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Home My WebLink AboutResolution No. 32-2017 - Amended Industrial Revolving Fund PlanRE, SOLUTION NO. 32-2017 A RESOLUTION OF THE CITY OF SOUTH BEND 130ARD OF PUBLIC WORKS APPROVING AN UPDATED AND AMENDED INDUSTRIAL REVOLVING FUND (IRF) PLAN The City of South Bend, Board of Public Works hereby consents to and adopts the following resolutions as the resolutions and actions of the City of South Bend, Board of Public Works at a meeting duly called and held, and at which a quorum was present and acting throughout: WHEREAS, the City of South Bend, Board of Public Works has been presented with an updated and amended Industrial Revolving Fund (IRF) Plan for the City of South Bend, Indiana ("Plan"), and upon consideration of same and after due deliberation, it has been determined that it is in the best interest of the City of South Bend, Board of Public Works to approve said Plan. NOW, THEREFORE, the resolutions which the City of South Bend, Board of Public Works has adopted are as follows: RESOLVED, that upon careful consideration, the City of South Bend, Board of Public Works has deemed it to be in the best interest of the City to approve the updated and amended Industrial Revolving Fund (IRF) Plan for the City of South Bend, Indiana as the final Revolving Loan Fund Plan; BE IT FURTHER RESOLVED, that the City of South Bend, Board of Public Works agrees to follow the terms and provisions of The Plan in the operation of its Economic Development Administration Revolving Loan Fund. ADOPTED this 22nd day of August, 2017, CITY OF SOUTH BEND, BOARD OF PUBLIC WORKS �L4 n" � Gary A. Gilot, President Therese Dorau, Member Suzanna Fritzberg, Member aL L" — Elizabeth Maradik, Member James Mueller, Member ATTEST: 4�\qmtbh 04f 10 Q-- t-i'tida7M—Martin, Clerk U 47 a :1 THE INDUSTRIAL REVOLVING FUND of South Bend, Indiana Industrial Revolving Fund (IRF) Plan City of South Bend Adopted MM/DD/YYYY 227 W. Jefferson Blvd. Suite 1400S South Bend, IN 46601 (574) 235-9371 TABLE OF CONTENTS EXECUTIVE SUMMARY ..................... ................................................... 3 PART 1: REVOLVfNG LOAN FUND STRATEGY A, ECONOMIC ADJUSTMENT PROGRAM OVERVIEW .................... I ...................... ....... ...,..s B. BUSINESS DEVELOPMENT STRATEGY ........................................................ ............................. 6 C. FINANCING STRATEGY ... ............................................................................................... ......... 9 D. FINANCING POLICIES .................................................................................................. ........... 12 E. PORTFOLIO STANDARDS AND TARGETS ................................................................................ 16 F. IRF LOAN SELECTION CRITERIA .............................................................................................. 18 G. PERFORMANCE ASSESSMENT PROCESS ................................................................................ 20 PART 11: OPERATIONAL PROCEDURES A. ORGANIZATION STRUCTURE ..................................................................... ............................ 21 B. LOAN PROCESSING PROCEDURES ................................................ - ....... ................................ 26 C. LOAN CLOSING AND DISBURSEMENT PROCEDURES ............................ ....... ........................ 31 D, LOAN SERVICING PROCEDURES ...................................................................... -- ................... 33 E. ADMINISTRATIVE PROCEDURES ............................................................................................. 37 APPENDICES A. Loan Application Package B. Loan Closing Checklist C. Loan Processing Checklist D. ResolutionApproving IRF Plan 43 44 .,.- ....... .............. 48 2 EXECUTIVE SUMMARY LookinIZ Back, Moving Forward In 1975, the Economic Development Administration provided financing of $5 million to one of the Midwest's first Employee Stock Option Plans (ESOP), facilitating the acquisition of a local but nationally known firm: South Bend Lathe. South Bend Lathe continued operation for many years, providing hundreds of local citizens' employment opportunities, opportunities that would have been lost to this community absent this action. The repayment of this ESOP loan was directed into a newly created trust, Industrial Revolving Fund of the City of South Bend (IRF), whose purpose was to reinvest its funds in other companies in need of assistance. Companies with solid business plans that found themselves unable to pursue traditional funding opportunities have been assisted by this fund. Current Adiustment Problem From the perspective of the manufacturing economy of the Midwest, the closing of Studebaker brought diversification to our manufacturing community at a faster pace than would have otherwise occurred. As one might expect, the IRF initially focused upon the manufacturing sector, assisting many local firms to move from automotive to other manufactured products. And where a product change was not possible, companies strove to increase the number of customers they served. As larger manufacturers transitioned away from vertically integrated operations, the IRF transitioned to support those opportunities that resulted such as specialty machining, exotic coatings, and other high - value or specialty businesses. There was a growth in third -party distribution and logistics. These structural business changes were needed to remain competitive in today's manufacturing environment. Unfortunately, while efficiencies were achieved, the total number of companies decreased. Even within surviving firms, nearly all efficiency gains produced fewer rather than more jobs. With few exceptions, the balance of our economy has not countered to offset these losses. Far too much of our regional economy continues to be tied to producing a restricted set of durable goods; a legacy set of manufactured products that have been in a steady state of decline... some for decades. Our regional economy has not successfully moved into new business and products. As detailed in Part I -A (Economic Adjustment Overview) the impact of our community's continued close ties to a declining set of products has produced: Declining wages, employment and population Shift from well -paid manufacturing jobs to lower paying jobs in the service and retail sectors, Stagnant growth in the property tax base Loss of community services and overloading remaining services Erosion of neighborhoods highlighted by an increase in vacant