Wisconsin Basic Economic Development Course

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Economic Development Finance. Review Types of Programs and Tools Tax Increment Financing TIF 101 Using TIF to Finance Projects Case Studies in Project Financing Financing Incentives from a Banker's viewpoint Questions. Review Types Ken Stubbe EDC of Manitowoc Co.. Private Sector Len

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Wisconsin Basic Economic Development Course

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1. Let me start off congratulating you on your 6’th Avenue street project! Many communities don’t take the time to celebrate their successes…and that IS important. As a Community Development Specialist at the Center for Community & Economic Development, U.W. Extension, I have spent the last 9 years of my life living in Middleton, Wisconsin. In my spare time, I serve as an Alder for the city of Middleton. That volunteer experience has been an incredible learning experience for me and has provided me with a unique perspective on today’s topic…What is our Role as elected officials in Economic Development.. While I had constituent who recently referred to me as a “carpet bagger” that should go back to where I came from, I have spent the majority of my life within a few miles of the place I now call home. Middleton is located right next to Madison, that city described by Wisconsin Republican governor Lee S. Dreyfus while campaigning in 1978 as "70 square miles surrounded by reality“ While I suspect many of you agree with that description, Mayor Dave Chezlevich has recently fired back by saying that Madison is growing….so reality must be shrinking. I have also spent time in Burnett County in N.W. Wisconsin and Grant county in S.W. Wisconsin. I think my work in small towns has kept me well grounded in reality. The communities and the people within those communities that I have worked with in Extension over the past 23 years have taught me as much as I might have shared with them. I would like to acknowledge my colleague, Alex Crockford, who is the Agricultural Agent for the U.W. Extension office here in Langlade County. I believe Alex is here? Normally I am in a County supporting the work of the Community Resource Development Agent, but I think many of you probably know that this position no longer exists in Langlade County. Instead, I was invited here today by the Community Development Advisory Board…a joint city/county board working to improve the economic climate in Langlade County. While I think its helpful to bring in outsiders on occasion for an external perspective of your community, there is also great value in having that local educator in the county office that understands the local issues.Let me start off congratulating you on your 6’th Avenue street project! Many communities don’t take the time to celebrate their successes…and that IS important. As a Community Development Specialist at the Center for Community & Economic Development, U.W. Extension, I have spent the last 9 years of my life living in Middleton, Wisconsin. In my spare time, I serve as an Alder for the city of Middleton. That volunteer experience has been an incredible learning experience for me and has provided me with a unique perspective on today’s topic…What is our Role as elected officials in Economic Development.. While I had constituent who recently referred to me as a “carpet bagger” that should go back to where I came from, I have spent the majority of my life within a few miles of the place I now call home. Middleton is located right next to Madison, that city described by Wisconsin Republican governor Lee S. Dreyfus while campaigning in 1978 as "70 square miles surrounded by reality“ While I suspect many of you agree with that description, Mayor Dave Chezlevich has recently fired back by saying that Madison is growing….so reality must be shrinking. I have also spent time in Burnett County in N.W. Wisconsin and Grant county in S.W. Wisconsin. I think my work in small towns has kept me well grounded in reality. The communities and the people within those communities that I have worked with in Extension over the past 23 years have taught me as much as I might have shared with them. I would like to acknowledge my colleague, Alex Crockford, who is the Agricultural Agent for the U.W. Extension office here in Langlade County. I believe Alex is here? Normally I am in a County supporting the work of the Community Resource Development Agent, but I think many of you probably know that this position no longer exists in Langlade County. Instead, I was invited here today by the Community Development Advisory Board…a joint city/county board working to improve the economic climate in Langlade County. While I think its helpful to bring in outsiders on occasion for an external perspective of your community, there is also great value in having that local educator in the county office that understands the local issues.

