The basics of development financing for real estate development and businesses, from how banks make loan decisions to how SBA and other programs work to help create and retain jobs. Presented at the 2016 Ohio Basic Economic Development Course.

1. Ohio Basic Economic
Development Course:
Economic Development Finance
Mark Barbash
Council of Development Financing Agencies
mbarbash@cdfa.net
Economic Development Consulting
Mark.barbash@gmail.com

2. Economic Development Financing
• Financing as a step in the Development
Process
• Private Financing
• Working with Bankers
• Public Sector & Non profit Financing
• Types of Public Sector Programs
• Tax Incentives

3. Steps in the Development Financing Process
1. Understand the
Business
2. Understand the
Project
3. Understand the
Private Financing
4. Understand the
Public Financing
6. Close
the
Deal
5. Identify
the Gap
and
Structure
the
Financing

4. Step One: Understand the Business
• Assessing the Health of the Business
• Lifeline of a Business
• Money
• Market
• Management

5. Business Lifeline
Start Up Fast
Growth
Stable Mature
?

6. Analyzing a Business’s Management and
Financial Condition
• Money
– Sufficient equity at beginning to avoid reliance on borrowed
funds
– Management of financial performance to produce cash flow and
a profit (see addendum)
• Market
– Identified market for the product or service and ability to
respond to changes in the market
– Understanding of competition provided by larger businesses or
niche competitors
• Management
– Appropriate variety of skills in project development, production,
financial management, inventory control, sales & marketing,
technology

7. Step Two: Understand the Project
• How the project will benefit the business
• Project Cost
• Project Timetable
• Project Documentation

8. How will the project benefit the business?
• Cost Efficiencies /
Consolidation
• Expanded Capacity to Meet
Existing Sales
• Expanded Capacity to Meet
New Sales
• Proximity to Markets,
Suppliers or raw material
• New location in a new market
• Proximity to key skills or
technical capacity
How will the project benefit
the community?
• Job creation/retention
• High wage/high tech jobs
• Location in an EZ or key
development area
• Industry cluster member
• Part of key community
initiative

9. Detail All Components of the Project Cost
Fixed Assets Land
Building
Equipment
Infrastructure Road and Rail
Fiber, Telecom
Sewer, Water, Gas, Electric
Operating Capital Inventory
Payroll
Receivables and Payables
Growth Capital Working Capital R&D
Equipment
Real Estate

10. Project Development Issues
• Cost:
– Be sure that all costs are identified, including
infrastructure, moving, installation and carrying costs
• Timetable:
– Pre-ordering of equipment, necessary environmental
studies, site preparation
• Documentation
– Appraisals, environmental assessments, engineering
reports

11. Step Three: Understand the Private Financing
• Business lifeline determines private investment
potential
• Financing for Fixed Assets
• Financing for Working Capital
• Financing for Growth
• From the Business’ Perspective
• From the Bank’s Perspective

12. REMEMBER…
All lenders and investors are money managers
– nothing more and nothing less -- with
different goals for return on investment based
upon their source of funding.

13. Private Investor Profiles
Investors Risk Control Investment
Seed Capital Individuals,
Local funds,
Foundation
Extremely high
(20 – 30%),
most lose
money
Informal
process, Very
high control
Ownership,
Out quickly to
VC
Venture
Capital
Managed VC
funds & SBICs
Very high (15 –
30%), 90% lose
money
Formal
process, high
control
Ownership,
Out 5–7 years
through IPO
Banks + Commercial
banks and
leasing cos.
Medium to low
or 0 risk; Prime
+
Very formal
process, low
control
Loans, leases
per asset life,
3–20 yrs.
Capital
Markets
Corporate/
Investment
banks,
insurance, REIT
No risk,
Treasury rate
return
Highly
structured
process, no
control
Loans, leases
based on asset
life, 7 – 30 yrs.

