John B. Conglose
One of the most important job duties performed by many economic development practitioners is to package financial deals for economic development projects. Financing for economic development purposes is usually related to those activities that help to produce goods and services and ultimately create jobs. "Financial packaging" is the term used to define the combination of owner equity, private financing, and public financing sometimes necessary to move an economic development project from the concept stage to a reality.
Owner equity, private financing, and public financing each can be presented in different ways. This fact sheet will highlight several forms of owner equity, private financing, and public financing, as well as combinations of the three. Case studies illustrating various combinations of funding sources also will be presented. Finally, a standard formula for combining owner equity, private financing, and public financing will be suggested.
Today, interested parties can obtain mortgage financing with little to almost no down payment or cash equity contribution. However, these situations are few and far between when trying to obtain financing for economic development purposes. Although financing from both public and private sectors is used for other purposes, within this fact sheet financial packaging for economic development is the primary issue. When approaching the financial packaging scenario, it should be remembered that each project has its own requirements for owner equity, private financing participation, and public participation. However, some general rules can still be established.
Owner equity in an economic development project is that portion of personal funds the principal owner or owner group is willing to contribute toward the project. Owner equity comes in many forms; however, in most cases, the owner equity for economic development projects is either in the form of cash or personal property. Equity funds, particularly in smaller business operations, come primarily from the personal resources of those individuals who are part of the group undertaking the project.
Other forms of owner equity can include equipment, buildings, and other real estate.
Very few developers, businesses, or industries can undertake a project using their funds only. As a result, most try to utilize their resources to leverage private funding from lenders. "Leveraging" is defined as using a lender's money to complete a project.1 Although other factors come into play in determining the amount of financing that can be obtained through lending institutions, a general rule can be applied: The greater the amount of money supplied by equity investors, the greater the amount of money that can be leveraged from private lenders.
In many cases, economic development projects require additional sources of funding beyond owner equity and private financing. There are frequent situations in which the owner or owner group has reached the limit of equity they are able to contribute toward a project. At the same time, the total amount of funding that can be obtained from private financing, plus this owner equity, does not equal the total cost of the project. This leaves the borrower with a "gap" in the financing for the project. In most situations, there is no way to narrow the scope of the project within the limits of owner and private financing so that this shortfall can be eliminated. So, in order to make the project work, this financing gap must be filled. It is then that the owner might be able to turn to public financing, and project shortfalls can be filled by the various loan and grant programs that are available on a federal, state, county, or local government level.
The limits to which public financing can be obtained, i.e., the largest "gap" that can be filled, is in the neighborhood of 30 to 40 percent of the total project cost. The remaining funds that are necessary to finance the project must come from owner equity or private financing sources. Because the source of funds is public dollars, these financing sources typically require commitments on the borrower's part for job creation, private investment, or other return to the community.
A financial package for economic development must contain a portion of owner equity. As a general rule, the portion of owner equity is in the neighborhood of 10 to 20 percent. Banks, mortgage companies, and other private lending institutions have particular formulas that determine the amount of financing they will provide.
Generally speaking, the portion of private financing that can be obtained by the project owner is contingent upon how much equity he or she puts into the project along with other assets that can be utilized as equity for the project. In some cases, private financing can be obtained for the remaining share of the project, which can be in the area of 80 percent. However, it is more common for private lenders to provide 40 to 50 percent of the total project cost.
As a result, there is a "gap" that needs to be filled by public sources. In these situations, public lending or grant programs can typically contribute from 30 to 40 percent of the project. Figure 1 provides a general format for financial packages.
A manufacturer, operating in an older 7,500 sq. ft. facility in a small Huron County, Ohio, village, utilized a number of public financing programs to create a financing package. This package enabled the corporation to relocate into a new 27,000 sq. ft. facility in a new industrial park in the village. The total project cost was $1,722,600. This project cost included $960,000 for construction of a new building, $305,000 for machinery and equipment, and $135,000 in new inventory. The project also included $270,000 dollars of public infrastructure costs along with $52,600 of professional design and consultant fees. A combination of public financing programs enabled the company to obtain 25% of the total funds for this project to work. The rest of the funds for the project came from private financing and owner equity. The first step in the process was for the company to obtain private financing commitments. Based on the history of the company along with assets at hand, a loan of $997,000 was obtained for the construction and design of the building. The village agreed to contribute $76,000 towards the project for the construction of a public roadway through the industrial park. The state of Ohio agreed to contribute $52,000 towards the construction of this same road.
Both the village and the county have a revolving loan fund program that makes loans to industries for expansion or relocation projects. The County Commissioners committed $142,000 out of the county's revolving loan fund for this project. The village committed $160,000 dollars out of the village's revolving loan fund.
| Equity | 10-20% | _______ |
| Private Lending Assistance | 40-50% | _______ |
| Public Lending Assistance | 30-40% | _______ |
| Total Project Cost | _______ |
Figure 1. A general format for financial packages.
The owner equity share in this project amounted to 17 percent or $292,000 of the total project, and the private financing portion amounted to 58 percent. The corporation was able to leverage its financial interest in the project by utilizing available public programs. The project resulted in the creation of 27 new full time jobs and the retention of 15 existing jobs.2
A company in a small city in Huron County, Ohio, undertook a $5,150,000 expansion that included the construction of a 30,000 sq. ft. building and the purchase and installation of machinery and equipment. A financial package was worked out by state, county, and city economic development professionals, along with representatives from the company, to make the project a reality.
The company utilized $550,000 of capital resources to obtain private-sector financing. This amount was equivalent to 11 percent of the deal. Private financing amounting to $2,905,000 was obtained by the company; this was equivalent to 56 percent of the deal. The company also obtained a loan from the state of Ohio for $1,545,000 and a loan from the city's revolving loan fund for $150,000 for the purchase of machinery and equipment. The amount of public participation in this case was equivalent to 33 percent of the project funding.
The project resulted in the creation of 57 new jobs and the retention of 150 existing jobs.3
Economic development practitioners should be aware of the issues related to financial packaging for economic development projects. A practitioner will get involved with this type of work in various degrees of detail. He or she should be familiar with financing principles at both the private and public level. Relationships should be established with representatives from local lending institutions so that the economic development professional and the lending institution are all on the same economic development team.
1 Richard J. Roddewig and Jared Shlaes. Analyzing the Economic Feasibility of a Development Project: A Guide for Planners. Chicago: American Planning Association, 1983. p. 7.
2 Information for this case study was obtained from the files of the Huron County Development Council, Huron County Administration Building, 180 Milan Avenue, Norwalk, Ohio 44857.
3 Ibid.
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