homes Loss of skilled workers as many relocate to higher paying wage areas. Regional Adjustment Stratel4ies, Objective Our current economic adjustment strategy is found in the 2015-2019 Comprehensive Economic Development Strategy (CEDS) prepared by the Michiana Area Council of Governments. In an effort to build programs that support business, the following objectives were established for our regional CEDS: Encourage the attraction of new businesses Grow and retain existing business Attract high quality, high payingjobs in growth industries with a focus on technology Encourage an attitude of entrepreneurship Promote an economy which supports business Improve capital access for local businesses Support new technology and workforce development. Local StratelZies, Objectives The regional CEDS describes four very different economics, each with (somewhat) unique economic challenges: Elkhart County is a robust manufacturing center, driven largely by the recreational vehicle and manufactured housing industry. Marshall County reflects a rural community setting, with an economy that is largely driven by agricultural linked manufacturing and service businesses. Kosciusko County is a rural community that happens to have (located in Warsaw) the largest concentration of orthopedic original equipment manufacturers in the United States. St. Joseph County reflects a major manufacturing economy that has gone through a massive contraction as products traditionally produced in the United States have moved offshore, remaining legacy operations have shifted to more highly mechanized production systems, and as locally owned firms have departed, leaving branch plant operations in their wake. Our local efforts in St. Joseph County are driven by two very significant and unique needs: To support the transition of our traditional manufacturing base, ensuring that those activities that can continue to effectively operate in the US (and the Midwest in particular) have the support and resources needed to succeed. To support the creation of new products and services, new business activities that are often fueled by the new concepts and technologies generated by university research. 4 PART I INDUSTRIAL REVOLVING FUND STRATEGY A. ECONOMIC ADJUSTMENT PROGRAM OVERVIEW 1. Nature and Scale of Economic Adjustment Problems Economic Adjustment Problems: 1. 1 The loss of many highly paid, low and medium skilled manufacturing jobs has precipitated a shift to lower paying jobs in the service and retail sectors. Successes in manufacturing that have occurred often involved jobs at the lower end of the manufacturing pay scale. The net result is a downward trend in wages, employment and population for the City that has continued over the last half century. 1.2 Local wage levels in comparison to national averages have dropped considerably. 13.0ther problems associated with decreases in wages, employment and population include: stagnant growth in the property tax base; loss of community services and overloading those that are left; erosion of neighborhoods with numerous vacant houses present in them; and loss of skilled workers who move to higher paying wage areas. 2. Plan and Strategies: 2.1.Economic Development • Encourage the attraction of new businesses, including technology, while continuing to grow and retain existing businesses • Attract high-quality/high -paying jobs in industries anticipating growth regionally and globally, especially technology • Promote alternate energy and green -based industries as integral sectors of the regional economy 2.2.Financial Resources Encourage an attitude towards entrepreneurship in the region Promote a local economy that supports and assists the development of small businesses Improve credit and capital access for local businesses 2.3.Technology Actively develop local and regional abilities to grow technology for government and business 5 2.4.Workforce Development Create a diverse regional economy for employers and employees Encourage an atmosphere for entrepreneurship opportunities and activities. 2.5.At the regional level MACOG is responsible for overseeing implementation of development programs, their review and for maintaining the CEDS. The Mayor of the City of South Bend and other local elected officials sit on the policy committee of MACOG, insuring that collaboration occurs at the highest levels. The City of South Bend, through its Department of Community Investment participates in the planning process that precipitated the CEDS and its updates. At the local level the Chamber of Commerce, together with the City's Department of Community Investment are responsible for managing day-to-day economic and business development activities. In addition, these activities are reviewed annually by the City's Mayor, South Bend's Common Council, and the local business community via the Chamber of Commerce. The Director of the Community Investment Department as well as the City Controller are members of the IRFs Board of Directors. Additional business and community engagement are maintained as a result of representatives from the Chamber of Commerce and the minority business community. This assures a coordinated approach in the utilization of the Industrial Revolving Fund in dealing with economic adjustment problems in South Bend. B. BUSINESS DEVELOPMENT STRATEGY 1. Objectives: 1. I.Work closely with the Chamber of Commerce to promote business growth in South Bend and St. Joseph County. 1.2.Provide assistance to existing businesses to help them survive, expand, and stay in the community. 1.3.Attract new export businesses to the community. While many of these firms will be manufacturing and technology based, service businesses which have the ma . ority of their sales outside the area are equally beneficial to the economic 9 health and well-being of the community. 1.4.Assist new business ventures to start up and remain in the community 1.5.Continue the development of the industrial and office parl,, facilities located in the City and the County. 1.6.Encourage and support programs engaged in employee skills training and displaced worker retraining 1.7.Grow the convention and tourism activities and programs operating within St. Joseph County. 1.8.Encourage and support international trade activities. 