2. Economic Development Finance Review Types of Programs and Tools Tax Increment Financing – TIF 101 Using TIF to Finance Projects Case Studies in Project Financing Financing Incentives from a Banker’s viewpoint Questions Quizes, are one format that I like to use with groups as a means of starting a discussion. Think about yourself or the people in your community. In a lot of our small communities people tend to think of the long term residents. And in fact we have a number of residents who have lived their entire life in one community. However, the census data reveals that about half of the households turn over in a five year period (51% for the nation, 46% for the State of Wisconsin but 62% for Langlade county). Quizes, are one format that I like to use with groups as a means of starting a discussion. Think about yourself or the people in your community. In a lot of our small communities people tend to think of the long term residents. And in fact we have a number of residents who have lived their entire life in one community. However, the census data reveals that about half of the households turn over in a five year period (51% for the nation, 46% for the State of Wisconsin but 62% for Langlade county).

3. Review Types —Ken Stubbe EDC of Manitowoc Co. Private Sector Lending Institutions Debt – Commercial Lenders, various funds Equity – venture capital, FFA, Angels, stock, investors Locating private financial sources and financial structuring are key roles for local economic developers

4. Review Types Public Sector Involvement Driven by economic growth, job goals and public benefit goals Aims to fill financing gaps and lower project risk to help attract other financing partners Used to lower project costs, increase equity, increase project competiveness Strings are always attached Loans typically offer lower costs, flexible terms, deferrals, lower collateral requirements, etc.

5. Review Types Local, State and Federal Financing Tools Direct lending (see RLF, TIF, grants) RLF Tax Increment Financing - TIF Micro-loans State financing programs (loans, training grants, loan loss reserve, research grants, guarantees, tax credits, etc.) Federal financing programs (SBA, EDA, SBIR, HUD, CDBG, USDA, tax credits, earmarks, targeted grants, loan guarantees, municipal revenue bonds, etc.) Foundations Sources and Uses

6. Review Types Business Financing Working capital Fixed assets Growth Small company vs. large company Seasonality Export financing Mature firms

7. TIF 101 – Doug Venable City of Janesville (ret.) What is ‘tax increment financing”? Commonly referred to as “TIF District” or “TID” TIF is the primary economic development tool for local governments TIF Law approved by WI Legislature in 1975 TIF Law found in section 66.1105 Wis. Statutes City makes investments in TIF districts to attract new development and increase tax base

8. TIF 101 Four primary TIF districts types: Blight elimination. Rehabilitation or conservation. Industrial development. Mixed Use (can have all three elements plus residential development). Town TIF § 66.1106 (16) Environmental TIF § 66.1106

9. TIF 101 How Does TIF Work? City creates TIF in 2000 Base value of $900,000 (red line) is taxed by all taxing bodies City invests in TIF to attract new development value (blue line) City uses taxes on new TIF value to recover TIF investments

10. TIF 101 Within TIF District taxes on “base value” are shared: City and Library - 30% School District - 36% County - 26% Tech College - 8% Within TIF District, 100% of the taxes on new “incremental value” are kept by the TIF fund to repay TIF investments.

11. TIF 101 The fundamental concept of tax increment financing is that without the City’s investments within a TIF district, there would be no new private development that creates new tax base. Therefore, the TIF district recaptures 100% of the property taxes on new development value within the TIF district to recover the City’s TIF investment.

12. TIF 101 How are TIF Districts Created? City Staff prepares TIF Project Plan Plan Commission posts Class 2 Notice, holds public hearing on TIF Project Plan and makes recommendation to the City Council City Council approves TIF Project Plan and determines TIF boundary Joint Review Board, with representatives from all taxing jurisdictions must approve TIF Project Plan. Process takes about 60 days

13. TIF 101 Types of TIF Districts Maximum Life Blighted Area District 27 years Rehabilitation District 27 years Industrial District 20 years Mixed-Use District 20 years City can make investments in a TIF District up to 5 years before maximum life of TIF District.

14. TIF 101 TIF Project Plan can be amended to revise budget, add new projects, and/or add or subtract territory TIF Plan Amendment requires Plan Commission hearing, City Council approval, Joint Review Board Approval (can be completed in about 45 days) TIF capacity equals 12% of city equalized value TIF dissolved once all project costs have been recovered or upon reaching maximum life, whichever comes first.

