ensuring the continued financial self- sufficiency of the department. RECOMMENDATION: City Council approves the resolution before them this evening and appoints the steering committee members as permanent appointees to a newly created Economic Development Loan Review Committee. FISCAL IMPACT: Up to $1,150,000 can be applied for from the two funding sources as soon as projects have been identified. Repayment of principal and interest on loans will then be recycled back into the community for new development. Additional applications may be submitted when the initial funds are expended. ALTERNATIVES: As suggested by Council. Respectfully submitted, CQ'rt-'�. f Chris A. Kukulski, Susan Moyer, Director City Manager Community Development RESOLUTION NO.4780 A RESOLUTION TO ESTABLISH AN ECONOMIC DEVELOPMENT REVOLVING LOAN FUND FOR BUSINESS RETENTION AND EXPANSION AND TO CREATE AN ECONOMIC DEVELOPMENT LOAN REVIEW COMMITTEE. WHEREAS, Rural Development and CDBG Economic Development Block Grant sources have funding available for the creation of revolving loan funds for small business retention and expansion which may stimulate economic development activity by assisting the private sector where a funding gap exists and alternative sources of public and private financing are not adequate; and WHEREAS, the Kalispell City Community Development Department will be able, through the use of such an economic development revolving loan fund and with funding from these grant sources, to assist businesses by making appropriate long-term, reasonable fixed rate financing to small businesses to stimulate economic development activity; and WHEREAS, a Steering Committee of local business and banking professionals have developed a set of policies and procedures for the management of an Economic Development Revolving Loan Fund which will effectively direct a Loan Review Committee in the management of the Fund; and WHEREAS, a Loan Review Committee should be established and appointments made to that Committee to monitor and direct the Economic Development Revolving Loan Fund. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF KALISPELL AS FOLLOWS: SECTION I. An Economic Development Revolving Loan Fund (RLF) shall be established within the budget of the City of Kalispell, which shall be funded solely from the Rural Development and CDBG Economic Development Block Grant sources. Loans from this fund shall be used to continue the activities from which the program income is being derived; 1) specifically to create and retain employment opportunities, and to 2) assist in preventing or eliminating blight, to revitalize, upgrade or improve the commercial/business area of the Kalispell community, and to 3) contribute partial funding as a match for Community Development projects funded with State and Federal Funds. To this end the use of the RLF shall be governed by the City of Kalispell Economic Development Revolving Loan Funds Policy and Procedures manual attached hereto in incorporated fully herein by this reference. SECTION II. The five person steering committee which authored the Policy and Procedures established above in Section I shall be and is hereby appointed to serve as the Loan Review Committee. The first term for Rick Hart, A.J. King and Dave Hanson shall be for a period of two years and the first term for Peggy Young and Donna Bolander shall be for three years. All terms thereafter shall be for a period of three years. Upon the expiration of any term or withdrawal of any committee member prior to the expiration of the term, the Committee shall develop and submit a list of three nominees to the Mayor who shall than make the appointment from that list to fill the seat on the Committee. PASSED AND APPROVED BY THE CITY COUNCIL AND SIGNED BY THE MAYOR OF THE CITY OF KALISPELL, THIS 7" DAY OF APRIL, 2003. Pamela B. Kennedy Mayor ATTEST: Theresa White City Clerk CITY OF KALISPELL ECONOMIC DEVELOPMENT REVOLVING LOAN FUNDS MISSION STATEMENT The City of Kalispell's Economic Development Revolving Loan Fund (RLF) is designed to stimulate economic development activity by assisting the private sector in order to create or retain jobs for low and moderate income persons. These funds are intended to be used in situations where a funding gap exists and alternative sources of public and private financing are not adequate. These funds are intended to compliment conventional business financing techniques by leveraging funding from other Federal and State financing programs and private lending institutions. The RLF is designed to assist businesses by making appropriate long-term, fixed rate financing available at reasonable interest rates by providing improvements in support of Economic Development activities. A. PROGRAM OBJECTIVE The Economic Development Revolving Loan Fund will continue the activities from which the program income is being derived; specifically to: 1. Create and retain employment opportunities. When applying for Community Development Block Grand Funds (CDBG) it should benefit no less than 5 1 % Low and Moderate Income (LMI) individuals within the City of Kalispell and service area. 2. To assist in preventing or eliminating blight, to revitalize, upgrade or improve the commerciallbusiness area of the community; 3. To contribute partial funding as a match for Community Development projects funded with State and Federal funds. B. FINANCING POLICIES The City of Kalispell Economic Development Revolving Loan Fund will be guided by the following financing policies: No loan will exceed the maximum limit or the debt/equity ratio