GUIDELINES fr the RE-USE OF LOCAL REVOLVING LOAN FUNDS (RLF) COMMUNITY DEVELOPMENT BLOCK GRANT ECONOMIC DEVELOPMENT PROGRAM (CDBG-ED) MINNESOTA INVESTMENT FUND STATE OF MINNESOTA DEPARTMENT OF EMPLOYMENT AND ECONOMIC DEVELOPMENT BUSINESS AND COMMUNITY DEVELOPMENT DIVISION OFFICE OF BUSINESS FINANCE March, 2014
INTRODUCTION The Cmmunity Develpment Blck Grant Prgram (CDBG) administered by the Minnesta Department f Emplyment and Ecnmic Develpment (DEED) is funded annually by the U. S. Department f Husing and Urban Develpment. DEED s Office f Business Finance receives 15% f the states CDBG annual allcatin fr the purpse f furthering ecnmic develpment in the nn-entitlement areas f Minnesta. This ecnmic develpment set aside is perated within the Minnesta Investment Fund (MIF) prgram, which is supplemented with state funds. (Fr purpses f this dcument, the prgram will be referred t as CDBG-ED and the requirements apply nly t the federal funds.) HUD establishes the CDBG regulatins and requirements fr the prgram and has versight respnsibilities fr the use f these funds. CDBG-ED funding is prvided t a unit f general purpse lcal gvernment. (The lcal unit f gvernment will be referred t as the lcal gvernment ). In turn, the lcal gvernment prvides a lan t a business t assist with its start up r expansin. DEED allws the cmmunity t retain the lan repayments, including principal and interest. Histrically, lcal gvernments chse t use the repayments t capitalize a Revlving Lan Fund (RLF) fr ecnmic develpment purpses nly. It has been fund that fr many reasns, (i.e., number f years it has taken t accumulate enugh cash t actually use the funds, staff turnver, lst paperwrk, cnfusin ver the federal requirements, lack f prjects, etc.) many RLF s have been inactive. Frtunately, CDBG rules prvide flexibility n the reuse f these funds. T assist lcal gvernments in the administratin f their RLF, CDBG-ED funds can be used fr the fllwing: 1) Revlving Lan Fund (RLF) fr Business Financial Assistance; 2) Other CDBG Eligible Activities; and 3) Assistance t a Lcal Develpment Organizatin (LDO). These guidelines will prvide general guidance n the requirements fr the reuse f the funds. Fr in-depth infrmatin the cmmunity must refer t regulatins psted by HUD n their website. Befre determining hw these funds will be used, it is strngly recmmended a thrugh needs assessment f the cmmunity be undertaken. Thrugh this prcess, the cmmunity will have a better understanding f its cmmunity and ecnmic develpment needs and will be psitined t effectively address these needs. 2
SECTION I Revlving Lan Fund (RLF) fr Business Financial Assistance The establishment f a Revlving Lan Fund within a cmmunity is ne f several tls available t encurage business develpment. When establishing a RLF, the lcal gvernment shuld begin by determining the ecnmic develpment needs f their cmmunity frm which they can develp plicies, prcedures and guidelines in respnse t thse needs. There is n reasn t reinvent the wheel as there is a wide array f RLF guidelines, samples f applicatin frms, and legal dcuments n the web; r DEED s applicatin(s) may be used. Upn cmpletin f the plicies and prcedures, the grantee must submit them t DEED fr apprval. When a RLF is capitalized with repaid CDBG-ED lan repayments, the cmmunity takes n a majr respnsibility, as it will be functining as a lender. The lending respnsibilities are similar t thse f cmmercial lenders and include lan marketing, applicatin prcessing, credit analysis, lending decisins, lan clsing and dcumentatin, and lan servicing, in additin t meeting all f the federal, legal and administrative requirements f the CDBG-ED prgram. Because the RLF dllars are public funds, the lcal gvernment must demnstrate t the taxpayers (as well as DEED and HUD) that their funds are being used wisely and fr a public benefit. If a prject fails, there may be a lss f public funds and external scrutiny f the lcal gvernments lending practices. It is imprtant fr the lcal gvernment t mitigate these risks thrugh prudent screening, underwriting, structuring and mnitring f business lans. It is strngly recmmended that administratrs f the RLF take RLF training thrugh rganizatins such as the Natinal Develpment Crpratin (NDC) r the Cuncil f Develpment Finance Agencies (CDFA). Lcal gvernments with CDBG-ED RLF s must keep the fllwing in mind: The RLF never