15. TIF 101 TIF maximum life can be extended up to 3 years if TIF revenues will not cover all TIF costs TIF life can be extended 1 year after all TIF costs have been recovered if TIF funds are used to improve local housing stock and at least 75% of funds are targeted to affordable housing. -- § 66.1105 (6) 1

16. Using TIF on Projects WI Stat. 66.1105 2.(f) defines “Project Costs:”

17. Using TIF on Projects WI Stat. 66.1105 2.(f) defines “Project Costs:”

18. Using TIF on Projects Industrial TIF districts Purchase land for industrial park Install streets, water & sewer utilities, storm detention ponds, rail infrastructure Selling land for less than market value or cost Reimbursing industry for expansion costs Low interest or forgivable loans for equipment or employee training Professional service contract to market industrial park for business attraction

19. Using TIF on Projects Blight or Redevelopment TIF Districts Land & building acquisition, building demolition, relocation, to assemble sites for redevelopment Purchase, renovate, sell existing building for adaptive reuse project Relocate or upgrade municipal utilities needed to serve redevelopment project Construction of parking facilities needed to support redevelopment activities

20. Using TIF on Projects Blight or Redevelopment TIF Districts Reimburse developer for agreed upon building renovation costs like elevator for multi-story projects Low interest or forgivable loans to restore historic storefronts Low interest or forgivable loans to renovate upper floors for re-use Professional service contract to market downtown for business attraction

21. Using TIF on Projects Basic TIF Math Municipal Tax Rate For Janesville the tax rate is $20.58 per $1,000 or 2.058% of equalized value $1,000,000 in new TIF value generates $20,580 in TIF incremental revenue annually. Loan Constant for Cost of Capital Annual principal and interest payment for each $1.00 borrowed – a function of interest rate and term. Janesville uses 10-year G.O. Notes at 4.0% interest Loan constant equals 0.1214942 Principal x Loan Constant = Annual Debt Service $1,000,000 x 0.1214942 = $121,494

22. Using TIF on Projects How much TIF investment will Project Support? or 16.9%

23. Using TIF for Projects

24. Using TIF for Projects Possible Deal Structures for TIF Incentive – assume a 25,000 SF building valued at $40/SF Sell a 4.4 acre industrial site costing $36,000/acre for $1.00. -- $158,400 Company guarantees minimum annual tax of $20,580 Sell a 2.0 acre site costing $36,000/acre for $1.00 and an $86,400 forgivable loan linked to job creation commitments. Company guarantees minimum annual tax of $20,580 Loan Constant for 10 yr at 4.0% = .1214942 $86,400 x .1214942 = $10,500 annual Debt Service Job commitment of 20 jobs For each job created – forgive $525 in annual debt service

25. Using TIF for Projects Deal Structure for $1,000,000 renovation of an existing $100,000 downtown building. City purchases building for $100,000 and spends $58,400 doing asbestos abatement – Sells building to developer for $1.00. Developer guarantees value after renovation of $1,100,000 and minimum tax bill increase of $20,580. City reimburses developer for $58,400 in asbestos abatement and builds a 30 car parking lot adjacent to project for off-street parking needs -- $100,000. (same developer value and tax guarantees)

26. Using TIF for Projects Deal Structure for $1,000,000 renovation of an existing $100,000 downtown building. City reimburses developer for $58,400 in asbestos abatement and agrees to pay developer 50% of increased property taxes for 10 years. (Pay-as-you-Go). If value increases $1,000,000, City pays $10,290 to developer and keeps $10,290 for other TIF projects. If value increases $800,000, City pays $8,235 to developer and keeps $8,235 for other TIF projects. Developer guarantees minimum increased tax payment of $58,400 x .1214942 x 2 = $14,190. ($690,000 increase in property value)

27. Summary on TIF Create TIF districts around ‘anchor’ project. Phase expenditures with private development. Know your tax rate and loan constant. Secure TIF investment with Developer Agreement. Developer Agreement needs min. tax guarantee. Have City Council agreed upon investment policies up front, before developer knocks on door. Don’t use 20 years of increment on project. Use later year TIF increments to do projects that don’t create a lot of value.

28. Financing Alternatives Case Studies Timothy J. Schneider COO, Co-Founder Investors Community Bank

29. Plastic Molders, Inc. History: Woman and minority owned manufacturer. Company has outgrown current 15,000 sq.ft. facility. An existing 45,000 sq. ft. is available. It is anticipated that a portion of the building will be leased out while the business grows into the additional space. The project will create 23 FTE’s in a community of 8M. In addition to the 504 project, the company needs to refinance debt, which is not on a reasonable term and purchase new equipment.