2. Targeted Businesses Since the objectives are very broad, there are no common characteristics of the businesses targeted by the business development strategy. Size, age, ownership, management, products, markets, competitiveness, production capacities, and capital are all variable, Characteristics of businesses the IRF may be approached by are, however, more definable, 2. I.Existing or new local companies with fewer than 100 employees 2.2.Not entirely served or denied by conventional lenders (e.g., lack of adequate collateral, negative net worth, poor or untested management, lack of project equity, unproven market, or lack of a sufficient track record due to the company's age) 2.3.Companies relocating their business to South Bend or retaining an existing business. 2.4.Start-up firms needing funds for such activities as proving the technology for final product development, proof of commercialization, and initial market targeting that will allow the firms to move on to venture capital financing and eventually to standard bank financing. 3. BusinessNeeds 3. I.Access to information on markets, government contracts, legislative changes, manufacturing processes, and new technology 3.2.Access to capital 3.3.Access to management expertise 3A.Access to information on available sites and development of new sites 3.5.Training and retraining services 3.6.Adequate infrastructure 7 4. Other programs and activities The following programs support and address the needs of the targeted businesses. Development of marketing packages for attracting new businesses to the area by the Chamber of Commerce in St. Joseph County (SJC). They coordinate programs that help businesses start, grow, or locate anywhere in the county. The Chamber works closely with local government partners, the business community and other regional partners in an effort to have a coordinated, focused and effective local economic development program. Partnership with other local, state and federal sources for financing such as the Indiana Economic Development Corporation (IEDC) and the Federal Government's Small Business Innovation Research (SBIR) program to finance new and existing businesses and to develop alternative sources of capital Incentive options for existing and new businesses through the City's tax abatement program. The City's tax abatement ordinance provides incentives for data storage companies to locate in South Bend. The City has worked in partnership with Notre Dame University to develop Innovation Park and Ignition Park. Development of brownfield sites where access to infrastructure and transportation networks already exist. Programs to encourage private -sector, university and governmental partnerships in regards to technology transfers. The local SBA Small Business Development Center is developing programs and engaging new entrepreneurs who are attempting to capitalize on new technologies developed through university research. Ivy Tech Community College has a program in nanotechnology training, along with other associate degrees for high tech industries. Other local universities are also gearing up to offer courses in nanotechnology related fields. Programs to promote the development of companies directly involved in the production of products and services for the alternative energy industry as well as those who may compliment that industry though the utilization of industry by- products. Recognition of entrepreneurs and small businesses for achievement in growth, sales and community service. The Chamber of Commerce of St. Joseph has an annual luncheon where businesses and entrepreneurs are recognized for economic success as well as service to the community. The State also has programs that recognize new and growing companies that are doing particularly well. Workforce development and career transition programs. The business community through the Chamber of Commerce and other organizations have voiced concern over the lack of potential employees trained in the skill sets they need. In response Ivy Tech Community College has embarked on a program to provide courses tied to the needs of local businesses. South Bend School City has started programs directed towards the needs of the private sector in such areas as advanced manufacturing as well as preparing students for advanced study in such areas as life sciences and medical technology. School City is placing increased emphasis on courses related to science, technology and mathematics. Information programs initiated by the City and the Chamber of Commerce on resources available to firms from government and other sources. A community - wide database of business resources is being developed for the City and surrounding communities. The database will be available to both new and existing businesses. Information about the IRF will be included in the database. C. FINANCING STRATEGY 1. Financing Needs and Opportunities 1.11ocal, existing companies needing to expand or retain their business. Most often the need is for fixed asset financing. 1.2.Start-up companies because they face difficulty in obtaining bank financing. Unless management is well seasoned and brings close to 30% or more equity to the table, it is unlikely a bank will fund the project 1.3.Companies exploring prospects to locate or consolidate their business in South Bend. These customers are generally creditworthy, but they have no established history with local lenders and vendors. The financing is also needed occasionally to retain a business that may move out of the community unless a financing is offered to compete with offers from other cities. However, such financing must be clearly consistent with the W strategic objectives and EDA regulations. 1.4.Retention financing is called for on occasion. Local subsidiaries of larger companies are sold or threatened with closing. New ownership is sometimes difficult for banks to finance. Projects are often highly leveraged. In many cases, a sale or closing is due to the local subsidiaries' poor economic performance, and a meaningful local transition can be difficult to finance. All retention financing will be consistent with EDA regulations and sufficient justification and consistency with the IRF objectives must be provided in the loan documentation. The IRF will help to create jobs and assist in business opportunities where current economic resources are not available. The IRF will serve as a catalyst and will fill gaps that the private or public sectors fail to address. The IRF, almost without exception, will partner with others in offering assistance. 9 On occasion, the IRF may extend financing to a non-profit if it is determined the loan would benefit the community along with retaining or creatingjobs. 