lses its federal identity. When lans are repaid, all CDBG regulatins and requirements that applied during the term f the riginal prject(s) will apply t the RLF. Sme f these requirements include, meeting a natinal bjective, public benefit standards, citizen participatin, envirnmental review and Davis-Bacn (prevailing wage). The nly exceptin is when lan repayments are made t a qualified Lcal Develpment Organizatin (See Sectin III). In additin, the grantee must reprt t DEED n the use f the RLF n an annual basis as lng as the funds cntinue t revlve. In cmpliance with HUD regulatins and state rules, the State f Minnesta has chsen t permit the lcal gvernment receiving CDBG-ED funds t establish a revlving fund t carry ut specific, identified activities. A revlving fund, fr this purpse, is a separate fund (with a set f accunts that are independent f ther prgram accunts) established t carry ut specific activities which, in turn, generate payments t the fund fr use in carrying ut such activities. These payments t the revlving fund are prgram incme and must be substantially disbursed 3
frm the revlving fund befre additinal grant funds can be requested frm the State fr revlving fund activities. Such prgram incme is nt required t be disbursed fr nnrevlving fund activities. Interest earned n the revlving fund is prgram incme. When using the RLF fr Business Financial Assistance, the cmmunity s RLF will cntinue the same activity that the riginal CDBG-ED assistance was addressed financial assistance t a fr prfit business that will create r retain permanent jbs, f which at least 51% will be taken by r made available t LMI persns. Hwever, in additin t making a direct lan t a business, there are several ther activities that are eligible fr funding. Eligible Activities The financial assistance t businesses can be prvided in the frm f grants, lans, lan guarantees, r ther assistance determined by the cmmunity and detailed in their RLF plicies. Fllwing are the activities that CDBG-ED RLF s can be used fr: Direct Financial Assistance t Businesses Direct financial assistance can be prvided t private, fr prfit businesses that intend t create r retain permanent jbs. Funds under this activity can be used t assist a business with the fllwing: Prject based land acquisitin; Building cnstructin and ther imprvements; Renvatin f an existing building; Purchase f capital equipment; Purchase f an existing building; Site imprvements; Wrking capital; Railrad spurs r similar extensins; Sme types f dwntwn cmmercial rehabilitatin. Retail peratins are eligible. Fr example, a lw interest lan can be prvided t a business t assist with the purchase f equipment as part f a larger prject. Infrastructure This includes public wrks prjects necessary fr the lcatin, expansin, and/r retentin f a specific fr-prfit business(es). Examples f eligible infrastructure prjects are: streets, rads, water, sewer, bridges, sidewalks, parking facilities, drainage systems, railrad spurs, etc. Micrenterprise Assistance The RLF may prvide direct financial assistance, including lans, grants, etc. and technical assistance t assist with the start up r expansin f micrenterprise businesses. A micrenterprise is defined as a cmmercial enterprise that has 5 r fewer emplyees, f which 1 r mre is the wner. 4
Business Incubatrs Fr the develpment, rehabilitatin r prperty imprvement f a building r the actual cnstructin f a building t huse the incubatr; and/r Prvide assistance t businesses lcating within the incubatr. Jb Training This invlves prviding skill building classes t emplyees r ptential emplyees and can be an imprtant part f an ecnmic develpment prgram. It can include: Training unskilled, lw-incme persns fr specific jbs fr which they have been hired and which require skill levels beynd what they nw have thrugh a custmized training prgram; Re-training existing emplyees f a business as part f a prject which qualifies as jb retentin. Technical Assistance (TA) CDBG-ED funds can be used t prvide TA in either f the fllwing ways: T prvide training t the lcal gvernment t carry ut the ecnmic develpment activities; and T prvide technical assistance and training directly t businesses n tpics such as business planning r accunting. Administratin Administratin is a ne-time cst fr items directly related t making the lan (cnsultant r legal fees, etc.), but cannt include