Development Financing for Economic Development

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Presentation to Wis Econ Dev Assoc class in financing for real estate and business development

Presentation to Wis Econ Dev Assoc class in financing for real estate and business development

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  • 1. Financial Analysis for Economic Development Deals & ProjectsMay 17, 2012 Mark Barbash WEDA Presentation 1
  • 2. Part 1: Steps in the Development Financing Process Part 2: Private Sector Financing Tools Part 3: Public Sector Financing Tools Part 4: Case Study in Structuring Business Financing Projects Part 5: Case Study in Structuring Real Estate Development ProjectsMay 17, 2012 Mark Barbash WEDA Presentation 2
  • 3. 1. Understand the Business 2. Understand the Project 6. Identify the Gap and 3. Understand the 7. Close Private Financing Structure the Deal the 4. Understand the Public Financing Financing 5. Understand the CommunityMay 17, 2012 Mark Barbash WEDA Presentation 3
  • 4. Start Up Fast Growth Stable Mature PERSONAL SEED VENTURE ASSET BASED / LEASING BANKS INSURANCE / R.E.I.T.S. BONDSMay 17, 2012 Mark Barbash WEDA Presentation 4
  • 5. Credit Risk Conservative credits, lending limits, selected industries• The Risk that the company’s overall growth will not support the financingCollateral Risk 75% L/V, no single-purpose assets, addl. Collateral/gtys• The Risk that the value of the collateral will pay off the loan in the event of default Rate Risk Higher rates, (P +) variable rate, wider spreads, fees• The Risk that the interest earnings on the loan will be less than the cost of the bank’s financing Maturity Risk Shorter term, RE: 10 years; M & E: 5 – 7 years• The Risk that changes in the business over time will reduce the value of the collateral or cash flowCash Flow Risk Conservative lending, high cash flow coverage ratios (1.5)• The risk that the business will not generate sufficient cash flow to make loan payments
  • 6. • The Rick Perry / John Edwards Rule• The Al Capone’s Safe Rule• The Heidi Fleiss Rule• The George Steinbrenner Rule• The Herb Cohen Rule• The Berlitz Rule• The Scouts Rule• The Elephant Rule• The Don Quixote Rule
  • 7. May 17, 2012 Mark Barbash WEDA Presentation 7
  • 8. May 17, 2012 Mark Barbash WEDA Presentation 8
  • 9. 1. Allow the business to tell their story…once2. Don’t waste time with a dog3. Not all projects can fit with public sector programs4. Let the program people represent their program5. Don’t overpromise what the program can deliver6. Don’t pile on government programs7. Explain the strings up front8. Find a cooperative lender9. Keep written records of your activities10. Be prepared to do the paperwork11. If it sounds too good to be true, it probably is
  • 10. 1. Is the company financially healthy? 2. What are project costs to be financed? 3. What financing is available and at what rate and term? 4. What is the business’ debt capacity? 5. What is the “bank only” structure? 6. Does the business have both equity and cash flow for debt service? 7. What is the financing gap? Equity, cash flow, collateral? 8. What P3 financing is available to fill the gap? 9. What is the P3 structure? Amount, rate, term, debt service 10. Does the business have both equity and sufficient cash flow for debt service?May 17, 2012 Mark Barbash WEDA Presentation 10
  • 11. Sales - Cost of Goods Sold: Cost of Making the product = Gross Profit - Admin Costs: Running the Company = Earnings Before Tax = Profit After Tax: To reinvest in the companyMay 17, 2012 Mark Barbash WEDA Presentation 11
  • 12. Assets (Own) = Debt & Equity (Owe)Assetsbecome Current Assets: Current Liabilities:cash w/in12 months • Assets that become • Debts that have to be cash within 12 months paid within 12 monthsPay Debts • Customers (Receivables) • Suppliers (Payables)due w/in • Inventory (Inventory) • Employees (Accruals)12 months • LOC & Term Loans Long Term Assets: Long Term Liabilities:Assetsbecome • Assets that become • Debts that have to becash after12 months cash after 12 months paid after 12 months • Land • Term Loans • BuildingPay Debtsdue after • Equipment Equity12 months • Equity Investment • Accum. profits & LossesMay 17, 2012 Mark Barbash WEDA Presentation 12
  • 13. Case Study: 21st Century Automotive 21st Century Automotive manufactures transportation vehicles that are customized for resorts, gated communities, retirement communities, urban neighborhoods and smart growth residential / commercial areas. The company has been in existence for 15 years and has gained a recognition for one of the strongest companies in the market. With the increase in urban living by Gen X’ers and many healthier Baby Boomers retiring, the company wants to expand its production capacity.May 17, 2012 Mark Barbash WEDA Presentation 13
  • 14. Gross Receipts (total potential revenue) - Vacancy Factor (% vac or phase in as $) = Effective Gross Rent (EGR) - Operating Expenses Net Operating Income (NOI) - Debt Service = Cash Flow for Investor ROIMay 17, 2012 Mark Barbash WEDA Presentation 14
  • 15. Case Study: Metropolitan PartnersProject Metropolitan Partners has approached the community about the redevelopment of an existing, dilapidated building in the neighborhood. The company is owned by Ron Grisham, a suburban residential developer who has developed a niche market of urban neighborhood redevelopment projects. They are well regarded in the industry as savvy developers, with key connections in the finance community.May 17, 2012 Mark Barbash WEDA Presentation 15
  • 16. • Money: – Inadequate working capital to finance growth needs – Project costs escalate – The financial strength of the business deteriorates • Market: – Defined too broadly – Expanding into an unfamiliar or inappropriate business line • Management: – Inadequate business skills among principals – Expanding too fastMay 17, 2012 Mark Barbash WEDA Presentation 16
  • 17. • Failure on the part of the public sector lender to understand the level of risk it is willing to take • The public sector program cannot deliver fast enough • The public sector program cannot be flexible enough • Unrealistic expectations of how government programs can help • Failure to obtain support from every appropriate level necessary for public sector program approval • Failure on the part of the public sector lender to take INFORMED riskMay 17, 2012 Mark Barbash WEDA Presentation 17
  • 18. • First seek to understand, then seek to be understood 1 • Deal structuring is a logical process that will lead to an informed decision. 2 • Lenders / investors are money managers with different goals for ROI based 3 upon where they get their funding • A bank must match its Source of Funds with its Use of Funds. A bank’s loan 4 terms must match its source of funds. • Deal Structuring is a process of identifying the financing gap and using 5 available tools to fill the gap. • Value ≠ Cost 6 • Financial Analysis doesn’t give you the answers. It gives you the questions to 7 ask. That’s the job of the EDP. • Don’t just take risk. Take INFORMED risk. 8May 17, 2012 Mark Barbash WEDA Presentation 18
  • 19. Thank you. Mark Barbash Economic Development Consulting Mark.barbash@gmail.com (614) 774-7599 www.linkedin.com/in/markbarbashMay 17, 2012 Mark Barbash WEDA Presentation 19