Lorain Development Corp- Lorain- Op ED
Last week I wrote a post re the loan program for the City of Lorain.
I dwelt upon what I considered failures or spending “money for old rope” . Doug Rangel- Director Lorain Development Corp. was very informative and helpful when answering my questions at the time. I believe the information should be shared so I asked Mr. Rangel to not only respond to the post but to tell the readers a little of how the program works.
The loan programs we offer are similar to SBA loans in that we typically finance the middle 30-40% of loans that is sometimes the difference between companies being able to operate or being able to open.
Typical bank financing for commercial entities will allow for 70-80% with owners needing to provide 20-30% of their project costs which some may not have or its uses all of the owner’s available cash. The program that the City offers allows project costs to be split where bank does 60%, an owner only being required to put down 10% with the city’s program lending 30% in the middle. This allows owner to save some additional cash as reserves in lieu of putting everything in and having nothing to lean on if necessary. These funds are development loans for those businesses that do have more risk than others.
The amount of money down for an owner can sometimes be a challenge and lack of available cash/working capital can certainly hurt a business. In an ideal world, all companies would pay to terms but that does not often happen with terms getting stretched and it’s typically the smaller businesses that get impacted. This is why businesses need lines of credit for these short term borrowing needs. During the downturn, numerous companies had their lines of credit either reduced or simply eliminated thereby impacted companies cash flow.
You note in the article that Lorain Development Corp. is funded by three sources but to further expound that, the funds that are used is the interest earned on these business loans that have been made in the City over the past thirty years. This is interest earned on the capital base of the loan programs which offset costs of operating the programs. On average, the cost of my annual contract is about 40% of interest and fees paid. This does not include regularly scheduled principal payments or early repayment of loans.
On the Prime Industries loan, City made initial loan in 1997 to Prime Design as well as the $100K in 2000 which was repaid in full with the sale of company to the Persicos in 2002. I don’t have an amount because that file is archived, but City likely earned over $100,000 in interest on that loan during its term. Prime Industries did indeed borrow $400K for initial deal as well as $100K in 2008 so they only borrowed $500K. During this loan term, they have paid the City approximately $300K which includes around $165,000 in interest and fees.
All lending institutions have these issues which is sometimes the primary source of repayment (cash flow) is inadequate to repay loans and we then need to look to secondary source of repayment which is typically the collateral and that is buildings. No lending institution wants to have to take back a building but sometimes it is necessary to recoup loans funds to preserve as much as possible but again not always likely particularly with where building values have gone lately.
We will continue to do economic development in hopes of growing the City, which is just like a business. The City needs cash flow to operate and its main source of revenues in payroll withholding taxes. As we create additional job opportunities, it should lead new or expanded payroll in which the City would realize additional tax revenues. As revenues grow, it allows for additional opportunities or to maintain what we already have.
As I look at your analogy of old rope being put into ships, I’m sure that even those patches needed to be replaced again and again and sometimes entire planks needed to be replaced and when ships were so old, they were likely taken out of service. Not to worry, I’ll bet they replaced them with new ships. The City and economic development can be thought of in the same vein. When businesses begin to fail and leave, we try and replace them with another business and that sometimes needs a more comprehensive repair to keep the building usable. Buildings do have shelf lives and sometimes just need to be replaced in whole. Sometimes it’s best to replace one building with another. This is our City and I want to work in my time here to leave it a better place than when I got here.
Potential business loans can either be a request from an existing business (looking to expand or grow) or new business to the City. There are many different ways people track me down about programs. Sometimes it’s just looking at City website; contacts from within City like through Mayor’s Office, Community Development, now Building Housing and Planning; referrals from Team Lorain County (county economic development arm) or Lorain County Community Development; Lorain Port Authority or referrals from others businesses I have worked with. It is sometimes just a cold call a business is looking for assistance. While the loan program is a major part of LDC, I do work on other projects that sometimes do not involve City loans. Sometimes I simply act as a business liaison to help answer questions.
A lot of calls I take, people are simply asking about loan programs and any other incentives. Most cases this is a simple explanation of the programs of how they work and what is required. A large percentage of these calls usually end without ever hearing back from them. There are some that take it further and I usually sit down and meet with some to further discuss the programs and the process. I usually get more specific information from these people on their plans for a business.
