BOARD AGENDA: 1/13/09 ITEM: 7.1 THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE AGENCY FROM: HARRY S. MAVROGENES BOARD EXECUTIVE DIRECTOR

Transcription

1 BOARD AGENDA: 1/13/09 ITEM: 7.1 THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE MEMORANDUM AGENCY FROM: HARRY 1 S. MAVROGENES BOARD EXECUTIVE DIRECTOR SEE BELOW DECEMBER 19,2008 SUBJECT: REVISIONS TO THE SMALL BUSINESS LOAN PROGRAM GUIDELINES RECOMMENDATION It is recommended the Redevelopment Agency Board approve revisions to the guidelines for the Small Business Loan Program (SBLP) to better serve the needs 7 of businesses in Downtown, Neighborhood Business Districts (NBD), Strong Neighborhood Initiative (SNI) Areas and Neighborhood Business Clusters (NBC). OUTCOME Approval of the proposed revised SBLP guidelines (Attachment B) will allow the SBLP to more effectively support the ground-level retail small businesses in the Redevelopment Project Areas and will leverage and support other Redevelopment small business technical assistance programs that support the Agency's Downtown and Neighborhood Business District retention and expansion efforts. BACKGROUND On June 25,2002, the San Jose City Council and Redevelopment Agency Board approved the SBLP and the set of lending guidelines (Attachment A) that set forth the terms by which the SBLP would make loans to small retail businesses. The purpose of the program was to strengthen and improve the retail environment in the Downtown and NBD's. Additionally, new strategies to diversify the mix of retail tenants in the project areas were implemented by staff. The availability of financing to these small businesses was an important factor to successfully implement these strategies. SBLP Guidelines

2 Redevelopment Agency Board SBLP GUIDELINES Page 2 December 19,2008 Funding for SBLP was provided by the Redevelopment Agency?om 2002 until July The Office of Economic Development (OED) administered the SBLP through a Project Services Memorandum. The SBLP will continue to be funded by non tax increment sources of revenue, which will allow SBLP funds to be used for operating and business expenses not typically eligible for Redevelopment assistance. In July 2008, the SBLP program and the staff responsible for administering the program were transferred to the Agency, along with the Enterprise Zone program and staff. The Agency now administers both the SBLP and the Enterprise Zone program. These programs are key tools used by staff for outreach and retention programs. - to attract and retain businesses. Other tools used include the Facade Improvement Program, the Signage Grant Program, retail business planning technical assistance and restaurant operations advisory services. Staff meets with businesses, assesses their needs and refers them to the appropriate technical assistance program. The SBLP was initially approved for an allocation of $2,000,000 in FY as stated in Attachment A. However, the actual amount funded by the Agency was $500,000 due to budget limitations. Twelve loans to downtown retail businesses were immediately issued for a total of $490,000 in FY In FY an additional $250,000 was made available and eight additional loans were approved. In FY a final $250,000 was made available to the SBLP program, for a total funding since inception of $1,000,000. Principal and interest pay-offs, plus the FY allocation, constitute the current fund balance available for loans of approximately $750,000; sufficient for approximately 15 loans. To date, the SBLP has provided twenty loans to retail businesses. Eleven of the loans have been repaid in full and eight loans are active and making monthly payments. Only one loan, to a restaurant, has defaulted and, as a result, is now being reviewed by staff and the City Attorney's office. Relative to other small business loan programs, the default rate of the SBLP is considered very low. The Small Business Administration (SBA) fully expects up to 50% default after the first two years of operations, while banks typically operate with an expected default rate of 1% to 3% for their high-risk small retail business loans. A loan default rate of 15% is typically considered to be an acceptable risk for community-based commercial loan programs. As noted, only one of the 20 loans issued to date by the SBLP has defaulted and it is still under review. The SBLP program's relative success is primarily due to the careful assessment of the businesses applying for loans. SBLP Guidelines

3 Redevelopment Agency Board SBLP GUIDELINES Page 3 December 19,2008 ANALYSIS The SBLP Lending Guidelines were approved in 2002 by the City Council and the Agency Board. These guidelines set the terms and conditions for the program with respect to loan rates, terms, lending amounts, eligibility, use of funds and how the program is administered and operated. Currently SBLP loans can be used for any normal business uses such as equipment, inventory, fixtures, furniture, supplies, refinancing high interest credit card business debt and working capital. The loans cannot be used for payment of taxes, personal notes of the owners, real estate financing or speculative investments. These loans can be combined with other loan programs such as the Opportunity Fund (previously known as Lenders for Community Development), the Small Business Administration loan programs, Facade Improvement Program Grants or Sign Grants. To better respond to market changes and the needs of retail businesses, the SBLP would benefit from greater flexibility with respect to specific lending terms, especially in light of recent fluctuations in the financial market. Staff is recommending the following revisions to the guidelines to better serve the needs of businesses and respond to market changes: Expand the service area to include Strong Neighborhood Initiatives (SNI) - areas and Neighborhood Business Clusters (NBC). Increase the maximum amount that can be loaned from $40,000 to $50,000. The maximum term of the loan will remain unchanged (up to ten years). Authorize the Executive Director to adjust the interest rate as warranted by market conditions up to a maximum of three percent. Require that a business loan recipient remain in one of the City's Redevelopment Project Areas dulillg the term of the Loan. If the business moves out of the project area, the note is subject to being recalled. This provision is necessary to ensure that Redevelopment funds are being used to benefit Redevelopment Areas as required by California Community Redevelopment Law. Expand the underwriting criteria used to evaluate the loans. It is recommended the SBLP loan use the five "C's" of credit used by the banking industry in evaluating each application. The criteria include cash flow, SBLP Guidel~nes