31. Plastic Molders, Inc. Project Description: $950M acquisition of a building $250M in building improvements $400M debt refinance $120M purchase and installation of equipment Issues to be addressed Need for multiple funding sources Amount of building that will be leased to 3rd party Refinance Minority / woman owned business Job creation

33. Plastic Molders, Inc. 504 Project

35. Plastic Molders, Inc. Entire Project

36. Medical Clinic Office Expansion Downtown redevelopment of Blighted site $6 MM Const. Cost $500M of New Equipment needed Combination Financing TIF available

37. Medical Clinic Office Expansion

39. Medical Clinic Office Expansion Programs Utilized Midwest Disaster Assistance Industrial Revenue Bonds US Small Business Administration 504 Program City Revolving Loan Fund TIF

40. MDA/IRB Program Benefits MDA/IRB Southern half of State declared disaster area allowing for non industrial related projects to qualify Current variable rate available in a publically sold IRB=2.157%

41. SBA 504 Program Benefits $2 MM Cap currently Limited Downpayment=10% Long Term Fixed Rate in 2nd Mtg position Long Term Fixed Rate currently= 4.861% 20 Years

42. City RLF Program Benefits Low Fixed Rate financing at 3.5% Fixed for 7 Years on Equipment No downpayment

43. TIF Program Benefits City has agreed to provide $616,000 of direct TIF funding to the project No owner downpayment

44. Medical Clinic Office Expansion Economic Benefits New Construction is improving a blighted area of downtown Business is bringing 65 well paying jobs to distressed downtown with plans to add another 55 jobs in the next few years through growth of the their outlying clinics

45. Industrial Business Expansion Rural Community with population less than 50,000 Plant expansion from 50,000 sq ft to 100,000 sq ft Expected employment increase of 100 jobs $2,500,000 building addition cost $1,000,000 of additional equipment needed

46. Industrial Business Expansion

47. Industrial Business Expansion Program Benefits Bank will receive an 80% USDA Business and Industry Guaranty for their loan of $4.572MM Ability to obtain a long term fixed rate for the client on this project in the range of 6% for the 20 year term and amortization Customer will have a 20 year term credit facility versus conventional financing where a bank may only provide up to a 5 year term

48. Industrial Business Expansion Economic Benefits 100 new well paying industrial jobs added Business able to grow their plant and equipment with bank being protected with an 80% government guaranty USDA program utilized in less than 50,000 population area

49. Various Programs SBA 504 Limited downpayment as low as 10% Long Term Fixed Rates for 30-40% of the project Bank in a first lien position at no greater than 50% of project-Good credit enhancement program, especially for commercial owner occupied real estate or equipment No bank refinance allowed Current 504 limit $2MM ($4MM for Industrial projects), but proposed to go to $5MM

50. Various Programs USDA Business and Industry Government guaranty program for projects up to $25 MM Secondary market available Utilized in Rural areas Allows for refinance of existing bank debt as part of the program use

51. Various Programs City RLF Low fixed rates Many times no equity/down required Assists bank in funding the project

52. Various Programs SBA 7A Most commonly used SBA program Up to 90% guaranty under current rules Fees subsidized by government under current stimulus Up to $2MM, but proposed to go to $5MM Will allow for refinance of existing debt under certain standards Secondary for these loans as well

53. MDA/IRB Industrial Revenue Bonds are an option on any project where capital assets are being purchased or constructed Over $2MM is most cost effective Very low variable rate available in the public sale market Bank needs a qualified letter of credit to support(can be challenging in todays banking environment) MDA only available in 30 counties thru 2012

54. Questions? Class questions of presenters? From a banker’s perspective, how can a economic developer use public financing programs to enhance a typical deal? From an economic developer’s perspective, what makes a project a good deal for the community?

55. Contact Info Timothy J. Schneider Chief Operating Officer Co-Founder Investors Community Bank Manitowoc, WI 920-686-5604 [email protected]

56. Contact Info Doug Venable Retired Director of Economic Development City of Janesville [email protected] Kenneth Stubbe Executive Director Econ Dev Corp of Manitowoc County [email protected] www.edcmc.org

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