In most cases, I ask about their business plan and in many instances, the plan is in their head but not on paper. This is where I inform them that before filing out an application, they should complete a written business plan as a way to see if the business will generate sufficient funds to operate as a going concern. At times, people realize that it is more costly to operate a business when they begin doing their financial projections as they realize the number and amount of expenses necessary to run a business.
There is help for people through Ohio’s Small Business Development Centers
http://www.scacog.org/Home.aspx which help people put together business plans that they can use to identify the sources of funding their business to match up against the use of business funding. The business plan gives them a blueprint for they will need to open and operate their business and gives the funding sources an idea of the individuals understanding of the business to determine whether they understand all of the factors involved in starting up a business as well as the continual operation.
When a business plan is ready, I provide an application which is submitted with the business plan and financial statements and projections.
The programs we use has a funding breakdown of 60% private financing like banks; 30% city loan funds and 10% owner’s equity. While we only require 10% equity, we typically like to see additional resources available to owner’s if the need arises. In these situations, the City is typically a second mortgage lender behind the Bank’s first. We require personal guaranty of debt by business owner’s and sometimes require additional collateral by owner’s.
Each project is somewhat unique so there is no standard answer. Once I have received completed information, I review the package and look to see the feasibility of the project. Does it make sense, are the numbers realistic, is there a need for the services or products in the area. If everything makes sense,
(1)I prepare a loan write-up that provides a background of the project with financial information and the justification for approving the loan.
(2)Once I have completed, I provide this to the loan board for their review and approval.
We do this process just like bank’s credit teams do and have discussion and if everything is okay, loan approves the credit. They can also reject loan requests or modify them though these do not happen too often.
The loan board are various professionals in insurance, banking, law, small business owners, etc. who all live in, work in or own businesses in the City of Lorain. This board has been a self-appointing board since its inception and they are not appointed by administration or council. Board tries to keep a mix of professionals on board so it is not all bankers or attorneys but a mix. They are an all-volunteer board and most of these individuals have been on board from a few years to one person who has been on board since inception over 25 years ago.
Once the board approves the loan credit, all loans are submitted to Board of Control for approval as they will eventually sign for the loan.
Once board of control approves, we move to documentation of loan with all documents reviewed and approved by City’s Law Department. At that time, we also open a purchase order to commit money and submit check requests when we receive necessary documentation requesting funds.
Loans are derived from two sources, one through HUD http://portal.hud.gov/hudportal/HUD and the other through the Economic Development Administration.
All loans come from the dedicated accounts that are solely set aside for this purpose. Since I have been here in 2000, the City has deposited no new funds into these accounts, we simply recycle the payments we receive from existing borrowers. This is why they are called revolving loan funds as we only provide loans to the extent there is money available in these accounts.
Monthly payments made are broken down into principal and interest payments. We have a dedicated loan system that tracks these payments and the breakdown. The contract LDC has with City is derived from the interest payment made by borrowers to the City. By having more interest than expenses, the City has grown the capital base of the RLF portfolios.
A few of the good examples are:
Larger: would be Camaco which was a startup with a 60,000 s.f. building and has continually grown to about 200,000 s.f. and employees about 400 people. Camaco has paid back all of its loans and currently has no obligations to the City.
A medium size business could be Trademark Global, who was also the first company out at Ford plant. They went from a 40,000 s.f. building in Avon to 100,000 s.f. at Ford and grown further to 150,000 s.f. We have made some small loans to them for equipment and all of those have been repaid in full.
A smaller business could be my first loan I made in 2000 with the Castro brothers who own Scorchers. They took two old tired buildings and transformed them into a single watering hole that has become a fixture. They are less than one year from repaying their loan with the City. If you have a chance, please visit Wil and Dennis Castro at Scorchers and ask them about this program. There are others who have had varying degrees of success.
I like to think that we have been moderately successful in that we have more money each year to lend as a result of good loans though we do occasionally have hiccups like any lender.
I know this is longer than what you were hoping for, but I want to make sure that everyone understands this is sometimes a long process to earn a loan approval, that these loans are just not handed out like candy at Halloween. The City can only continue to offer this program if we have funds to lend. Not only do we need to grow as a City but we need to grow as a County and as a region.
Entry filed under: city of lorain, Corporate responsibility. Tags: City of Lorain, Doug Rangel LorainLDC, Economic Development Lorain, Lorain, Lorain Development Corp, Old and new business Lorain, real-estate, Revolving Loan Fund.