2. Local Capital Market 2.1. Private financing institutions Private financial institutions are primarily banks. These are not asset -based lenders but, rather, lenders who inake loans based on the company's ability to repay through profits and cash flow. There are some ad hoe as well as more formalized groups providing angel type financing, In order to fill our technology parks this void will have to be addressed either by the private or public financing institutions. 2.2. Public financing institutions A local certified development corporation (the Business Development Corporation). This financing entity often meets the financing needs of area businesses (average loan size is $450,000) utilizing the SBA 504 loan program. 2.3. Role of public and private lenders Private conventional lenders prefer to tend to applicants with a good credit history, strong historical cash flows and sound collateral coverage, which requires a larger equity injection than many borrowers are able to meet, Private landers also avoid smaller loans due to high transaction costs in relation to the risk and return, making an exception for their good deposit applicants with whom they have strong relationships. Public lenders are willing to meet the credit needs of higher risk but creditworthy businesses not entirely served by private lenders. Lower interest rates and longer terms improve a borrower's cash flow. Moreover, public lenders help entrepreneurs by lending in partnership with a bank so that the overall cost to the borrower is reduced and a long-term relationship with a private bank is established. When viewed from access to the capital market, the local business efforts are driven by two very significant but very different needs: To support the transition of our traditional manufacturing base, ensuring that those activities that can continue to effectively operate in the US (and the Midwest in particular) have the support and resources needed to succeed. While this sector is recognized to be in a contractive mode, it continues to represent and will always be a significant portion of our economy and a significant employer of our citizens. 10 The IRF works in concert with many public and private entities in supporting this historic and continuing business development "need". To support the creation of new products and services, new business activities that are often fueled by the new concepts and technologies generated by university research. We are painfully aware that most of the past generator of new products and new services exited communities such as ours during the consolidations and mergers of the 70's and 80's. The loss of local ownership not only meant that a headquarters (large or small) departed, it typically meant that the company's research and development team left as well, which meant the typical Midwest community lost: 0 The source of new ideas The systems and infrastructure that effectively whittled 100 ideas down to 3 or 4 successful product launches The infrastructure and support that caused most new product and service (business) launches to occur locally Today the most significant generator of new, promising ideas are our regional universities. The IRF is committed to support the effective evaluation and transition of new university -based ideas. While we recognize local and regional universities are a growing source of new science and phenomena to fill the idea generation gap, we also recognize that the (formerly private, internal) company infrastructure that processed 100 ideas into 3 or 4 viable businesses is gone. The replacement of this "concept development" infrastructure is critical to new business and job -creation activities. This is the second community business development "need" that the IRF is committed to support. 3. Characteristics of IRF Financing Niche Types of businesses typically assisted by the IRF: 0 Retention of existing companies in any NAIC code a Expansion of local and non -local companies in any NAIC code a New start-up companies classified under any NAIC code Types of financing typically provided by the IRF: Term loans for fixed asset purchases, working capital, and acquisition of businesses (to maintain their location in South Bend). These loans will be made primarily to businesses that export the majority of their product or service outside the immediate area Working capital and equipment loans for high tech industries in the technology parks and in other areas of the City 11 Mixed loan and equity financing for start-ups for final product development, product testing and certification, and market confirmation/development Types of terms provided for its loans, including non-traditional financing methods: 0 Working capital loans will generally mature within 3 years. 0 Equipment loans will generally mature within 10 years 0 Real estate loans will generally mature within 20 years Interest rates will generally be fixed and below market, however, in the case of some start-ups the interest rate may be much higher to account for increased risk Loans will be typically secured by the assets being financed along with personal guarantees. The IRF will leverage private funds of $2 for every $1 of loans that it makes. This will be the average across the IRF's portfolio and may vary from loan to loan. While not only helping to reduce overall unemployment, the IRF loans will also provide better than average wages. As noted previously, most IRF loans will be to manufacturing companies or high tech firms where average wages are much higher than in service and retail jobs. D. FINANCING POLICIES 1. Eligible Lending Area The City of South Bend. Other eligible lending areas may be added in the future with EDA's prior written approval. Loan agreements with IRF borrowers will provide for the IRF's ability to call the loan if the company should leave the then current location requirements of the IRF. 2. Allowable Borrowers Allowable borrowers will be for profit businesses or not -for —profit organizations. Loans will be made for start-ups, business retention, or business expansion. Industrial projects include those engaged in the production of a product. Commercial projects will include retail and wholesale trade business. Service projects will not include businesses involved in public administration. 12 Loans will be inade to high tech businesses particularly for the commercialization of new products developed by university researchers. 3. Allowable Lending Activities Loans will be made for the purchase of real estate, the construction of real estate, the rehabilitation of real estate, the purchase of equipment, or working capital. 