14. The business lifeline determines the private
investment available
Start Up Fast
Growth
Stable Mature
Personal Assets
Seed Capital
Venture Capital
Conventional Lenders, Banks
Capital Markets (Stocks,
Bonds)
30%+ VC
6.5%+ Bank
3.5 % Prime
Preseed
Capital
Angel
Investors
2.3 % Treas

15. Financing Principles: Bank and Business
Business
• Longer Term Loans
• Lower Interest Rates
• Higher Loan/Value
• Lower Equity
• Fixed Rates
• Collateral: Limited to
Business Assets
• Non Recourse
Bank
• Shorter term loans
• Higher Rates & Fees
• Lower Loan/Value
• Higher Equity
• Variable Rates
• Collateral: Business and
Personal Assets
• Personal Guarantees

16. The Nine Rules for Working with Private
Lenders
1. The Donald Trump / Bernie Sanders Rule
2. The Al Capone’s Safe Rule
3. The Henry F. Potter Rule
4. The George Steinbrenner Rule
5. The Herb Cohen Rule
6. The Berlitz Rule
7. The Scouts Rule
8. The Elephant Rule
9. The Don Quixote Rule

17. Step Four: Understand the Public Sector
Financing
• Purpose of Public Sector Programs
• Types of Public Sector Programs
• Tax Incentives and TIFs
• Taxable and Tax Exempt Bonds
• Joint Economic Development Zones +
• Selecting the Public Sector Program
• Rules for Working with Public Sector Programs

18. Purpose of Public Sector Programs
• Achieve social or economic goals
– Create or retain jobs
– Assist specific groups of citizens or neighborhoods
• Leverage bank financing
• Reduce bank risk
• Finance non-bankable businesses
• Provide incentives for targeted investments

19. Types of Financing Programs
• Direct Loans
• Loan Guarantees
• Bonds: Taxable and Tax-Exempt
• Tax Incentives
• Tax Increment Financing
• Intermediary Programs
• Hybrid Programs

20. Direct Loans
• Finance 30-50% of a
Project Cost
• Fixed Interest Rates
• Terms Equal to or Longer
than the Bank
• Loan is Subordinated to
the Bank
• Reduced Business Equity
Requirement (10%)
• Generally for Fixed Assets
Only
• JobsOhio
• Ohio 166
• SBA 504
• Community
Development Block
Grants
• Intermediary Programs
depending on local
structure

21. How a Direct Loan Makes the Deal
Better…
Bank
75%
Equity2
5%
Bank
50%
Equity 10%
Public
40%
Bank Only Public/Private

22. Loan Guarantees
• Guaranty of Bank’s Loan
• Bank’s Rate and Term
• Guaranty up to 85% of
Bank Loan
• Can Finance Working
Capital
• Alternative: Provide
secured deposit
• SBA 7(a)
• SBA Community
Advantage
• Collateral
Enhancement Program
• Capital Access
• USDA Business and
Industry Loan Program

23. Public Sector Programs
Start Up Fast
Growth
Stable Mature
Ohio 166 / Enterprise Bond fund
SBA 7A
Collateral Enhancement / Capital Access
SBA 504
USDA B & I
30%+ VC
6.5%+ Bank
3.5 % Prime
JobsOhio Growth Fund Loan
Innovation Ohio
2.3 % Treas

24. Step Five: Determine the Gap and
Structure the Deal
• Can the available private sector financing support the entire
project?
• If not, what is causing the gap?
• Utilize the public sector program that most efficiently and
effectively fill the gap
• Make sure that the private financing and the public sector
programs are compatible.

25. Financing Gaps
• Cash Flow Gap: Insufficient cash generated to pay
debt service on financing
• Collateral Gap: Cash flow is sufficient to make
payments, but the collateral doesn’t support the
amount of the private sector financing
• Credit Gap: Start up business with insufficient history
to support private financing
• Character Gap

26. How public sector programs help fill the
financing gap
• Guarantee risky credits or lower value collateral
• Long Term Financing
• Fixed Rate Financing
• Lower down payment financing to preserve cash for
working capital
• Lower rate financing
• Reduced Debt Service Needs
• Increased Borrowing Capacity
• Bring lower rate and long term financing through
capital market bond financing (tax exempt or taxable)

27. Step Six: Close the Deal
• Project Management:
– Making sure that each member of the team understands their roles
• Monitoring progress by team members
• Developing a timetable
• Most public / private projects fail at the deal closing stage
• Why do public/private projects fall apart?