4 Redevelopment Agency Board SBLP GUIDELINES Page 4 December 19,2008 capacity, credit, collateral and character. More emphasis will now be placed on capacity and cash flow to provide a platform for extending technical and financial assistance. Expand the pool of applicants toajlow loansmo>ki-up & s&~s.~ current^-~ guidelines require that a retail business must be in operation at least one year to be eligible for a loan. This policy has precluded the eligibility of many start-up businesses that are located in or want to locate in Redevelopment Areas and can demonstrate they are a good credit risk. By using the 5 "Cs" of credit analysis previously mentioned, risk levels with start-up businesses can be minimized. In addition, extensive technical assistance will be provided to the start-up business during the loan application process. Create a new loan advisory committee titled the Credit Advisory Committee (CAC) to replace the Funding Advisory Board and to assist staff in reviewing and approving loan applications. The CAC will be comprised of the Agency's Director of Finance, the Director of Downtown Management and Industrial Development and the Senior Vice President of Focus Bank, which is located in the Downtown. Focus Bank was selected due to its 20 years of experience making loans to small businesses and, in particular, the Vice-President's prior experience on another community-based credit committee. In the event that Focus Bank's Vice President becomes unable to serve on the CAC, the Agency's Executive Director will select a qualified replacement. The size of the committee is kept small and the loan review process streamlined to ensure that businesses can be served in a timely and efficient manner. EVALUATION AND FOLLOW-UP Updates will be provided to the Agency Board as part of the Agency's Quarterly Projects Status Report. PUBLIC OUTREACHIINTEREST The proposed action does not meet any of the criteria for added outreach efforts. This staff report will be posted on the Agency's website and made available for public review in the Agency's public lobby area. 0 Criterion 1: Requires Council action on the use of public funds equal to $1 million or greater. SBLP Guidelines

5 Redevelopment Agency Board SBLP GUIDELINES Page 5 December 19,2008 Criterion 2: Adoption of a new or revised policy that may have implications for public health, safety, quality of life, or financial/economic vitality of the City. Criterion 3: Consideration of proposed changes to service delivery, programs, or staffing that may have impacts to community services and have been identified by staff, the Board or Council, or a community group that requires special outreach. COORDINATION This proposed action has been coordinated with the Agency's General Counsel. FISCAL IMPACT Funding is provided in the Agency's Adopted FY Capital Budget, Merged Area, Small Business Loans Program, Downtown Business Improvement & Loans project line. Any increase in loan interest rates will result in higher interest income. Not a project. p HA Y S. MAVROGENES Executive Director SBLP Guidelines

6 ATTACHMENT A GUIDELINES APPROVED BY CITY COUNCIL 2002 THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE SAN JOSE OFFICE OF ECONOMIC DEVELOPMENT Small Business Assistance Loan Program The San Jose Office of Economic Development and the San Jose Redevelopment Agency propose a $2 million Loan Fund to provide 3% financing up to $40,000 per loan with flexible terms for retail businesses located in the Downtown Core or in Neighborhood Business Districts that have experienced declining or stagnant sales during the last year. The program intends to fill a financing gap, not currently available from other governmental or private sector loan programs, for small businesses to stabilize or to undertake expansion plans in a more difficult economic environment. The program is being funded by the San Jose Redevelopment Agency and administered by the San Jose Office of Economic Development. This program is an extension of their existing Development Enhancement Special Fund, but with more flexible underwriting criteria. Loans are reviewed and approved by the Fund Advisory Board, which is comprised of banking, small business, and community and city representatives. Technical Assistance will be provided to any applicant who requests it. The Entrepreneurial Center, the Hispanic Chamber of Commerce, the Vietnamese Chamber of Commerce or the Office of Economic Development staff will provide technical assistance. Eligibility Criteria Any retail small business operating in the Downtown Core or a Neighborhood Business District (West San Carlos, Story Road, Alum Rock, East Santa Clara, Monterey Corridor, The Alameda or Japantown) is eligible to apply. Only those businesses that have been in operation for a minimum of one-year in an eligible area can apply. A business must be able to show that it is: 9 Currently breaking even; or 9 Profitable; or 9 Were profitable for a majority of the last three years and having a net loss for no more than the last six months.