4. Prohibited Lending Activities Per 13 CFR 307.17 b, IRF capital shall not be used to: (1) acquire an equity position in private business; (2) subsidize interest payments on an existing IRF loan; (3) provide for borrowers' required equity contributions under other Federal Agencies' loan programs; (4) enable borrowers to acquire an interest in a business either through the purchase of stock or through the acquisition of assets, unless sufficient justification is provided in the loan documentation. Sufficient justification may include acquiring a business to save it from imminent closure or to acquire a business to facilitate a significant expansion or increase investment with a significant increase in jobs. The potential economic benefits must be clearly consistent with the strategic objectives of the IRF; (5) provide IRF loans to a borrower for the purpose of investing in interest - bearing accounts, ceitificates of deposit, or any investment unrelated to the IR.F; (6) refinance existing debt unless (i) the IRF Recipient sufficiently demonstrates in the loan documentation a "sound economic justification" for the refinancing (e.g. the refinancing will support additional capital investment intended to increase business activities). For this purpose, reducing the risk of loss to an existing tender or lowering the cost of financing to a borrower shall not, without other indicia constitute a sound economic justification: or (ii) IRT, capital will finance the purchase of rights of a prior lienholder during a foreclosure action which is necessary to preclude a significant loss on an IRF loan. IRF capital may be used for this purpose only if there is a high probability of receiving compensation from the sale of assets sufficient to cover the IRF's costs plus a reasonable portion of the outstanding IR-F loan within 18 months following the date of refinancing. Loan agreements with IRF borrowers will include a provision for calling the loan if it is determined that the business violated Federal non -relocation provisions. 5. Loan Size The minimum loan size will be $25,000. The maximum loan size will not be greater than 25% of the IRF's total capital base. The maximum amount which can be outstanding to any one borrower is 25% of the IRFs total capital base, 13 the Board can determine on a loan by loan basis if any one borrower qualifies for an exemption to the maximum loan size. 6. Interest rates The minimum interest rate the IRF will charge is four (4) percentage points below the lesser of the current money center prime interest rate quoted in the Wall Street Journal, or the maximum interest rate allowed under State law. In no event shall the interest rate be less than the lower of four (4) percent or 75 percent of the prime interest rate listed in the Wall Street Journal. If the prime interest rate listed in the Wall Street Journal exceed fourteen (14) percent, the minimum IRF interest rate is not required to be raised above ten (10) percent if doing so compromises the ability of the RLF Recipient to implement its financing strategy. Guidelines and exceptions above the minimum would be based on the following: • Start-up loans may be charged higher rates based on increased risk and the company's growth potential • Based on the assessed potential for a company to obtain conventional financing at a later date, the rate may be set higher to encourage refinancing • Based on an assessment of the company's ability to afford higher debt service payments, the rate may be set higher • The interest rate for high tech starLups may be set higher to reflect the increased risk 7. Standard repayment terms and allowable deviations Working capital loans will mature within (3) three years unless a sales contr ' act exists to support a longer term. Such loans to high tech, start-up companies will not require a sales contract. Equipment loans will mature within (10) ten years and may mature earlier depending on the estimated life of the asset being financed, of the company's ability to afford higher debt service payments related to a shorter term. Real estate loans will mature within (20) twenty years and may mature earlier depending on the assessment of the company's ability to afford higher debt service payments related to a shorter term. 8. Fees There will be a closing fee of $1,000 per loan which may be waived by the IRF Board as necessary. There will be an annual service fee of one half of one percent of the outstanding loan balance calculated each year on the anniversary date of the 14 loan closing date. The borrower will reimburse the IRF for all legal documentation, recording fees, and title work costs. 9. Equity and Collateral to be Required of Borrower Each applicant will contribute at least 10% of the total project cost as equity. The equity may come from the company's cash on hand or from a cash injection from the owners. New companies may be required to contribute more than 10% equity, depending on the type of collateral. All or part of the cash equity injection may be waived if - The IRF determines it to be more advantageous to retain those funds for working capital purposes or a Net collateral securing the IRF loan is at least 120% of the loan amount or 0 Prior equity investments have been made within the last nine months Company assets As collateral, the IRF will generally secure the loan with the asset being financed. If the asset is real estate, then a mortgage will be taken. If the asset is equipment, accounts receivable, or inventory, then the IRF will take a security interest and file UCC financing statements. If the assets being financed are just accounts receivable and inventory, then a security interest will be taken in these assets. As additional collateral, other assets of the business may be taken to adequately secure the IRF loan. If the company leases its facilities, then a landlord's lien waiver may be required. In some instances, the collateral may be intellectual property. This may be the case for start-up loans to high tech firms. The IRF's Board has approved Collateral Guidelines which are utilized to provide a guide for discounting the collateral to arrive at an estimated liquidation value for collateral valuations presented in loan applications. Key -person life insurance Key -person life insurance may be required, depending on the business owner's age, health, and importance to the business. Personal guarantees Personal guarantees will be required on most all IRF loans, but may be waived if the IRF has a first mortgage or first security interest in assets with an estimated 15 liquidation value equal to or greater than 75% of the IRF loan. They may also be waived for startup, high tech loans. 