staff time. Csts will be capped at 10% f the lan amunt r $5,000 whichever is less. If a lan shuld default at a later date, legal expenses and cllectin fees wuld be eligible, but please cntact yur DEED lan fficer in this instance. If a cnsultant is hired, the lcal gvernment must fllw the prcurement prcess. Other Requirements Ecnmic Develpment prjects funded by the lcal gvernment with CDBG-ED funds are subject t a wide range f requirements. The lcal gvernment is respnsible t ensure that the peratin f the RLF is in cmpliance with a whle hst f federal and state laws, regulatins and executive rders. Fllwing are the majr requirements. Additinal infrmatin n these and all ther requirements are detailed n HUD s website. Natinal Objective All prjects must meet ne f three natinal bjectives: Benefit t persns f lw and mderate incme (LMI); T aid in the preventin r eliminatin f slum and blight; T meet ther cmmunity develpment needs having a particular urgency because existing cnditins pse a serius and immediate threat t the 5
health r welfare f the cmmunity. In the CDBG-ED categry, nearly all prjects will meet the Benefit t LMI bjective. Public Benefit Standards These standards ensure that at least a minimum level f public benefit is btained frm the expenditure f CDBG-ED funds. Use f these standards is mandatry. This requirement is separate frm the Natinal Objective requirement that 51% f the jbs created r retained be taken by LMI persns. Basically, the standards are a cst per jb r cst per gds and services calculatin used t determine if the financial assistance is apprpriate. Anti-pirating f Jbs CDBG-ED funds cannt be used fr emplyment relcatin activities r jb pirating. Jb pirating refers t the use f federal funds t lure r attract a business and its jbs frm ne cmmunity t anther. Specifically, CDBG-ED funds may nt be used t assist businesses if: The funding will be used t assist directly in the relcatin f a plant, facility r peratin; and The relcatin is likely t result in a significant lss f jbs in the labr market area frm which the relcatin ccurs. Envirnmental Review All prjects are subject t the Natinal Envirnmental Plicy Act (NEPA) which seeks t avid adverse impacts n the envirnment by mandating careful cnsideratin f the ptential impacts n any prject assisted with federal funds. All prjects must have an apprpriate envirnmental review cmpleted prir t prject csts being incurred. Citizen Participatin The lcal gvernment must include the public in decisins abut use f the RLF, as well as each prject t be funded. Acquisitin/Displacement and Relcatin Requirements Applies t any acquisitin f real prperty when CDBG-ED funds are used fr the acquisitin. Davis Bacn and Related Acts Includes the Federal Cntract Wrk Hurs and Safety Standards Act, and the Cpeland Anti- Kickback Act; Applicable when mre than $2,000 f CDBG-ED dllars are used fr cnstructin, remdeling, site develpment and equipment installatin. Guidelines and Objectives fr Evaluating Prject Csts and Financial Requirements. These underwriting guidelines are designed t assist the lcal gvernment t select ecnmic develpment prjects that are financially viable and will result in the mst 6
effective use f CDBG-ED funds. The use f these guidelines is vluntary; hwever, lcal gvernments electing nt t use these guidelines are expected t cnduct basic financial underwriting f prjects funded under this eligibility categry. There are six criteria that must be evaluated: Prject csts are reasnable; All surces f prject financing are cmmitted; T the extent practicable, CDBG-ED funds are nt substituted fr nn-federal financial supprt; Prject is financially feasible; T the extent practicable, the return f the wner s equity investment will nt be unreasnably high; and T the extent practicable, CDBG-ED funds are disbursed n a pr-rata basis with ther finances cmmitted t the prject. 7
