CITY OF LOS ANGELES CALIFORNIA

Transcription

1 RICHARD L. BENBOW GENERAL MANAGER September 2, 2011 Jobs and Business Development Committee Los Angeles City Hall C/0 City Clerk Room 395, City Hall CITY OF LOS ANGELES CALIFORNIA ANTONIO R. VILLARAIGOSA MAYOR COMMUNITY DEVELOPMENT DEPARTMENT 1200 W. 7TH STREET. I I LOS ANGELES, CA Date: _ ~ Submitted in~f2 Q ~Committee Council File No:~Jftt=11 V ~ itemno.:~.-- Deputy:~-~-~--~ Council District Number: All Contact Pesons & Phone Nos: Ninoos Benjamin Phillip Vargas Jr Economic Development Division REPORT BACK: CITY OF LOS ANGELES SMALL BUSINESS LOAN PROGRAM The General Manager of the Community Development Department (COD) of the City of Los Angeles (City) reports back at your request on the status of the City of Los Angeles (Program), recommends restructuring and requests for the authorization(s) necessary for implementation. RECOMMENDATIONS: The General Manager of COD, requests that the Mayor and City Council: 1. AUTHORIZE the General Manager of COD, or designee, to negotiate termination of the City Loan Agreement C , dated November 30, 2009, as amended on January 25, (Loan Agreement), with the Valley Economic Development Center, Inc. (VEDC), in accordance with the intent of this transmittal, subject to the approval of City Attorney as to form and legality; 2. AUTHORIZE the General Manager of COD, or designee, to negotiate and execute contracts to restructure the City of Los Angeles Small Business Loan program (Program), for the marketing and loan origination of Program by the LA BusinessSource Centers, including VEDC (Loan Originators); credit and regulatory underwriting transactions under the Program by COD, credit approval of all recommended loans under the Program by a panel of independent credit committee AN EQUAL EMPLOYMENT OPPORTUNITY- AFFIRMATIVE ACTION EMPLOYER

2 City of Los Angeles 2 September 2, 2011 (Credit Committee}, and administration of loan documentation and loan servicing by a qualified third party loan servicer (Loan Servicer), subject to the approval of City Attorney as to form and legality; 3. AUTHORIZE the General Manager of COD, or designee, to negotiate and execute amendments to contracts with the U.S. Department of Housing and Urban Development (HUD) relative to the restructuring of Program, subject to the approval of the City Attorney as to form and legality; 4. AUTHORIZE the General Manager of COD, or designee, to prepare Controller instructions, with the concurrence of the GAO, including any future technical adjustments relative to the intent of this transmittal, and instruct the City Controller (Controller) to implement these instructions; 5. AUTHORIZE the Controller to: a. Establish new account OOH625 and appropriate up to $14,040,000 within Fund 43F of COD Section 108 Loan Guarantee Program; and b. Expend funds upon proper request of the General Manager of COD, or designee. BACKGROUND As per Council File No , the Program was approved by the City Council on December 17, 2008 and by Mayor on December 23, Subsequent to HUD granting its conditional approval of Program, COD entered into Loan Agreement with VEDC. As per the Loan Agreement, VEDC is the conduit borrower to lend the City's borrowed funds pursuant to Section 108 Loan Guarantee Program (Section 108) to small businesses on a citywide basis. The loan funds may be used only for reasonable and eligible costs and expenses of each small business, in accordance with the Code of Federal Regulations (CFR), terms of the Loan Agreement, and consistent with the conditional approval of Program by HUD. To date, utilization summary of Program is as follows: Business Borrowers Universal Art Gallery Alco Truck & Auto Alameda Truck & Van Powerline Control Sys. Total Commitment $260, $175, $75, $450, $960, Total Funded $81, $26, $37, lli450, $595, Amortization $6, $26, $37, $18, ;1288, Available $178, $0.00 $0.00 $0.00 $178,098.08

3 City of Los Angeles 3 September 2, 2011 After more than eighteen months, the Program has not met the initial expectations, which was a condition of the Loan Agreement. Currently, $14,040,000 portion of the Program remains unutilized. The identifiable causes for not meeting the initial goals and expectations are as follows: Small businesses' overwhelming need for credit is for revolving loans to fund working capital and on-going business activities. The Program, however, because of funding restrictions imposed by the Section 108 program, is limited to provide only secured term loans and only for the eligible activities as per In light of the markets contraction and significant slack in the form of excess production capacity, businesses have lacked the confidence and demand driven pre-requisite for making the new investments. This includes the small businesses that have deferred expansion of production capacity or modernization of equipment, which could have utilized the secured term loan offering of this Program. The Program was designed to compensate for the vacuum created by banks and the stringent collateral requirements by the Small Business Administration (SBA). In the mid-201 0, SBA however did revamp its lending programs materially which expanded the volume of loans made. Also, most private business lenders lowered the extent of rigidities applied in the underwriting of loans for viable small businesses. The all-in pricing (front end fee and spread over index) of loans offered under the Program were exorbitantly high and not competitive in the market place; except for the very high risk borrowers that were willing to borrow at any cost. However, the high risk borrowers rarely met the underwriting conventions required by CFR and the collateral requirements of the Loan The Program has not been widely introduced on a citywide basis. The Program was designed to fill-in the vacuum created by the financial markets, which remain unable to provide credit to going-concern small businesses that have viable expansion and financing needs. Therefore, the Program was offered to provide for the financing "need" of viable small businesses that private lenders, including the Small Business Administration (SBA), failed to accommodate. Nonetheless, the Program is not intended and as per CFR shall not compete with the banks, private lenders and loan programs administered by SBA. The loan applicants under this Program must demonstrate that private banks and other plausible lenders have rejected their viable financing applications. In addition, the Program can hardly be utilized by start-up businesses, unless the business applicants can demonstrate their ability to meet: (i) Collateral requirements, (ii) test of Profitability, and (iii) the promise of Job Creation.