10. Moratoria on interest and/or principal payments Moratoria on interest and/or principal repayments will usually not exceed (2) two years. Deviations may also be considered for businesses caught in an industry facing a severe economic downturn or suffering the effects of a general economic decline. Deviations will be made on a case -by -case basis and reviewed and approved by the IRF's Board of Directors. The key factor allowing deviation is cash flow balanced with anticipated projections for future growth. If it is determined to be too low to afford the full payment, than a moratoria on interest and/or principal repayments may be granted so long as the assumptions for future growth are realistic. It is anticipated that most high tech start- up firms resulting from university research or other sources will have insufficient cash flow and require a moratoria on interest and/or principal payments. 11. Credit Not Otherwise Available The IRF cannot be used to substitute for available private capital. Potential borrowers must demonstrate that credit is not otherwise available on terms and conditions that permit the completion or successful operation of the activity to be financed. E. PORTFOLIO STANDARDS AND TARGETS 1. Anticipated Target Percentage of IRF Investments 1. 1. Land Use The anticipated percentage of IRF investments for these categories is as follows: Industrial 60% Commercial 10% Service 30% Each of the categories will include targeting technology or technology infrastructure, but loans in each category are not expected to exceed 20% of that categories total active loan position. While these are anticipated percentages of IRF investments, they are neither minimums nor ' maximums. The definitions used by the TRF for industrial, commercial and service projects are as follows: 16 • Industrial projects include manufacturing and construction businesses, essentially businesses engaged in the production of a product • Commercial projects include retail and wholesale trade business • Service projects include businesses that provide a service to individuals or businesses, i.e., those not engaged in the production of a product or the sale of merchandise, however, for IRF purposes they do not include businesses involved in public administration The IRFs preferences are not based on these particular categories but, rather, the quality of the jobs being provided by the individual borrower and whether tho se j obs are rel ated to the exporting of goo d s or services. 1.2. Business Status The anticipated percentage of IRF investments for these categories is as follows: New business 45% Expansion 40% Retention 15% While these are anticipated percentages of IRF investments, they are neither minimums nor maximums, only general guides. 1.3.Loan Type The anticipated percentage of IRF loans for these categories is as follows: Working capital 30% Fixed assets 70% While these are anticipated percentages of IRF loans, they are neither minimums nor maximums, only as general guides. 2. Private Investment Leveraging Ratio for the Overall Portfolio The portfolio ratio of private funds to IRF finds will be maintained at 2:1 or higher. This may include the non -guaranteed portions and ninety percent of the guaranteed portions of US. Small Business administration 7(A) and 504 loans. 17 3. Job Cost Ratio The cost per job for the total portfolio will be maintained at $35,000 per job. This amount may vary for individual loans. Actual created jobs are the result of and attributable to the IRF loan and have to be verified by a borrower. For purposes of the calculation, jobs will be counted as outlined below: • Only jobs created or retained within (5) five years of a loan's initial funding will be counted or if construction is involved, within (5) five years after construction completion regardless of the status of the loan • Only permanent and directjobs will be counted • Part-timejobs will be summed to full-time equivalents (FTE) based on one- half FTE for each part-time job, assuming that a part-time job is, at least, (20) twenty hours per week. • Jobs will only be counted as retained when there is sufficient evidence that without the IRF loan they would have been lost. F. IRF LOAN SELECTION CRITERIA 1. Financing Not Otherwise Available The IRF will require the borrower to provide evidence demonstrating that credit is not available on terms and conditions that permit the completion or successful operation of the activity to be financed. That evidence may include but not limited to: * A bank turndown letter 0 List of banks contacted, funds requested, and banks' verbal response IRF analysis showing borrower's creditworthiness to be insufficient for conventional financing 2. Economic Impact Criteria The IRFwilI consider a number of criteria as follows: 0 Numberofjobs 0 Quality of job wages and benefits Does the business export goods or services out of the community, or does it provide a substitute for imported goods or services 18 6 Indirect impact on employment a Increase in local tax base Potential impact on efficiency in a production process or in the provision of services 0 Contribution towards diversifying the local economy Potential the project will drive other business activity or that it will attract or create additional businesses • The proposed loan must be consistent with the IRF Plan. • The proposed loan application will capitalize on the regional assets. • The loan will support and advance innovation and that it increases productivity in a particular industry or sector of the economy. • Will approval of the proposed loan maximize private investment that would not otherwise come to fruition without the IRF's investment? Will the proposed loan result in the creation or retention of higher -skill and higher -wage jobs? 3. Ability to Repay IRF loan 3. I.Analysis of ability to repay IRF loan Based on historical financial information and projected financial information, along with an assessment of management, the IRF will determine the potential for the borrower to generate cash flow sufficient to repay the IRF loan. Loans will not be approved where, in the opinion of the IRF Board, there is insufficient potential to repay the TRY loan. 3.2.Collateral coverage A part of the loan selection criteria includes a review of collateral coverage. Since IRF loans are typically subordinated to bank financing and the collateral is discounted for liquidation, these loans are usually under- collateralized. While no specific standard has been set for collateral coverage, each loan being judged on its own merits, collateral may be so insufficient as to justify turning the loan request down. HE This may apply especially in cases where the ability to repay is questionable. In the case of start-up, high tech firms, collateral may be based on the technology or intellectual property owned by the firm. Loans to start-up, high tech firms will almost always be under collateralized. G. PERFORMANCE ASSESSMENT PROCESS 1. Periodic Performance Assessment Biennially, the IRF Board will review the IRF's performance for the purpose of making any needed changes to the IRF Plan. IRF staff will be responsible for conducting the performance assessment and will seek out both private and public input as part of the assessment process. 