limit of the funding source. The loan interest rate will be determined based on the appropriate index and the risk of the loan. The Economic Development Loan Review Committee will have the authority to approve special financing, such as deferrals of principal or interest payments or both, to meet a borrower's need for high -risk financing and to leverage financing from conventional borrowers. The Committee may also forgive or postpone loan payments due to special circumstances or unanticipated difficulties. When considering requests for postponement of payment obligations, the Committee will consider the request on its merits alone and will base its decision on a thorough analysis of the business's financial statements, especially historical and projected cash flows. Moratoria on principal payments will be granted only for businesses that can evidence the ability to achieve a positive cash flow within a specified time. Payments may be postponed for a maximum period of one year upon the Economic Development Loan Review Committee's consideration. With regard to collateral, the Economic Development Loan Review Committee will consider the merits and potential economic benefits of each request. When appropriate, financing may be secured by liens or assignment of rights in the assets of assisted firms in accordance with the following principles: 1. To encourage the participation of other lenders and investors, the City of Kalispell's lien position may be subordinated and made inferior to liens securing other loans made in connection with the project. 2. In projects involving direct working capital loans, the City of Kalispell, will normally obtain collateral such as liens on inventories, receivables, fixed assets or other available assets of the borrower. Such liens may be subordinated only to existing liens of record and other loans involved in the project. 3. The City of Kalispell may also require security in the form of assignment of patents, licenses, intangibles and other assets with a realizable value. 4. Life and/or disability insurance may be required on each owner or key person(s) of the business or corporation with 20% or more ownership. Such policies will be assigned to the City of Kalispell. 5. Personal guarantees may also be required from principal owners when the Economic Development Loan Review Committee determines that sufficient collateral is not available for the loan. 6. Loan amounts will not exceed appropriate percentage of the value of the collateral offered through the above means. 7. Hazard or liability insurance will be required on all businesses, and policies will have City of Kalispell listed as loss payee. All proceeds from interest payments and loan fees will be utilized in one or all of the following ways: 1. To cover Loan Loss Reserves. 2. To cover administrative costs related to the loan fund programs. 3. Returned to the loan fund to provide funds for additional loans. N 4. Used as collateral and payment to other financial institutions to allow City of Kalispell to borrow short -terms funds for immediate increased capitalization of the loan fund. An appropriate loan origination fee (generally recommended 1 to 3%) will be charged for all loans. At the discretion of the loan review committee, this requirement may be reduced to the most reasonable rate to encourage participation in the program. Title insurance, appraisal cost and all other applicable fees or charges will be billed 100% to the borrower and must be paid at closing. Community Development Department staff will utilize other state and federal programs to the maximum extent feasible either in lieu of or in conjunction with the program in an effort to secure maximum economic benefits to the City of Kalispell. Type of Businesses/Activities Assisted Priority for loan assistance will be given to projects that create employment, existing businesses that are expanding and businesses that show a clear need for gap financing. Consideration will be given for developing a balanced portfolio. Working Cgpital Loans It is the long term goal of this program that no more than 50 percent of a total loan portfolio will be allocated to working capital loan. A minimum of 50 percent of the portfolio will consist of fixed asset loans. Leveraging The overall loan portfolio will leverage a minimum of one private dollar for every one dollar of the City of Kalispell financing Loan Loss Reserve A 2% loan loss reserve shall be established at the creation of each revolving loan fund through a new loan. As the portfolio grows and matures, the reserve percentage will be assessed for adequacy at regular intervals, but no less than annually. As losses occur, the reserve account will be charged with the loss and the reserve account will be adjusted through additional charges to earnings if necessary to keep the reserve account at the current minimum standard. D. REVOLVING LOAN FUND SELECTION CRITERIA 3 1. The City of Kalispell's Economic Development Loan Fund will only provide financing that is otherwise not available. 2. Loan recipients will be evaluated on their ability to create or retain jobs. 3. All loan recipients must be located in the City of Kalispell or within an impact service area to City of Kalispell and must agree to remain so during the life of the loan. 4. The Loan is due and payable, in full, if loan recipient's project was to relocate outside the impact service area that benefits the City of Kalispell. 