4 City of Los Angeles 4 September 2, 2011 RESTRUCTURING TERM SHEET In light of the obstacles identified, summary of the restructured Program will be as follows: Business Loans: Business loans offered under the Program are secured term loans and not the revolving loan type. The loans may be disbursed in one or multiple draws, in frequency of not more than four draws. Borrowers: The business applicants for loans under the Program shall operate within the boundaries of the City of Los Angeles. The annual gross revenue of business applicants under the Program shall not exceed $10 million. Loan Amounts: Purpose: Origination: Underwriting: The amount of business loan for each applicant may range from $50,000 to $450,000. The purpose and use(s) of business loan must meet Eligible provision of 24 CFR LA BusinessSource Centers. Upon receipt of initial loan applications from small businesses, CDD will conduct initial screening. Viable applications will be requested to submit full application, including financial statements, projections, tax returns, and other commercially reasonable documents that are required for underwriting a business loan. CDD will underwrite all transactions both for the credit and regulatory aspects and produce a recommendation report for each and every qualified transaction. Credit Committee: HUD Approval: Underwriting package for the COD recommended transactions will be submitted for consideration and approval by the Credit Committee, to consist of minimum three and maximum five qualified credit professionals, selected by COD, which are familiar with credit underwriting aspects of business loan transactions. Each and every business loan is subject to final approval by HUD, as provided in the condition of approving the Program by HUD.

5 City of Los Angeles 5 September 2, 2011 Loan Fee: Admin Fee: Interest Rate: Amortization: Collateral: One and half percent (1.5%) of business loan amount is payable from the initial disbursement of the loans. The Loan Fee, when received, will be split 2/3 to Loan Originator (1 %) and 1/3 to the City (0.5%). One percent (1.0%) of business loan amount is payable from the initial disbursement of the loans. The Admin Fee is payable in full to the Loan Administrator, as defined herein. Interest rate for each business loan will be fixed at the yield for ten (10) year U.S. Treasury Notes plus spread of two percent (2.0%) per annum, payable monthly in arrears. The outstanding principal amount of business loans shall amortize monthly based on an agreed to five to ten year schedule, to be determined on a case by case basis. Collateral for business loans may be a combination of the following: Accounts Receivable- 35% total Collateral Value 0-30 days: 1 00% days: 85% days: 65% days: 20% Business Inventory- 35% total Collateral Value Production Equipment- Percentage contribution to Collateral Value: Existing Equipment- up to 30% of current book value New equipment~ up to 100% of the purchase price Real Assets- 1 00% total Collateral Value Incl., Real Estate; and Excl., Single Family Dwellings Maximum Ratio of Loan to Total Collateral Value is 65% Quarterly monitoring of Collateral value is a requirement of the Program. Subordination: Going Concern: City loan, only when secured by real estate, may be subordinated to a first mortgage loan, subject to market value of such real estate, based on a current market value appraisal report, not to exceed sixty five percent (65%). The borrower shall be a going concern business, evidenced by profitable operation, having cash flows that will be sufficient to meet the service of business loans by ratio of 1.25: 1.00.

6 City of Los Angeles 6 September 2, 2011 Guaranty: Job Creation: Loans will have either full recourse to the principle(s) of the borrowing entity, or shall be guaranteed by an independent guarantor, to be determined on a case by case basis. Business borrowers shall commit to creation of one new permanent full-time equivalent (FTE) job per $35,000 of business loan amount received. In addition, at least 51 percent of the new jobs should be made available to low to moderate income persons. During term of the business loan, all job openings in the borrowing entities should be listed in the COD administered WorkSource Centers. Environmental: If the business loans were to be secured by real assets, including commercial real estate, transactions will be subject to: a) A satisfactory Phase 1/11 environmental assessment report(s), indicating without qualification that the property is clean and clear of hazardous material; b) Compliance with the California Environmental Quality Act (CEQA); and c) Compliance with National Environmental Policy Act (NEPA). Loan Administrator: COD shall procure a qualified Loan Servicer to produce pre-approved loan documents for all business loans approved under the Program. CDBGIMPACT The business loans will be funded by borrowings of the City from HUD pursuant to Section 108 Loan Guarantee Program of the Federal Housing and Community Development Act of The borrowings of the City from HUD are up to five times the current fiscal year's entitlement of the CDBG entitlement grant provided to the City. The City's debt payment obligation to HUD is a function of its receivables from the business loans made for economic development purposes. In case of a default by any of the business borrowers, there will be a mismatch of the payables and receivables, and thus, the necessity for meeting this shortfall from the CDBG as provided by the applicable provision of CFR and the City's promissory notes made to HUD. In case of a default by any of the business borrowers, the City's remedies are subject to terms of each City loan contract, collateral documents and the other underlying documentation. The remedies available to the City may include foreclosure and liquidation of Collateral, pursuit of recourses and guarantees, and adjudication of the City's rights.

7 City of Los Angeles 7 September 2, 2011 NECESSARY AND APPROPRIATE STATEMENT The Program, as recommended for restructuring, is deemed necessary and appropriate unde t e federal assistance guidelines and will benefit the small business community wit n e City Los Angeles. HARD L BENB~f General Manager