Transcript Document

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Module #9 – Funding Community
Development
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Introduction & Overview
A.
Connecting the Dots in Community Economic
Development (CED)
1. Build Wealth and Value
a.
b.
c.
Neighborhoods
City
State
2. Prioritized Projects
a.
b.
c.
Strategic Planning Outgrowth
Assigning Responsibility
Identifying Resources
3. Project Opportunities
a.
b.
c.
Attract Investment
Debt and Equity
Better the Community
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Introduction & Overview
B.
Finance: Fuel to Facilitate Programs &
Projects
1. Programs
a. Longer Timeframes
b. Multiple Initiatives
2. Projects
a. Better Defined Time Horizons
b. Clearer Benchmarks
3. Focus for Leaders
a. Match Financial Resources With…
b. Project Opportunity
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Introduction & Overview
B.
Finance: Fuel to Facilitate Programs &
Projects
4. Mix of Resources
a. Private
b. Public
c. Nonprofit
5. Amount of Resource Intervention
a.
b.
c.
d.
Risk Profile of Opportunity
Feasibility and Value
Extent of Conventional Sources
Size of Funding Gap
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Framework of CD Finance
A. Why Community Development Finance?
1. Project Life Cycle
a.
b.
c.
d.
Gestation
Growth
Maturity
Stabilization
2. Cycle Characteristics
a.
b.
c.
Growing Risks
Differing Levels of Commitment
Different Players or Sources
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Framework of CD Finance
A. Why Community Development Finance?
3. Funding Gaps Inevitable
a.
b.
c.
d.
e.
Frustration
Overwhelmed
Do Nothing
Procrastination
Missed Opportunity
4. Fundamental Truth About Community
Development Lending and Investment
a.
b.
c.
d.
Financial Matter First
Not Social
Projects Must Pencil Out
Fundamentally Sound
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Framework of CD Finance
B.
What is Community Development Finance?
1.
2.
Not Tool for Fixing Flawed Projects
a. Faulty Business Model
b. Dismal Location
c. Non-marketable Concept
d. “Lipstick on the Pig” Principle
Market Punishes Poor Projects
a. Financial Damage
b. Credibility Damage
c. Financial Partners Exit
d. Community Leadership Frustration
e. No-win Proposition
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Framework of CD Finance
B. What is Community Development Finance?
3. Sharp Pencil Due Diligence
a.
b.
c.
d.
Equity Already Committed
Collateral Value of Assets
Reliable Cost Estimates
Expertise and Capabilities
4. Focus of Community Development Finance
a.
b.
Fill Private Market Resource Gaps
Ensure Capital Available When Private Sources
Unwilling or Unable
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Framework of CD Finance
C. What is Role of Finance in Community
Development Process?
1. Finance Only One Component
a.
b.
Necessary But Not Sufficient
Other Elements Needed
2. Fundamentally Sound Local Economy
a.
b.
c.
Growth Even if Slow
Demand for Goods and Services
Room for New Market Entrants
3. Availability of Suitable Workforce
a.
b.
Educated and Trained
Possible Misuse of Incentives if Lacking
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Framework of CD Finance
C. What is Role of Finance in Community
Development Process?
4. Community Infrastructure
a.
b.
c.
d.
Physical
Technical
Educational
Financial
5. Infrastructure vs. Projects
a.
b.
c.
Both/And Not Either/Or
Priorities/Choices/Trade-offs
Success and Sustainability
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Framework of CD Finance
D. Alternatives for Filling Funding Gaps
1. Adapting Existing Private Financial Institution
Activities
a.
b.
c.
d.
Include Community Development as Part of “Normal”
Business
Reduce Market Imperfections
Good Project and Market Information for Due
Diligence
Regulatory Dilemma: Safety and Soundness vs.
Community Reinvestment
2. Creating Alternative Funding Sources/Financing
Entities
a.
b.
c.
Public, Private and Nonprofit Sources
See Appendix A
Caution: Substitution of Capital
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Who Are the Major Players in
Community Development
Finance?
A. Public Sector
1. Broad Policy Goals
2. Promote Public Good
3. Regulations to Ensure Equity and Fairness
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Who Are the Major Players in CD Finance?
B.
Federal Level
1. Department of Housing & Urban Development (HUD)
2. Economic Development Administration (EDA)
3. Department of Agriculture (USDA)
4. Environmental Protection Agency (EPA)
5. Small Business Administration (SBA)
6. U.S. Treasury
a. Community Development Financial Institutions
(CDFI)
b. New Markets Tax Credits (NMTC)
c. Historic Tax Credits (HTC)
d. Low Income Housing Tax Credits (LIHTC)
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Who Are the Major Players in CD Finance?
