All the elements of suspense are here, in this story of a complex project that has (at least in economic development circles): a dormant, brownfield manufacturing site; an aggressive entrepreneur seeking business expansion on his own terms; and a village and regional economic development organization wanting to create new manufacturing job in an area of high unemployment.
Here is the article, originally published on iedconline.org (http://www.iedconline.org/EDNow/052311/Financing.html )
Financing Deals in Today’s Lending Climate: A Case Study of a Tough Project
By Chris Manheim, CEcD
This story of a complex project has all the elements of suspense (at least in economic development circles): a dormant, brownfield manufacturing site; an aggressive entrepreneur seeking business expansion on his own terms; and a village and regional economic development organization wanting to create new manufacturing jobs in an area of high unemployment.
American Aluminum Extrusion (AAE) is investing $7.5 million to open a manufacturing facility in the Village of Roscoe, Illinois, by the end of 2011. The project is expected to create 130 manufacturing jobs by the end of 2013. In addition, the company will remediate and occupy a brownfield site, a 291,000-square-foot plant vacated by Warner Electric more than 10 years ago.
It’s a great project that will anchor a new industrial park for Roscoe, but it has been a highly complex deal that was tougher to put together than it would have been just a few years ago. Here’s a look at what worked and what didn’t.
What worked: Laying the groundwork
First, the political will was in place before the project became public knowledge. The Rockford Area Economic Development Council (RAEDC) had been working with the Village of Roscoe, one of its investors, for some time to find a re-use for the old Warner Electric plant. Likewise, the project had the support of Winnebago County and local and federal officials.
Second, the RAEDC coordinated a meeting early in the process in which the Illinois Department of Commerce and Economic Opportunity offered its incentives. These included:
• A tax credit of $1 million (from the Economic Development for a Growing Economy, or EDGE program);
• A $50,000 job training grant (from the Employer Training Investment Program, or ETIP);
• And, most importantly, a $750,000 Community Development Assistance Program (CDAP) grant to replace the 30-plus-year-old well and septic systems. (CDAP is known nationally as the Community Development Block Grant program.)
About the players in this story
American Aluminum Extrusion (AAE) manufactures custom aluminum extrusions for the transportation, consumer, building and construction markets in the Midwest.
• Facilities in Beloit, Wis., and Canton, Ohio
• Total workforce: 190 employees
• Annual sales: $85 million
Roscoe is a village of about 9,000 in Winnebago County, Illinois, near the Wisconsin border.
• Approximately an hour’s drive northwest of Greater Chicago
• Part of the Rockford, Illinois, Metropolitan Statistical Area
Third, a feasibility study solidly demonstrated that a tax increment financing (TIF) district was appropriate – and needed – to help finance the redevelopment of the 50-acre parcel and building. (The authority to create the TIF comes through the Illinois Jobs Recovery Law, in which districts qualify based on the level of unemployment or vacant industrial facilities they contain, rather than a determination of “blight”). Getting the TIF district approved required gaining the support of local taxing bodies (water and school districts).
Fourth, an economic development impact analysis completed by Northern Illinois University demonstrated to elected officials and the public that incentives were justified.
Fifth, after some delay, approval finally came through from the U.S. Environmental Protection Agency for the site’s remediation plan. The delay ended up being a good thing, as our team needed time to adapt our financing plan after most of our tried and true financing programs fell short.
What we thought would work but didn’t
Like so many start-ups, AAE, really in business for just a few years, relied heavily upon its venture capitalist. Its bankers provided the normal business financial services, but as the financial needs of the company grew to second- stage or development capital, trying to use traditional private and public financing vehicles became problematic.
Industrial Development/Revenue Bonds: We believed that with this relatively small deal – about $7.5 million – an IDB/IRB would do the trick, particularly if the Illinois Development Finance Authority was used. Typically, a small project such as this is bundled with others to make an attractive package to a financial institution. But times have changed: in the current economic climate, with the new banking rules, AAE’s financial institutions were not interested in the project, bundled or as a stand-alone project.
The key reason given was lack of collateral. Changes in banking regulations discourage the use of existing, non- performing equipment, as well as property that has not been officially remediated, as collateral. Once the equipment was assembled and producing product, then it would become viable collateral. Under old collateral guidelines, this likely would not have been as much of an issue.
Local financing programs: We also explored with AAE and their financial partners the use of the Winnebago County Recovery Zone Facility Bonds and its Revolving Loan Program. They found the application process too onerous and cumbersome, ultimately choosing not to apply.
SBA and USDA programs: At the same time, we sent the company information about the Rockford Local Development Corporation (RLDC) and its SBA 504 and 7(a) programs, ones that I personally have a great deal of experience using. The site also qualified under USDA’s Industrial Development programs for loans and loan guarantees. But similar to the IDB/IRB issue, the same stricter collateral guidelines would still apply, thus resulting in the same recommendation not to approve the project.
Financing today: Not for the faint of heart
In the end, the upfront financing to get the project off the ground was structured through the use of TIF proceeds, the CDAP grant to extend water and sewer lines, and the venture capitalist co-signing a loan from a commercial bank. The EDGE tax credits are welcomed, but are available only after the company shows income, and over a period of 10 years; companies need both cash flow and capital during the initial stages of a project (typically, during the first three years). The training grant (ETIP) is very useful up front, of course, for training new workers.
Ultimately, this project shows that economic developers must be persistent and resourceful in order to finance developments that fail to meet the current commercial lending standards. In addition, we really have to take another look at how to apply tried and true programs, such as IDBs and SBA programs, to the needs of manufacturers who are making that transition from venture/private financing to qualifying for loans under the revised criteria. These government lending programs are meant to provide financing as a ‘lender of last resort’ or a guaranty to persuade a lender to approve a loan. Yet with requirements that seem just as stiff as in conventional lending, my colleagues and I find ourselves questioning the value of these tried and true programs, given today’s realities of global competition and start-up funding.
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