SECTION II Other CDBG Eligible Activities The cmmunity may braden the use f the RLF by establishing a prgram that supprts ther cmmunity develpment needs which cmbines a wide array f activities. These activities must cntinue t meet the requirements f the CDBG prgram. When cnverting CBDG-ED t CDBG- SCDP, the Prgram Incme can nly be used as leverage fr pen active grants r n new applicatins t SCDP. The cmmunity must receive apprval frm DEED s Office f Business Finance if it chses t use sme r all f its CDBG-ED lan repayments fr Other CDBG Eligible Activities. The written request must include the dllar amunt t be transferred and a plan fr the use f the funds. The request will be reviewed by DEED s Office f Cmmunity Assistance (SCDP) staff) and if apprved, the cmmunity will transfer the agreed upn amunt frm its RLF t a Prgram Incme accunt. The administratin f the Prgram Incme is then transferred t DEED s Office f Cmmunity Assistance staff. Federal Objective All prjects must meet ne f three natinal bjectives: Benefit t persns f lw and mderate incme (LMI); T aid in the preventin r eliminatin f slum and blight; T meet ther cmmunity develpment needs having a particular urgency because existing cnditins pse a serius and immediate threat t the health r welfare f the cmmunity. Eligible Use f Funds fr Other CDBG Activities : Cmmunity Develpment is the primary fcus f these funds. Fr mre infrmatin see the SCDP A-Z guide n the DEED website. Yu can chse ne r a cmbinatin f the fllwing activities. Husing Activities-rehabilitatin f husing which includes Lead Based Paint and histrical evaluatin and remediatin. Hmewner Rehabilitatin t assist existing hmewners with rehabilitatin f their hmes. Rental Husing t rehabilitate rental husing.51% f the units must be ccupied by lw t mderate incmes at HUD Fair Market Rents. Cmmercial Rehabilitatin: Rehabilitatin f nn-residential building wned privately r by a nn-prfit. This activity must cme in cmbinatin with anther activity. 8
Cde Vilatins Health and Safety Issues Façade Imprvements Energy Efficiency Accessibility Access Public Facilities and Imprvements: Activities that are necessary t imprve public facilities fr cmmunities that have 51% r greater f lw and mderate incme persns by census r survey area. Public Imprvements include, but is nt limited t water and sewer lines, water and wastewater treatment and strage. Public Facilities such as cmmunity centers. Assessment Abatement: The recvery f the capital csts f a public imprvement. Abatement assessments are prvided t husehlds whse family incme is 50% r less f the cunty median incme. Clearance: Usually related t demlishing structures as a result f a disaster r urgent threat t health and safety in the cmmunity. Remval f demlitin prducts (rubble) and ther debris. Cnversin The cnversin f a clsed building frm ne use t anther. Cnversin f a clsed schl building t residential r fr use as an eligible public facility. Prgram Administratin fr the planning and executin f CDBG activities. Eligible csts include staff and related csts required fr verall management, crdinatin, mnitring, reprting, and evaluatin. Applicatin preparatin is nt an eligible activity with any CDBG funds. This is nt a stand- alne r separate budget line item and shuld be included within the main activity cst. Nte: All Disaster activities will be addressed n a case by case basis. 9
Other Federal Requirements under the SCDP-Prgram Incme Envirnmental Review All prjects are subject t the Natinal Envirnmental Plicy Act (NEPA) which seeks t avid adverse impacts n the envirnment by mandating careful cnsideratin f the ptential impacts n any prject assisted with federal funds. All prjects must have an apprpriate envirnmental review cmpleted prir t prject csts being incurred. Citizen Participatin The lcal gvernment must include the public in decisins abut use f the prgram incme, as well as each activity r prject t be funded. A public hearing is required and if funded a secnd hearing mid-prject is required. Davis Bacn and Related Acts-used in cmmercial rehabilitatin, rental rehabilitatin f 8 units r mre and public facilities. Includes the Federal Cntract Wrk Hurs and Safety Standards Act, and the Cpeland Anti-Kickback Act; Applicable when mre than $2,000 f CDBG dllars are used. Acquisitin/Displacement and Relcatin Requirements Applies t any acquisitin f real prperty when CDBG-ED funds are used fr the acquisitin. 10