1 . , Performance as measured by the Revolving Loan Fund Mission Statement will be evaluated by City of Kalispell Economic Development Department and The Economic Development Loan Review Committee. This will be done annually or when needed during the first three years of the loan. If need be, the Economic Development Revolving Loan Fund Plan will be modified to accommodate changes in the need for financing and new opportunities for economic development that may arise in the future. All proposed modifications to the Polices and Procedures will be forwarded to the various funding sources for approval. Procedures governing the USDA, Rural Development, and Intermediary Relending and Community Development Block Grant Program (CDBG) will be submitted to each proper governing body for their approval. PART II: REVOLVING LOAN FUND OPERATIONAL PROCEDURES Loan Review Committee In order to provide financing and lending expertise to the loan review process, an Economic Development Loan Review Committee will be created consisting of 5 members appointed by the Mayor and City Council. The Community Development Department will contribute expertise to the loan review process. The duties of the Economic Development Loan Review Committee will be as follows: 1. Review complete loan application submitted to the Community Development Department of the City of Kalispell, establishing that each loan request has sufficient collateral, financial feasibility and sound management. The Committee will meet monthly or as needed to review loan packages. 2. The Economic Development Loan Review Committee may make the following decisions regarding loan applications. a. Approve the request with standard conditions. b. Approve the request with standard conditions and special contingencies. c. Deny the request with reasons explained. d. Table the request for future consideration. n 3. The Committee may make recommendations regarding revisions to these Policies and Procedures to the Kalispell City Council. Appeal Process (This is being researched by Susan and Sandy). If an applicant should disagree with the decision of the Loan Review Committee, a written appeal can be made to the committee up to 30 days after the date of the first denial letter. The applicant will be asked to attend the meeting and specifically explain why the committee should reconsider the decision. Should the applicant's request be denied a second time, the project will no longer be considered for assistance from City of Kalispell's Economic Development Revolving Loans Funds. B. LOAN PROCESSING PROCEDURES Standard Loan Application Requirements At a minimum all loan applicants must complete the applicable Application Form. Additional information required to complete the application process includes: 1. Existing business - historical financial reports for last three years of operation. 2. Tax returns for last 3 years for the business plus 3 years personal tax returns. 3. Current financial statements (at least the last 3 months). 4. Completed business plan with 3 year projections and the first year month by month cash flow, Pro Forma, income statement(s) and balance sheet(s). 5. General Information Release form 6. Resume of key personnel. Credit Reports All applicants must agree to allow The Community Development Department. to request a credit report on the principals involved in the business by signing an Information Release Form. Appraisals Appraisals will be required for land and building offered as collateral. Appraisals must be less than six months old prior to submittal of the loan application to the Community Development Department. Appraisals of other assets, such as equipment and machinery, may be required if values are questionable. Appraisals must be prepared by either a certified appraiser or by a third party with sufficient knowledge and expertise. The requirement of an appraisal may be waived if the applicant can verify the value of the land and building in some form other than an appraisal and the Loan Review Committee approves the valuation as being valid and acceptable. Loan applicant is responsible to pay appraisal fee up front. If the bank has already requested an appraisal for their approval process, this appraisal may be used by the Community Development Department. Environmental Reviews All construction projects will be reviewed for their impact on floodplains, wetlands, endangered species, water supplies, wastewater treatment and other environmental factors. No project that will have unmitigated harmful impact on the environment will be approved. The environmental review process will consist of the following steps: Step #l: Each project proposed for assistance will be screened relative to Environmental concerns. Step #2: A permanent record of that screening process will be maintained for each Proj ect. Step #3 Will determine a need during phase 1 or as needed depending on the loan program. Standard Collateral Requirements 1. All loans must be adequately collateralized. 2. Title insurance will be required when land and buildings are included in the collateral for a loan. 3. Life and disability insurance on the principals will also be required for proprietorships, partnerships and closely held corporations. 4. All borrowers must carry insurance on assets pledged for collateral, such as buildings and equipments, in an amount no less than 80% of replacement value. 5. The City of Kalispell will require security agreements for each loan and UCC financing statements will be filed in every case where equipment, machinery, accounts receivable, inventory and other assets are pledged as collateral. 