28. PUBLIC SECTOR AND NONPROFIT
DEVELOPING FINANCING PROGAMS

29. • Creation of JobsOhio Growth Fund from funds
provided by liquor enterprise
• Current DSA linked with JobsOhio programs
• Start with your JobsOhio Regional Partner EARLY
• Through a Deal Team, JobsOhio and DSA will evaluate
the project and the program that best fits the need
• JobsOhio Growth Fund has much greater flexibility
than existing DSA programs
• JobsOhio Growth Fund approval and closing
streamlined

30. JobsOhio Growth Fund
Loan
• Fixed Assets: Land, Building & Equipment
• $500,000 to $5,000,000
• Generally up to 50% of Total Project Cost
• Generally 10% Equity from Borrower
• Term: Real Estate – 15 years; Equipment – 10 Years
• Interest rate based upon investment risk

31. JobsOhio Growth Fund
Grant
• Fixed Assets: Land, Building & Equipment
• Moving Costs
• Demolition
• Infrastructure / Rail access / Roadways
• Utilities
• Generally $100,000 to $500,000

32. Financing Continuum

33. Key Factors to Consider
• Emphasis on creation of new jobs, increase in payroll
• Return on Investment generally by year 3
• Targeted Industries
• Financial Strength of Company
• Average Wage at least 150% of federal minimum wage
• Utilities
• Generally $100,000 to $500,000

34. Players in Development Finance
JobsOhio JobsOhio & Revitalization Fund Loans and Grants;
Incentives for larger projects
ODSA Federal Money, Community Development Block Grants
SBA 504 CDCs SBA 504 direct loan, SBA 7a Loan Guarantees, Ohio 166
Regional Program
Port Authorities Finance Authorities; Taxable and Tax Exempt Bond,
Bond Funds, Real Estate Development, Aggregating
Capital, PACE (Energy Efficiency Financing)
Port Authorities: Real Estate Development, Pass thru
bonds
Local
Government
CBDG Revolving Loan Funds, Tax Increment Financing,
Income Tax Incentives, etc.
Network Partner First step on larger projects, negotiation of incentives;
Link to JobsOhio

35. Bonds
• Debt issued by local authorities
• Underwritten by investment banking firms
• Purchased by national capital market investors
• Better credit companies or
• Companies backed by bank Letter of Credit or other
security
• Larger projects

36. Bond Programs
• Stand alone Industrial Revenue Bonds
• Ohio Enterprise Bond Fund
• Port Authority Bonds
• Ohio Air Quality Development Authority
• Ohio Water Quality Bonds

37. Taxable and Tax-Exempt Bonds
Taxable Bonds
• Can be used for almost any
purpose
• Lenders pay tax on interest
income
• No interest savings to the
borrower other than the
lower national market rates
• Better credits, larger
issuances
Tax Exempt Bonds
• Finance public-benefit
projects
• Job creation, housing,
education, government,
student loans
• Lenders of tax exempt
bonds pay no income tax
on interest earned
• Savings passed on to the
borrower in the form of
lower interest rates
• Typically very high “cost of
issuance”

38. Tax Incentives
• Governed by State Law
• Abatement of Real or Personal
Property Tax
• Income Tax Credits or Income
Tax “refunds”
• Linked to a public purpose (job
creation or retention,
investment)
• Purpose: Reduce “cost of
doing business” or provide
incentive
• Impact on other local taxing
authorities (schools) make
abatements controversial
• Enterprise Zone (EZ)
• Community Reinvestment
Area (CRA)
• Job Creation / Retention
Tax Credits
• Income Tax Rebates /
Credits

39. Tax Increment Financing
• Purpose: To finance public improvements
• Source of Funds: Increase in real estate taxes from new
investment (the increment)
• Funds are redirected towards other purposes
• Method: Direct reimbursement or as debt service on
bonds issued to pay costs
• Difficult to combine tax abatements with TIF financing
• Impact on other local taxing authorities (schools) make
TIF financing controversial
• New Ohio law has restricted the TIF program by
requiring county approval and direction of funds to
human service agencies