SECTION III Lcal Develpment Organizatins HUD has recgnized the need t lessen the burden t lcal gvernments that are administering CDBG-ED funded Revlving Lan Funds (RLF s). Therefre, the Husing and Cmmunity Develpment Act (HCDA) was amended t allw grantees f CDBG-ED funds t sub-grant their award t a qualified nn-prfit rganizatin t carry ut cmmunity ecnmic develpment prjects. This prcess is referred t as de-federalizing the funds and by ding s, the RLF is exempt frm the CDBG requirements. The lcal gvernment selects the nn-prfit rganizatin t carry ut the activity and designates it as a Lcal Develpment Organizatin using a LDO agreement. Because f the large number f underutilized RLF s funded with CDBG-ED funds, as well as the cmplexity f the CDBG requirements, DEED is strngly recmmending that lcal gvernments with CDBG-ED RLF s cnsider the use f this prcess. Advantages f de-federalizatin: Decreases the administrative burden n lcal gvernments t cmply with the nerus CDBG requirements; Increased flexibility in the administratin f CDBG-ED RLF s; Maximizes the flexibility f use f CDBG-ED funds, including accmmdating reginal appraches t the administratin f lending prgrams. N annual reprting t DEED n the use f the funds. Lcal Develpment Organizatin Eligibility Requirements: The LDO must meet the requirements f 105(a)(15) f the Husing and Cmmunity Develpment Act. The lcal gvernment and prspective LDO will be required t cmplete and submit t DEED a LDO Designatin frm (attached), indicating that the fllwing requirements related t the eligibility f the LDO have been met: The rganizatin is rganized as a nn-prfit under the apprpriate Internal Revenue Service cde fr nnprfits; The rganizatin is rganized under state r lcal law t serve the cmmunity/ecnmic develpment needs f cmmunities; The rganizatin is independent f the lcal gvernment; The LDO will be carrying ut the specified activity. In rder fr lan repayments t becme de-federalized, the LDO will be the beneficiary f the lan; and The activity shall nt be carried ut until DEED has apprved the LDO designatin and Agreement. 11
Prcess DEED awards the CDBG-ED grant t the lcal unit f gvernment wh, after executing the LDO Agreement, grants the funds t the lcal nnprfit rganizatin that meets the abve definitin. This entity is nw knwn as the Lcal Develpment Organizatin (LDO). The LDO lends the funds t the business and the lan repayments are returned t the LDO. This lan is subject t the CDBG-ED requirements; hwever, subsequent lans made by the LDO thrugh the repayments f the riginal lan are nt. The lcal gvernment mnitrs the LDO fr cmpliance. DEED mnitrs the lcal gvernment. When the prject is cmplete DEED administratively clses the prject file. Reprting t DEED n the use f the RLF is nt required. Thugh exempt frm the CDBG requirements, the LDO must establish plicies and prcedures which further ecnmic develpment in the cmmunity. T accmplish this, the lcal gvernment must prvide the fllwing t DEED: Citizen Participatin dcumentatin. A public hearing must be held t discuss the transfer f funds t the LDO. Infrmatin t be prvided t DEED includes: the public hearing ntice, public hearing minutes, passage f a reslutin cncerning the arrangement with the LDO including a stipulatin regarding the de-federalizatin f the funds; Draft agreement that is mutually acceptable t bth entities, IRS dcumentatin establishing the nnprfit rganizatin; Cpy f the LDO s prpsed RLF plicies and prcedures; LDO Designatin frm; Upn DEED apprval, the agreement may be executed and the RLF plicies and prcedures finalized. A lcal gvernment that has an existing RLF capitalized with CDBG-ED funds can als prvide sme r all f its RLF t an LDO. The LDO s initial use f these funds must meet all CDBG requirements and will nt be de-federalized until repaid t the LDO. The prcess fr the transfer f funds t the LDO is the same as utlined abve. Once the transactin is cmpleted and the LDO Agreement is executed, the Grantee cannt recall the funds nr can they instruct the LDO n the use f the funds. Respnsibilities fr the initial prject The Lcal gvernment is respnsible fr the fllwing: Cmpliance with all CDBG-ED requirements n the initial use f the CDBG-ED funds; Mnitring the LDO; Obtaining any necessary recrds frm the LDO; Submittal f annual reprts t DEED while the grant is pen. 12