6. Personal guarantees will be required from individuals who own more than twenty percent of the outstanding stock of a corporation. Personal guarantees (full or limited, secured or unsecured) may be secured from the officers and directors of closely held corporations if necessary. Standard Equity Requirements 1. Generally borrowers should have a debt/equity ratio no larger than 5 to 1. 2. For new businesses, the equity requirement must be in the form or cash or equivalent. 3. Existing business seeking financing for expansion or working capital must demonstrate a debt/equity ratio of no more than 5 to 1 after the financing has been injected. Cel Other Requirements 1. Relocation: If CDBG funds are used, these funds cannot be used to move a company within the State. Use of Federal funds will not be allowed for a business relocation from one state to another. However consideration will be given to a business that has sufficient written evidence describing the need for relocation. 2. Flood Hazard Insurance: Prior to approval of any project in a designated flood hazard area, the borrower will be required to obtain Flood Hazard Insurance, which must be approved prior to the disbursement of funds. 3. Civil Rights: The City of Kalispell will assure equal opportunity in its lending practices by advertising loan opportunities, contacting existing minority businesses in the area and disseminating information to local minority organizations, tribal councils and reservation business committees. The Community Development staff will also inform local lenders about the availability of the loan programs and its guidelines. The City of Kalispell will insure that borrowers do not discriminate against employees or applicants for employment by including in each application a statement of compliance with all applicable state and federal laws and regulations. The City of Kalispell will monitor the employment practices of approved borrowers on a regular basis, but not less than annually. Periodic checks may be made to verify that the project hiring and training plan is being implemented properly. Complaints alleging discrimination will be referred to the Montana Human Rights. 4. Commission: No applicant will be denied a loan on the basis of race, color, national origin, religion, age, handicap or sex. 5. Access for the Handicapped: If the proposed borrower requests financing for a construction project that will have public access, assurances of accessibility for the handicapped must be provided. 6. Davis Bacon: In the event funds will be used for construction purposes subject to Davis -Bacon and Federal Labor Standards requirements, appropriate procedures will be followed to comply with these laws. Loan Write -Up When an application submitted to The Community Development Department is determined complete, the Community Development staff will prepare a loan write-up, which will be submitted to the Economic Development Loan Review Committee at least one week before the Committee meets to consider the loan request. The loan write-up will include a narrative discussing how the proposed project does not replace private lender financing sources. All other pertinent documents supporting the loan request will be presented to the review committee. The loan write-up will also explain how the proposed project meets the criteria for assistance from the applicable loan fund and summarize the anticipated benefits (job creation and retention, tax base, indirect benefits to other businesses, etc.). All borrowers will receive a written notice of the loan decision. If the loan is denied, the reasons for denial will be clearly stated and borrowers will be informed of their appeal rights. 7 C. DECISION PROCEDURE Loan Ranking of Applications Each Revolving Loan Fund application for assistance will be ranked in five categories, a Best ranking will equal 5 points; an Average ranking will equal 3 points; and a Poor ranking will equal 1 point. Any application receiving less than a `Poor" score in a category is ineligible for the benefits of this program and will be rejected. 1. Business proposal is appropriate for the City and this program. Best = 5 Average = 3 points Poor = 1 point. 2. Number of jobs created or retained. Greater than 10 jobs = 5 points Between and including 5 and 10 jobs = 3 points Less than 5 jobs = 1 point 3. Cost per job. Less than or equal to $15,000/jobs = 5 points. $15,001 — $25,000 = 3 points. $25,001 plus = 1 point. 4. Business proposal is financially feasible. 5. Percent benefit to Low and Moderate Income (LMI) Persons, only when CDBG funds are used. 80% - 100% = 5 points. 60% - 79% = 3 points. 51% - 59% = 1 point. Note: Compute by dividing the number of jobs created for and or retained by LMI persons by the total number of jobs created and/or retained. 6. Area economic impact: Project which has the broadest potential for impact on other area businesses, or real estate values, or school enrollments or agriculture etc, will be given a "Best = 5 points". Other applications will be ranked against the best application, with the next best receiving an "Average = 3 points". Within 60 calendar days from the application deadline, the Committee will provide a written evaluation of each loan application, accompanied with a recommendation for loan approval or rejection. i 1 1 : ' 1 General Closing Requirements Upon approval of the loan by The Economic Development Loan Review Committee, staff will prepare the loan agreement, a draft of which will be submitted to the City Attorney for review. The loan agreement will describe the document needed to confirm equity capital injection and private lender financing. Equity capital will be evidenced by a balance sheet and in the case of subordinated notes, the applicable agreements. Depending on the circumstance, independent confirmation of the balance sheet may be required. Private lender financing will be evidenced by a binding commitment letter. When the loan approval is signed, a loan closing date will be scheduled. Loan Closing Documentation Requirements 1. A list of all required loan documents will be provided to the borrower prior to loan closing. 