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Microloan Agreement with ECIA Business GrowthCopyrighted April 6, 2020 City of Dubuque Action Items # 6. ITEM TITLE: MicroloanAgreementwith ECIA Business Growth SUMMARY: City Manager recommending approval to draft a contract with ECIA Business Growth for the development and administration of a microloan program to assist downtown businesses adversely affected by lengthy City construction projects. SUGGESTED DISPOSITION: Suggested Disposition: Receive and File; Adopt Resolution(s) ATTACHMENTS: Description Type Construction Related Microloan Agreement with ECIA City Manager Memo MVM Memo Staff Memo Staff Memo ECIA Memo Supporting Documentation Masterpiece on the Mississippi Dubuque bitil All-A.aia City 111111 2007.2012.2013 2017*2019 TO: The Honorable Mayor and City Council Members FROM: Michael C. Van Milligen, City Manager SUBJECT: Construction -Related Microloan - Partnership with ECIA Business Growth DATE: March 31, 2020 In the past several years, the City has undertaken multiple construction projects in the downtown area that are key to the overall Bee Branch project, as well as improvements along Central Avenue in anticipation of the City having jurisdiction over this street once the Southwest Arterial opens to traffic. During conversations with several downtown business owners, it has become clear that lengthy City construction projects have caused financial hardship for some of these businesses. Economic Development Director Jill Connors recommends City Council approval to draft a contract with ECIA Business Growth for the development and administration of a microloan program to assist downtown businesses adversely affected by lengthy City construction projects. A funding source will be identified over the next 60 days for this program. The contract would be brought to the City Council for review and approval. I concur with the recommendation and respectfully request Mayor and City Council approval. 7-- Mic ael C. Van Milligen MCVM:jh Attachment cc: Crenna Brumwell, City Attorney Teri Goodmann, Assistant City Manager Cori Burbach, Assistant City Manager Jill M. Connors, Economic Development Director Masterpiece on the Mississippi Dubuque bittd AII•America City N• IK: '.I i]7(: I liM7Lil` 1 1p 2007*2012*2013 2017*2019 Economic Development Department 1300 Main Street Dubuque, Iowa 52001-4763 Office (563) 589-4393 TTY (563) 690-6678 http://www.cityofdubuque.org TO: Michael C. Van Milligen, City Manager FROM: Jill M. Connors, Economic Development Director SUBJECT: Construction -Related Microloan — Partnership with ECIA Business Growth DATE: March 31, 2020 INTRODUCTION This memorandum presents a proposed partnership with ECIA Business Growth for the development of a microloan program to assist businesses affected by City construction projects. BACKGROUND In the past several years, the City has undertaken multiple construction projects in the downtown area that are key to the overall Bee Branch project, as well as improvements along Central Avenue in anticipation of the City having jurisdiction over this street once the Southwest Arterial opens to traffic. DISCUSSION During conversations with several downtown business owners, it has become clear that lengthy City construction projects have caused financial hardship for some of these businesses. Our department and the City Manager have met with ECIA staff to develop a proposed loan program that could be used to assist businesses in this situation. The attached memo from ECIA's Executive Director, Kelley Deutmeyer, sets forth a proposed approach to such a loan program, which would be funded by the City. In addition to funds made available to loan recipients, the City would also agree to paying fees to ECIA for processing and administering the loans. RECOMMENDATION/ ACTION STEP In order to maintain our downtown economic development strategy of supporting the success of small businesses, I respectfully request approval to draft a contract with ECIA for the development and administration of a microloan program to assist downtown businesses adversely affected by lengthy City construction projects. The contract would be brought to the Council for review and approval. 2 East Central Intergovernmental Association a regional response to local needs MEMO TO: Jill Connors, Economic Development Director FROM: Kelley H. Deutmeyer, ECIA Executive Director CC: EC Matt Specht, Co -Director of Community and Economic Development Mark Schneider, Co -Director of Community and Economic Development Dawn Danielson, Lending Development Specialist RE: Establishing a Microloan Program DATE: March 27, 2020 PURPOSE The following memo outlines the development of a pilot microloan program for starting, improving, or expanding small businesses or for small businesses negatively impacted by roadway construction when traditional loans are too expensive or unavailable for entrepreneurs and business owners located in the City of Dubuque. Traditional lending institutions, such as banks and investors, and ECIA's revolving loan fund or the Small Business Administration (SBA) 504 loan program, are unlikely to offer loans and investment capital to small businesses due to a variety of reasons. Small businesses and entrepreneurs are viewed as risky businesses since growing these types of businesses typically exhibit erratic bursts of growth and downturn. The perceived