C. State Level
1.
2.
3.
4.
5.
Piggyback Conduits for Federal Programs
Revolving Loan Funds (RLF)
Equity Capital and Subordinated Debt
Targeted Tax Credits
Industrial Revenue Bonds
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Who Are the Major Players in CD Finance?
D. Local Level
1. Piggyback Conduits for State and Federal
Programs
2. Revolving Loan Funds (RLF)
3. Technical Assistance
4. “One-Stop Shops”
5. Municipal Bonds
a.
b.
General Obligation Bonds
Revenue Bonds
6. Tax Increment Financing
7. Tax Abatements
a.
b.
Full or Partial
P.I.L.O.T.’s
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Who Are the Major Players in CD Finance?
E. Private Sector
1. Primary Motivations
a.
b.
c.
Make Profit
Create Value
Build Wealth
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Who Are the Major Players in CD Finance?
F.
Commercial Banks and Thrifts
1. Community Vested Interests
a.
b.
c.
d.
e.
Attract Deposits
Make Loans
Declining Community Damages Balance Sheet
and Profitability
Good Business
Community Reinvestment Credits
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Who Are the Major Players in CD Finance?
F.
Commercial Banks and Thrifts
2. Business Decision Framework
a.
b.
c.
d.
e.
f.
g.
Continued Evolution
Globalization of Finance
Cycles of De-Regulation/Re-Regulation
Tough Competition
Tight Margins
Limited Latitude for Mistakes
Balance Sheet Management
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Who Are the Major Players in CD Finance?
G. Individual Investors
1. Usually with Local Vested Interests
2. Individuals or Groups
a.
b.
Providing Equity
Legal Entities (LLC’s, Partnerships, etc.)
3. Institutional Investors
a.
Linked to Local Wealth or Institutions
4. Property Owners
a.
b.
Strategic Parcels or Buildings
Possible Resistance
i.
ii.
Legal Impediments
Tax Liability
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Who Are the Major Players in CD Finance?
H.
Nonprofit Sector Players
1. Mission Not Profit-Driven
a.
b.
But Must Make Money
Operating Excess
2. Not Extensions of Government
a.
b.
c.
Facilitated by Tax Exempt Status
Conduits for Federal, State and Local Government
Funding
Prolific Growth Particularly in Community
Development Sector
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Who Are the Major Players in CD Finance?
H. Nonprofit Sector Players
3. Community Development Corporations (CDC’s)
a.
b.
c.
Housing and Commercial Revitalization Focus
Improve Quality of Life, Attract Jobs and Private
Investment
Entrepreneurial CDC’s Create Profit-Focused
Subsidiaries
4. Bank CDC’s
a.
b.
c.
Special Form Sanctioned for Nationally Regulated
Banks
Profit or Nonprofit Status
Co-Labor with Community-based CDC’s
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Who Are the Major Players in CD Finance?
H.
Nonprofit Sector Players
5.
Faith-based Organizations (FBO’s)
a.
b.
6.
Partner with Bank CDC’s in Housing and Commercial
Revitalization Projects
Provide Financial and Technical Assistance to Build
Sustainability
Foundations
a.
b.
c.
d.
e.
Privately Endowed
Corporate Endowed
Mission Focused Programs
Highly Competitive Grants Process
Program Related Investments (PRI’s)
1.
2.
3.
Direct Equity Investment
Below Market Subordinated Debt
Not Grant But Discounted Return Investment
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Structuring Community Development
Finance Opportunities
A.
Debt and Equity Mix
1. Both Expect Returns
2. Both Take Many Forms
3. Driven by Nature and Value of Assets
Financed
4. Pure Equity Has No Fixed Return
a.
b.
c.
Cash
Ownership Interest Contribution
Tax Credit Purchase
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Structuring Community Development
Finance Opportunities
A.
Debt and Equity Mix
5. Debt Has Fixed Cost by Contract
a.
b.
c.
Repay Principal Plus Interest
Structured: Term vs. Amortization
Pledge of Collateral as Security
a.
b.
d.
e.
Additional Guarantees May Be Necessary
Credit Enhancements
Default to Foreclosure
Performance Covenants
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Structuring Community Development
Finance Opportunities
B.
Value: The Underlying Criteria, What Drives It and
Measuring It
1.
Market Value of Assets Important
a.
b.
c.
2.
Four Determinants of Value
a.
b.
c.
d.
3.
Funding Decisions
Funding Gaps
Finance Interventions and Enhancements
Demand
Utility
Scarcity
Transferability
Quantifying Value
1.