2. Lien and title searches will be completed prior to loan closing and execution of security documents. 3. City of Kalispell will file all pertinent documents to perfect the City's lien position, immediately upon loan closing. 4. The following is a list of STANDARD closing documents but not limited to to the following: Promissory Note Amortization Schedule Hiring and Training Plan (if needed) Trust Indenture/Mortgage Security Agreement UCC Financing Statement Personal Guarantee Federal Labor Standards E. ADMINISTRATIVE PROCEDURES Loan Files and Documentation Economic Development Revolving Loan Fund loan files will contain the following information: a. Completed loan application with attachments and information release form. b. Loan write-up and minutes of Economic Development Loan Review Committee and Community Development meetings at which the loan was discussed. c. Borrower eligibility analysis. C d. Conflict of interest statements signed by each Loan Review Committee member. e. Loan Agreement, with correspondence from attorney regarding the agreement. f. Environmental assessment. g. Documentation of other project financing. h. Historical and current financial statements and tax returns. i. Personal financial statements (required for personal guarantors and all individuals signing the promissory note. j. General correspondent and copies of newspaper articles related to the proj ect. k. Loan closing statement and summary of loan processing expenses (i.e., legal fees, title insurance, filing costs, etc.). 1. Copy of promissory note . Loan Disbursement Requirements Borrowers must prepare a request for loan funds that describes the use of the funds requested and to which is attached supporting documentation. Funds will be provided only when they are actually needed. The loan agreement will describe any special requirements governing the disbursement of loan funds, especially as related to working capital and construction loans. F. LOAN SERVICING PROCEDURES Loan Payment and Collection Borrowers will make monthly payments to City of Kalispell, in accordance with the promissory note, executed at loan closing. All loan payments will be deposited immediately into the RLF account. Past due payments will be assessed at a 5% late fee, or $25 whichever is less. Fee will be assessed 10 days after due date of the loan payment. Loan Monitoring 1. All borrowers must submit financial statements, consisting of a balance sheet, income statement and annual tax return to the Community Development Department annually. 2. New borrowers will be required to submit monthly financial statements for the first 6 to 8 months. 3. The Community Development Department will receive copies of all insurance notifications sent to borrowers. 4. UCC filings will be renewed every five years. The collateral backing a loan will be assessed every three years. lul 5. The Community Development staff will visit the site of each borrower at least twice a year and conduct an annual loan review. Late Payment Follow-up Borrowers will be notified immediately if their monthly loan payment is not received by the 10t1' day after which payment is due. If payment is not received within 30 days, Community Development staff will meet with the borrower to assess the situation. Loans that are over 90 days in arrears will be declared in default and appropriate recovery action will be taken if the loan is not brought current. If the borrower request postponement of the payment obligation, the request will be submitted to the Loan Review Committee immediately. Write -Offs In the event all efforts to bring a loan current, fail and a default is declared by the Loan Review Committee it will be recommended to write-off the loan when all possible value from loan collateral has been realized. The amount lost, if any, on the loan will be determined and will be withdrawn from the loan loss reserve to restore the base capital of the loan fund. Compliance Procedures Prior to submitting the annual RLF Report, the Community Development Director will conduct an internal review to ensure compliance with all grant requirements and to assess the effectiveness of ongoing monitoring efforts. Corrective actions, if needed, will be discussed with the City Council when the Annual Report is completed. Community Development staff will publicize the availability of the loan programs through the local news media, brochures and public meetings. Visits will be scheduled with area lenders, accountants, chambers of commerce, local government officials and civic groups to explain the program. G. SOURCES OF FUNDING TO COVER ADMINISTRATIVE COSTS The administrative cost of the loan fund programs will be provided from interest earned on loans, loan service fees, income generated by contracted services and general administrative funds already available to the City. The City Council will approve an administrative budget for the organization prior to the beginning of each calendar year. The Community Development Director and Re -Development Manager will prepare the proposed budget. 11