2. IRF Plan Modifications Modifications to the IRF Plan will be made every five years or as needed if changes are required prior to the five-year review. Proposed modifications will be submitted to EDA for approval, as required. 91j PART 11 ATTACHMENTS FOR REVOLVING LOAN FUND OPERATIONAL PROCEDURES A. ORGANIZATION STRUCTURE 1. Critical Operational Functions The IRF is directly overseen by a Board of Direetorsi made up of no less than (6) six and no more than (9) nine members from the public and private sectors. They must approve all loans, loan modifications, foreclosures, etc. as well as changes in the IRF Plan. They also review loan performance and the biennial performance assessment. Due to the specialized nature of the high technology projects that may be presented for loan consideration, the Board will call upon one or more experts in the chosen field to provide advice as to technical feasibility and market need. The number of experts called will depend on the size, type of technology and complexity of the proposed project. 1. 1. Marketing the IRF Identification of opportunities may be done by IRF Board members, staff and other members of the Community Investment Department of the City, financial institutions, Chamber of Commerce, or any other organizations and individuals familiar with the IRF loan program. Staff will bear the primary responsibility for determining the appropriateness of each financing opportunity along with the IRF Board. Staff will also bear the responsibility for development of each appropriate financing opportunity. 1.2,Business assistance and advisory services The IRF staff will not directly provide these services. It may provide financing to obtain business advisory services, and it will make referrals to local, state and federal organizations which provide business assistance and advisory services. 1.3.Environmental reviews The City of South Bend's Department of Community Investment will provide environmental reviews for IRF loans. Staff performing this function will have experience in performing environmental reviews for other Federal ly-funded projects, or will be supervised by someone with such experience. i The Board of Directors was initially established pursuant to the IndUstrial Revolving Fund of South Bend, Indiana Trust Agreement dated June 10, 1975, which (he City of South Bend tenninatcd effective March 30, 2017, in consultation with the Economic Development Administration. Notwithstanding the City's termination of the Trust Agreement, the Board of Directors continues its work in accordance with the terms of this Plan and the ordinary practices adopted by the Board from time to time. 21 The IRF will ensure compliance with applicable environmental laws and regulations, including but not limited to 13 CFR Parts 302 and 314, the National Environmental Policy Act of 1969 and other Federal environmental mandates. Staff will determine whether the project will result in a significant adverse environmental impact. The applicant may be asked to submit additional documentation as necessary to make the determination. No activity shall be financed which would result in a significant adverse environmental impact unless that impact is to be mitigated to the point of insignificance. When necessary to ensure compliance, any required mitigation shall be made part of the loan conditions. Staff will determine whether the project involves new above -ground development within a floodplain based on a review of the proposed development against FEMA Flood Insurance Rate Maps. No activity shall be financed which would result in new above -ground development in a 100 year floodplain, per E.0, 11988. Staff will determine whether the project will be located within or adjacent to any wetland area. The applicant may be required to provide wetland delineation information as necessary. No activity shall be financed which would result in alternation of any wetland or in any adverse impact on any wetland without consultation with the U.S. Department of the Interior Fish and Wildlife Service and, if applicable, a Section 404 Permit with the Army Corp. of Engineers shall be obtained, IRF staff shall notify the State Historic Preservation Officer (SHPO) of each approved loan that involves significant new construction and expansion and request and receive comments on the effect of the proposed activity on historic and archaeological resources prior to closing of the loan. In cases where the SHPO has recommended actions or has determined an adverse impact, the IRF and loan applicant must work with the SHPO to address any issues identified before the loan is closed. All loan applicants are required to provide information regarding whether or not there are hazardous materials such as EPA listed hazardous substances (40 CFR 300), leaking underground storage tanks, asbestos, polychlorinated biphenyls (PCB) or other hazardous materials present or adjacent to the affected property that have been improperly handled and have the potential of endangering public health. 