40. 40

41. Collaboration for Economic Development
• Intended as a way for two or
more jurisdictions collaborate
to support an economic
development project
• Municipalities & one or more
townships
• Agreement to share revenue
and expenses
• Ability to levy an income tax in
a township, if partnering with
a city that currently has an
income tax
• If unanimous trustee vote, no
referendum
• Joint Economic Development
Districts (JEDDs)
• Joint Economic Development
Zones (JEDZs)
• Cooperative Economic
Development Agreements
(CEDA)
• Annexation Agreements
• Community Improvement
Corporation
• Other Agreements

42. Intermediary Programs
• Government provides funds or
allocates tax credits to local
economic development for
relending
• Local group takes
responsibility for policy,
underwriting, marketing,
processing and management
of funds
• Local group assumes
responsibility for funds
management and repayment
of funds to the government, if
a loan
• EB 5 Financing
• SBA Microloan
• Regional 166
• CDBG
• New Markets Tax Credits
• Community Development
Financial Institutions
• USDA Intermediary
Relending
• SBA Intermediary Program

43. How to Determine If Its A Real Deal
on the First Visit
1. Are they willing to provide business and personal financial
statements?
2. Are they willing to provide references?
3. How do they respond to challenging “devil’s advocate”
questions?
4. Is their answer always “Someone Else is in Charge?” and
do they blame everyone else for their problems?
5. Do they expect “free money?”
6. Do they have a realistic assessment of the market,
competition and job creation potential?
7. Are they willing to spend money up front?

44. Rules for Economic Development Finance
Professionals
1. Allow the business to tell their story…once
2. Don’t waste time with a dog
3. Not all projects can fit with public sector programs
4. Let the program people represent their program
5. Don’t overpromise what the program can deliver
6. Don’t pile on government programs
7. Explain the strings up front
8. Find a cooperative lender
9. Keep written records of your activities
10. Be prepared to do the paperwork
11. If it sounds too good to be true, it probably is
12. Take informed risk!

45. Contact information
Mark Barbash
Mark.barbash@gmail.com
(614) 774-7599

46. Additional Information

47. Key questions to ask about project costs
1. Is the site landlocked? Is there room to grow?
2. Are there any potential environmental issues which
could drive up cost?
3. Does the site have adequate infrastructure? Sanitary
sewer, storm sewer, water, electricity, natural gas,
transportation, fibreoptic, etc.
4. Does the site have appropriate zoning for the desired
use? What is the community process for changing
zoning?
5. Is there evidence of any historic significance for the
site or any existing structures?

48. Questions to ask about the project timetable
1. Does the developer have site control? If an option exists,
when does the option expire and what are the terms for
renewal?
2. Has an environmental assessment been completed and
have all issues been identified?
3. How far in advance does equipment have to be ordered?
Does payment have to be made on advance orders?
4. What is the projected time for site preparation?
Construction?
5. Does the general contractor have experience with this type
of project in this type of community?

49. Key questions to ask about project
documentation
1. Has an appraisal been completed on any real estate or
equipment project?
2. Has an engineering assessment of existing and needed
infrastructure been completed?
3. Has an environmental assessment or Phase I been
completed which shows any remediation that must be
completed?
4. Has an engineering assessment on existing buildings been
completed to assure that there are no structural issues?
5. Have detailed and documented project cost estimate been
done by a third party?

50. Some questions to ask on an “Incentive”
Project
1. Does your ED organization have a goal for incentive
projects? What kinds of projects do you want to
incentivize?
2. Is your community in competition with another city?
Where is that city? Is it in the same marketplace?
3. What is the wage level for jobs to be created?
4. What is the cost-benefit analysis for the project? Will
you get more than you spend in the long run?
5. What is the track record of the company being assisted
in asking for and meeting the terms of other incentive
projects?

51. Why do public / private deals crash?
• 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 risk

52. Why do projects fail?
• Money:
– Inadequate working capital to finance growth needs
– Project costs escalate beyond the business’ ability to afford the
project.
– The financial strength of the business deteriorates, causing the
lender to withdraw its commitment (either temporarily or
permanently).
• Market:
– Defined too broadly
– Expanding into an unfamiliar or inappropriate business line
• Management:
– Inadequate business skills among principals
– Expanding too fast
– Project Issues: Problems with site requirements, costs, etc.