risk reduces the chance of them receiving a traditional bank or SBA loan. Additionally, small businesses in most cases require small amounts of capital, and thus banks and lending institutions often believe that is not an efficient use of their time and resources. Additionally, we have found that small businesses are also negatively impacted when road improvements are completed in front or near their business. Many of them struggle to keep their doors open during the construction period and simply require a small amount of operating money to make ends meet during this timeframe. BACKGROUND ECIA Business Growth, Inc. was incorporated in 1983 to provide loans to business start-ups and expansions in the ECIA region. Business loans are currently made from the Small Business Administration 504 program and various revolving loan programs. ECIA has made 351 loans totaling $83,490,523 since 1983. The parameters of the current loan programs offered through ECIA Business Growth required a minimum loan of $50,000 and have a job creation/retention component. ECIA staff manages the Energy Efficient Loan Fund (EELF) for the City of Dubuque which was originally capitalized from a Department of Energy grant. The fund provided loans for up to $50,000 to Dubuque -based businesses wanting to make energy improvements to their business. The Dubuque Metropolitan Area TransportalIMPI Eastern lowa Development Corpo Eastern Iowa Regional Utility Services System Eastern Iowa Regional Housing Authority I ECIA Business Growt , Inc. Region 1 Employment and Training I ECIA Regional Planning Affiliation I Region 8 Regional Transit Authority 1 17600 Commerce Park, Dubuque, IA 52002 www.ecia.org I ecia@ecia.org 563.556.4166 I Iowa only: 800.942.4648 I Relay Iowa 800.735.2943 I f: 563.556.0348 Page 2 — Microloan Memo EELF loan cannot be used for anything but energy efficiency improvements. The fund has made 8 loans since its inception with an interest rate of 1%. The loans are made over a 5 to 7-year period and revolving back into the fund to do additional lending. Based on the Small Business Administration (SBA) 2019 microloan program data, the average microloan nationally was $14,375 with an average interest rate of 7.5%. The SBA data also indicated that microloans have been most utilized by the underserved minority and female -owned business populations. ECIA staff contacted the Cedar Rapids microloan program for information regarding their program. Initially the program was funded by the City of Cedar Rapids with the maximum loan of $10,000 at an interest rate of 4%. Additional partners were added to include the Foundation, local banks and credit unions. In researching microloan programs throughout the years, default rates on microloans tend to trend higher than on traditional loan programs and in some situations default rates have reached up to 50% of the total loans. This is an issue we have to recognize going into developing the loan program. It will have a great risk but also a valuable reward to the community. The niche area not being served is the loan for entrepreneurs and small businesses under the $50,000 threshold that ECIA Business Growth serves. To address this need, ECIA has outlined a pilot microloan program to assist entrepreneurs and small business owners in the City of Dubuque as well as businesses that have been negatively impacted by road construction. After a year, the program will be evaluated and could be expanded to include Dubuque County and other ECIA member governments with additional microloan funding from their municipality. DISCUSSION The pilot microloan loan program is designed to stimulate economic growth and assist small business owners and entrepreneurs in Dubuque with working capital, inventory, supplies, furniture, fixtures, machinery, build out of leased space, and equipment. Ineligible loan purposes include real estate purchase, refinancing of existing debt, and projects located outside the city limits of Dubuque. Non-profit organizations with a documented sales revenue stream are eligible borrowers. The following is an outline of the microloan program parameters: Fund Capitalization - $100,000 as initial pilot for a business located in the jurisdiction of the City of Dubuque only Fund Manager — ECIA Business Growth, Inc. Loan Committee — Two ECIA loan staff and three City of Dubuque staff. A loan must be approved by a majority vote of the loan committee. All loan exceptions or deferments must be approved by the loan committee. Maximum Loan - $25,000 maximum with a minimum loan amount of $2,500 per business entity Loan Volume — Anticipate an average of 6 loans in first 18 months Interest Rate — The interest rate shall be fixed at the time of funding at the current five-year Treasury rate plus 0.25% for the term of the loan. For example, today's Treasury rate is 1.75% and adding 0.25% percentage point would make the rate 2.00%. Interest earned will be returned back into the fund to grow the loan fund. Loan Terms — Amortized over a 60-month period with monthly principal and interest payments deferred for 3 to 6 months as requested by the borrower and approved by the loan committee at the time of loan approval. Loan deferment for business owners impacted by road construction may request a microloan based on the construction timeline which could exceed the average 6-month deferment. Page 3 — Microloan Memo Eligible Borrower - Small businesses located in the jurisdictional limits of the City of Dubuque Borrower Credit Score — Minimum credit score of 550 with exceptions on a case -by -case basis with explanation. If no credit score is available, additional documentation may be required to verify borrower is credit worthy. Definition of Small Business — At the time of microloan application, applicant revenue under $500,000 for fiscal year and less than 15 full-time equivalent employees. For startup or businesses with less than a year in operation revenue is year-to-date revenue amount or $0 in case of startup. Borrower Down Payment — 10% down payment of total project cost which can include cash, in -kind or equity Business Owner and/or Signer Identification Requirements — Photo ID including borrower's name, date of birth, street address, social security number and phone number. For non -US citizens the identification must contain taxpayer ID number, passport number with country of issuance, alien ID card number or another foreign -issued picture ID Required Application Documents — Completion of microloan program application; business plan with budget and proforma; borrower and/or identification documentation and entity documentation; completion of SBDC small business courses/training; and receipt of two years of owner's signed/dated personal tax returns. Tenants will provide a copy of lease agreement. For existing business, two years of signed/dated tax returns. Collateral — Vehicle title, Security Agreement if applicable Guarantee - All individual borrowers and/or business owners will sign an unlimited personal guarantee Insurance — Proof of business insurance is required Loan Documents — Promissory Note Fees - Loan processing fee: $50 to be paid by the City of Dubuque; Loan closing/Documentation fee of $200 to be paid by the City of Dubuque; The application and documentation fees will cover all hard cost fees and UCC filing, lien notation, certificate of good standing, credit bureau reports, etc. These fees are per loan to cover origination costs and are in addition to the ECIA's administration fees. Administration — ECIA Business Growth staff will administer the program including assisting the City with promoting the program; accept and process applications; underwrite and recommend approval of loans; refer borrower to SBDC for training; manage loan committee meetings; loan package and closing documents; maintain loan files, service monitor and review of loans; annual borrower loan review and meeting/visit if necessary; and annual reporting. Loan Tracking/Reporting — ECIA staff will track at minimum the following: loans made to veterans, minority -owned business, female -owned business; number of FTE's created; total investment; delinquencies, community impact, and will review financials quarterly during the deferment period and in addition, will require financials annually. ECIA staff will track the construction -related loans for those businesses impacted by road construction separately and will track the following: the type and location of the business impacted; location of construction; construction timeline; monthly sales before construction; hardship imposed by construction; and will review financial statements quarterly during the deferment period and in addition, will require financials annually. ECIA will provide a loan status report to the City staff quarterly. Page 4 — Microloan Memo Loans in Default — The City Attorney will assist with collections of loans in default or the City will reimburse ECIA Business Growth for attorney cost associated with collection. Administrative Costs/Budget — Estimate six loans annually. Loans will be billed based on actual time spent per loan estimated at $3,000 per loan. First year budget includes a program set up fee including the operational plan, program guidelines and procedures, and all required forms and documents. Fee to establish the program and documents is $2,000 at approximately 22 hours of work. ECIA will bill administrative costs monthly tracking time spent per loan, program set-up, and marketing. Loan Committee meetings are included in the per loan fee. ECIA will bill up to $2,500 for marketing and outreach of the loan program. City will assist in the program marketing and outreach efforts including establishing a web page for program information; downloading program information and forms; and the ability for the borrow to access a form online. Legal fees for each loan will be billed separately and are not included in the total administrative fees. ECIA staff will work with the City legal department for loan review and filing. Budget — Year 1— Initial Set up Year Developing program guidelines/procedures/operational plan/documents $ 2,000 6 loans @ $3,000/loan estimate (some loans may take more and others could be less) $18,000 Outreach and Marketing $ 2,500 Legal Fees — City Legal Total Year One Administrative Fees $22,500 Total Year Two Administrative Fees $20,500 SUMMARY ECIA is very enthusiastic about developing a pilot microloan and small business construction impact loan program for the City of Dubuque to fill a niche that has been underserved for many years. ECIA has the experience and capability to initiate and manage the program. We look forward to working on a contract for services with City staff and moving forward with this exciting new program. Thank you for your consideration.