2.
Appraisal
Market and Economic Feasibility Analysis
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Structuring Community Development
Finance Opportunities
C.
Measuring, Compensating and Pricing Risk
1. Risk Avoidance vs. Risk Mitigation
a. Avoidance Impossible
b. Mitigation By Strategic Structuring
c. Sharing vs. Shifting Risks
2. Credit or Business Risk
a. Revenue Shortfalls to Cover Operating and
Financing Costs
b. Net Operating Income (N.O.I.)
c. Debt coverage Ratio (DCR)
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Structuring Community Development
Finance Opportunities
C.
Measuring, Compensating and Pricing Risk
3. Liquidity or Marketability Risk
a. Convert Loan to Cash
b. Secondary Markets
c. Loan Participations
4. Maturity Risk
a.
b.
c.
d.
Long vs. Short Loan Repayment
Value Erosion Due to Inflation
Increased Default Risk
Term vs. Amortization Period
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Structuring Community Development
Finance Opportunities
C.
Measuring, Compensating and Pricing Risk
5. Interest Rate Risk
a. Loan Value Decrease Due to Market Interest
Rate Changes
b. Floating or Variable Rate Loans to Mitigate
6. Cost of Debt
a.
b.
c.
d.
Risk Free Rate
Plus: Risk Premiums
Market Competition
Compressed Risk Compensation
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Putting Community Economic Development
Projects Together:
The Strategic Business Plan
A.
Define Strategic Intent and Goals
1.
2.
3.
4.
5.
6.
Guides Entire Process
Goals and Objectives
How Achieved?
By Whom?
By When?
Plan “B”?
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Putting Community Economic Development
Projects Together:
The Strategic Business Plan
B.
Describe Organizational Plan and Identify Key
Personnel
1.
2.
3.
Invest in People First; Opportunities Second
People’s Gifts, Talents, Abilities Make Projects Happen
Identify Strategic Players
a.
b.
c.
4.
Why on the Team
What They Will Do
What They Will Bring
Legal Structure of Deal
a.
b.
c.
Ownership Interest of Players
Controlling Players
Key Individuals
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Putting Community Economic Development
Projects Together:
The Strategic Business Plan
C.
Provide Analysis of Project’s Market Dynamics
1.
Market-driven Rationale for Project
a.
b.
2.
Sources of Market Demand
a.
b.
c.
3.
Does It Fill a Niche?
What Is Market or Business Risk Profile?
How Deep?
Where Are They?
How Will They Support Project?
What is the Competition?
a.
b.
c.
d.
Pricing Structure
Observed Demand
Strengths and Weaknesses
Existing and Future Competitors
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Putting Community Economic Development
Projects Together:
The Strategic Business Plan
D.
Describe and Fully Document Project’s Financing
Structure
1.
2.
Detailed Start-up Capital and Operating Costs
Five-Year Operating Budget and Cash Flow Statement
a.
b.
c.
d.
3.
Sources and Uses of Funds
Funding Schedule By Source
Maximum Initial Commitments
Willingness, Ability and Cost to Increase Commitment
Quantify Returns for Investors
a.
b.
c.
Cash-on-Cash
Internal Rate of Return
Non-Financial Returns
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Putting Community Economic Development
Projects Together:
The Strategic Business Plan
D.
Describe and Fully Document Project’s Financing
Structure
4. Estimate Cash Burn Rates
a.
Strategies for Filling Cash Needs
5. Indentify Exit Strategies
a.
b.
c.
Take-out Permanent Loans
Refinancing
Disposition of Assets
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Putting Community Economic Development
Projects Together:
The Strategic Business Plan
E.
Describe Project Implementation and
Stakeholder/Participant Risks and Rewards
1.
Key Questions for Stakeholders
a.
b.
c.
2.
Why Are We Doing This?
What Are We Getting Out of This Project?
How Do We Get Out of This Project – Successfully?
Establish Periodic Benchmarks
a.
b.
Voluntary vs. Contractual Deadlines
“Drop-Dead” Dates
a.
b.
Non-Performance Penalties
Who Is Held Responsible?
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Putting Community Economic Development
Projects Together:
The Strategic Business Plan
E.
Describe Project Implementation and
Stakeholder/Participant Risks and Rewards
3. Identify Project Rewards for Stakeholders
a.
b.
c.
d.
Private Investors: Returns and Value Appreciation
Private Lenders: Interest Earnings and Regulatory
Compliance Credits
Local Economic Developers: Job Creation and
New Capital Investment
Local Government: Tax Revenue Growth
and Infrastructure Enhancements
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