7 An applicant must either be a tenant, a subtenant, or the owner of the space they are in. An applicant must meet the Small Business Administration (SBA) definition of a small business based on total annual receipts or number of employees (excerpt attached). No more than one application will be permitted for any given business owner. An applicant must have a written plan on how they intend to stabilize or grow their revenue. If an applicant is applying for more than one loan from OED, only one application will be required. The Fund Advisory Board and OED will review and, if approved, underwrite the loans as one assistance whenever possible. Applicants should contact OED staff before submitting their SBLP application to discuss whether they may be eligible for other loans or small business assistance. Loan Terms Loans can be for between $1,000 and $40,000 and will carry an interest rate of 3% simple interest. Loans can be for between two and ten-year terms. The first two years may be interest only, at the discretion of the Fund Advisory Board. The loan will become due upon the business ceasing to operate in the City of San Jose, any violation of the loan agreement, or at the end of its term. Loan payments will be due at the first of each month, if payments are not received by the 10" of the month a late charge of 5% will be added to that monthly payment. The business may be asked to provide collateral of at least 50% of the loan amount. The collateral may be personal or real property. The SBLP loan will take second or third position to any private existing lien. There are no fees or points for this loan. If collateral is not available, the Fund Advisory Board may approve the loan without collateral. Applicants must submit: 9 Application; page plan that describes the process for achieving business stabilization or growth (must include current and anticipated future revenue and expenses); and 9 A budget for utilization of the SBLP funds. 9 Applicants must also submit a copy of their lease/sublease/ownership documentation and most recent IRS tax returns.

8 Eligible Uses for Loan Proceeds Loan proceeds can be used for: Purchasing inventory and equipment; Physical improvements to a retail store; Repayment of credit card or other high interest debt that is directly attributable to the business (up to 50% of the loan amount); Advertising or promotional campaigns; Overhead, including staff salaries and rent (not to exceed 50% of the loan amount); Other reasonable costs that enable the business to meet its articulated growth goals.

9 ATTACHMENT B SBLP GUIDELINES - DECEMBER 2008 THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE Small Business Assistance Loan Program The San Jose Redevelopment Agency (SJRA) is providing a small business loan program (SBLP) for the purpose of assisting small storefkont retail businesses in Redevelopment Project Areas only. Small storefront retail business in the Downtown, Neighborhood Business Districts (NBD), Strong Neighborhood Initiatives (SNI) and Neighborhood Business Cluster (NBC) Redevelopment Project Areas in San Jose are eligible to apply. The maximum loan amount is $50,000. This special loan can be combined with other private and governmental loans or grants to fund business assets. Loan proceeds can be used for equipment, working capital, inventory, furniture & fixtures, and other reasonable businesses uses consistent with the goals of increasing sales tax revenues in San Jose and creating an economically viable small business climate in downtown and neighborhoods. Eligibility Criteria Any small storefi-ont retail business, start-up or existing, located in the Downtown, NBD, SNI and Neighborhood Business Cluster (NBC) Redevelopment Project Areas is eligible to apply. An applicant must either be a tenant, a subtenant, or the owner of the space they are in. An applicant must meet the Small Business Administration (SBA) definition of a small business based on total annual receipts or number of employees. Applicants must provide financial and other related documentation as described in the loan application checklist. Applicants must have a written business plan on how they intend to stabilize or grow their revenues. Applicants must be able to show that the business meets one of the following criteria: (a) currently breaking even or making a profit; (b) was profitable for a majority of the last three years and has a net loss for no more than the last six months; or (c) is a start-up business that is a good credit risk. The Agency's Credit Advisory Committee will review applications based on the Agency's underwriting guidelines. SBLP assistance may be combined with other forms of assistance.

10 Loan Terms Loans can be for any amount up to $50,000. The maximum loan term is ten years. There are no fees or points for these loans. Loans will have a fixed interest rate set by the Agency Executive Director, not to exceed three percent (3%) per annum. Accrual of interest and commencement of repayment of the Loan may be deferred for up to 60 days for the convenience of the Agency. The first two years may be interest only, at the discretion of the Credit Advisory Committee. The loan will become due upon the business ceasing to operate in one of the Redevelopment Areas, or for any violation of the loan agreement. If the business is sold or closed, the loan is due and payable in full. Loan payments will be due at the first of each month; if a payment is not received by the loth of the month a late charge of 5% of the amount due will be added to that monthly payment. The business may be asked to provide collateral of at least 50% of the loan amount. The collateral may be personal or real property. The SBLP loan may take second or third position to any private existing lien. If collateral is not available, the Credit Advisory Committee may approve the loan without collateral. Personal or Corporate guarantees may be required. Eligible Uses for Loan Proceeds Funds provided under the SBLP may be used for the following types of uses: Equipment Working capital Inventory Furniture & Fixtures Refinancing high interest credit card debt used for business Other reasonable business uses. Funds provided under the SBLP may NOT be used for the following types of uses: Speculative investments Shareholder loan repayments Financing tax payments Real Estate financing. Additionally, funds provided under the SBLP may not be used for "construction, alteration, demolition, installation, or repair work done under contract".

11 Financial Guidelines All loans should meet the following underwriting standards, unless waived at the time of approval by the Credit Advisory Committee: Fully amortizingjat least 1 : 1 positive cash flow coverage/collateral Ratio 1.5:1/Current ratio 1: llleverage 4: 1 maximum. The Applicant should not have filed a Bankruptcy within the past three years.