Lcal Develpment Organizatin (LDO): Is respnsible fr carrying ut the initial prject. This primarily means it will undertake the activity f the prject directly r thrugh cntracts with an entity ther than the lcal gvernment. In any case, the LDO must have and cntinue t have a direct and cntrlling interest in the prject and have the capacity fr ensuring that prgram requirements are met. It cannt be simply a passive passthrugh participant fr the lcal gvernment that perfrms all f the wrk. Is respnsible fr the fllwing minimum activities in carrying ut the prgram: Owner f all prgram plicies and prcesses fr the implementatin f the prgram; T manage the prgram. If the LDO des nt have adequate staffing t manage the prgram it can cntract fr these services with a private cntractr. A slicitatin prcess fr the cntractr must be cnducted in accrdance with the pen and cmpetitive requirements f the state s prcurement requirements. These services may include but are nt limited t perfrming the daily accunting, applicatin prcessing, and cnstructin management duties; T be in cntrl f all decisins regarding the transferred CDBG funds, including final lan decisins; Cmpliance with all federal and state lending requirements; Owner f the resulting lans and lan repayments; T use any repaid funds as specified in the LDO agreement. If, fr sme reasn the LDO disslves and an asset reversin ccurs, cntact DEED fr assistance. An asset reversin culd change the federal identity f any repaid funds; and Final accuntability fr all CDBG funds received. N frmal prcurement prcess is required fr the selectin f a LDO. The lcal gvernment negtiates terms with its selected LDO. It is recmmended that the lcal gvernment use DEED s draft LDO Agreement template. 13
LOCAL DEVELOPMENT ORGANIZATION (LDO) DESIGNATION Minnesta Department f Emplyment and Ecnmic Develpment (DEED) NON-PROFIT IDENTIFICATION Applicant Cntact Address City/State/Zip Telephne # Fax # Federal Tax ID Number Email Address SUPPORTING DOCUMENTATION Charter Articles f Incrpratin By-Laws I RS Dcumentatin Revlving Lan Fund Plicies L DO Agreement Lcal Gvernment Reslutin Public Hearing ntice and minutes NON-PROFIT CERTIFYING OFFICIAL: I certify that meets the IRS definitin f a nn-prfit rganizatin and is rganized (under state r lcal law) t serve the ecnmic develpment needs f nn-entitlement cmmunities, per Sectin 105(a)(15) f the Husing and Cmmunity Develpment Act f 1974, as amended, and that the rganizatin will carry ut the prject entitled directly r thrugh cntracts with an entity ther than the grantee. T the best f my knwledge and belief, data and infrmatin included in this dcument are true and crrect. Signature Typed Name and Title Date apprved LOCAL UNIT OF GOVERNMENT CERTIFYING OFFICIAL: I certify that the has held a public hearing and passed a reslutin naming as a Lcal Develpment Organizatin t carry ut the prject entitled. I authrize the LDO t be the beneficiary f the lan and retain all lan repayments t further ecnmic develpment in the. I acknwledge that the cannt recall the funds frm the LDO. T the best f my knwledge and belief, data and infrmatin included in this dcument are true and crrect. Signature Typed Name and Title Date apprved 14
RESOLUTION OF (Name f City r Cunty) Requesting Designatin f the (Nn-prfit Organizatin) as a Lcal Develpment Organizatin WHEREAS, the (Name f City r Cunty), (herein, the City r Cunty ) wuld like t better utilize the Cmmunity Develpment Blck Grant Ecnmic Develpment (CDBG-ED) Set-Aside federal funds; and, WHEREAS, if the ( City r Cunty ) retains these funds and their repayment, the funds retain the federal designatin and guidelines frever; and, WHEREAS, the ( City f Cunty ) by reslutin, can request frm the Minnesta Department f Emplyment and Ecnmic Develpment (DEED), authrizatin t transfer CDBG-ED Set- Aside funds t a Lcal Develpment Organizatin, herein, (LDO); and WHEREAS, the (Name f Nn-Prfit Organizatin) is interested in being designated as an LDO and is a nn-prfit rganizatin, as defined in Internal Revenue Service regulatins, serving the cmmunity and ecnmic develpment needs f a nn-entitlement area; and WHEREAS, the (Name f Nn-Prfit Organizatin) has adpted prcedures and guidelines fr the use f the federal funds, the repayment f the federal funds plus any interest accrued, earned r paid theren. NOW, THEREFORE BE IT RESOLVED by the ( City r Cunty ) that the ( City r Cunty ) hereby requests apprval frm the DEED t designate the (Name f Nn-Prfit Organizatin) as a Lcal Develpment Organizatin (LDO), serving the cmmunity and ecnmic develpment needs f the ( City r Cunty ) and, therefre, authrize them t receive the repayments frm the CDBG-ED Set-Aside lan t (Name f Business). I CERTIFY THAT the abve Reslutin; was adpted by the (City Cuncil r Bard f Cmmissiners f the City f r Cunty f) n the day f, 20. SIGNED: WITNESSED: Name/Title Name/Title 15