22 If deemed necessary, the loan applicant may be required to perform or provide evidence of performance of a Phase I Site assessment to identify possible sources of contamination, a Phase 11 Site Assessment to test soil and/or groundwater samples, and a Phase III Site Remediation involving mitigation of applicable contaminants, No activity shall be financed which involves unresolved site contamination issues. The loan applicant shall be responsible for working with the appropriate state environmental agency office to resolve any issues before any loan can be approved for the affected site. 1A.Loan processing The City of South Bend's Department of Community Investment currently provides loan management and administrative services for the IRF under a contract. These services include: Loan processing Credit analysis Loan write-ups and recommendations Closings Collections Servicing Handling defaulted loans and foreclosures Compliance with EDA requirements Various other administrative services In order to perform the services listed above, the Department of Community Investment will provide trained personnel with experience in the areas of business, finance, marketing, credit analysis, loan packaging, processing, and servicing. The IRF will use an attorney experienced in loan transactions to prepare loan documents, provide counsel on foreclosure actions, and provide other counsel as appropriate on the administrative or loan related issues of the IRF. 1.51oan closings The IRF staff is responsible for the loan closings. Legal counsel is responsible for all actions, documentation preparation, and other procedures necessary to close loans. The forms and documents required are outlined in Section C Loan Closing and Disbursement procedures. 1.6. Loan servicing It is the objective of the IRF loan servicing activities to monitor loans in the portfolio to be in compliance with established EDA standard procedures. 23 In servicing loans, the IRF will seek to balance two goals of assuring the repayments of loans and prornoting the health and stability of the IRFs borrowers. The repayment monitoring, administrating loan collections and handling defaulted loans are discussed in detail in Section D Loan Servicing Procedures. 1.7. Organizational administration The IRF must ensure compliance with all EDA requirements. Staff keeps financial records and creates a balance sheet and income statement on a monthly basis. The procedures are outlined in Section E Administrative Procedures. 2. Loan Administration Board 2. I.Size & composition The size of the IRF Board will be no less that (6) six members and no more than (9) nine members and will be composed of individuals representing both the public and private sectors as follows: Executive Director or designee, City of South Bend, Department of Community Investment Controller or designee, City of South Bend Executive Director or designee, Airport Authority President/CEO or designee, the Chamber of Commerce, a local organization responsible for coordinating economic development activities, as well as marketing the community in order to attract new industries. Executive Director/Director or designee of the TRFs Bank Agent. A member of the minority business community, nominated and elected by the IRF Board, in the event none of the Board positions noted above are filled by a representative of the minority business community. Up to (3) three additional members representing the regional business community, 2.2.Experience requirements Community and/or economic development experience Business experience Finance experience in an area similar to the IRF's types of loans 2.3,Duties and responsibilities 24 The IR-F Board will be responsible for approving loans, all major loan modifications and waivers, loan foreclosure actions, loan policy and IRF Plan revisions. 2.4.Membership terms It is not required to call for regular reappointment or reelection of officers except for the representative of the minority community. The term for an elected member of the IRF Board shall be (3) three years or until another person is elected for the position 2.5.Quorum requirements For meetings or decisions involving loans, 50% of the Board members must be present to constitute a quorum, and at least one member present must have financing experience similar to the types of loans made by the IRF or have long service on the IRF Board which can qualify for such experience. For meetings or decisions not involving loans, 50% of the Board members must be present to constitute a quorum. 2.6.Technological Expertise To assist with the review of high tech loan projects the IRF Board will seek advice and comment from experts in the respective field of technology. Such fields include nanotechnology, mechanics, aerospace, metallurgy, chemistry and life sciences. One or more technical experts may be called upon. The experts are expected to come from the many educational institutions found locally including but not limited to Notre Dame, Indiana University at South Bend, Purdue University Extension, St. Mary's College, Bethel College and Ivy Tech Community College as well as businesses, non -profits and individuals from the private sector. As necessary, experts from outside the local area may be recruited. Any remuneration paid to the experts will be included as part of the closing costs for the loan. If the loan is not made the cost will be absorbed as an administrative expense by the IRF. The IRF Board will ensure that the procurement of such services comports with federal procedures and regulations. 3. Conflict of Interest Situations The IRF Board will follow the prohibitions on direct or indirect financial and personal benefits as contained in current EDA regulations (13 CFR, §302.17). Each Board member will sign a No Conflict of Interest Policy that is in compliance with the EDA regulations, From time to time, the Board will review EDA's regulations with its legal advisor to assure compliance and to update the Board on any changes. 25 B. LOAN PROCESSING PROCEDURES 1. Standard Loan Application Requirements The IRF uses a loan application to collect information from potential borrowers. This application (attached as Appendix A) includes an executive summary along with requirements to submit the following: Business plan Company financial data (historical, interim and projected) when available Personal financial statements of guarantors (anyone owing 20% or more) Sources and uses of funds Information on available collateral Proposed repayment terms Jobs to be created or retained Impact on local tax base and any proposed tax abatement action Bank commitment letter showing bank's participation Evidence showing the credit is not otherwise available 2. Credit and Financial Analysis 2. I.Business and personal credit reports A Dun & Bradstreet credit report will be obtained on an as needed basis for each business applying for a loan. A personal credit report will be obtained on an as needed basis for each individual owing 20% or more of a company applying for a loan. 2.2.Standard Collateral Requirements The IRF will generally secure a loan with the assets being financed. If the asset is real estate, then a mortgage will be obtained. If the asset is equipment, inventory, accounts receivable, or other working capital, a security interest will be taken and UCC Financing Statements will be filed. If the assets being financed are only accounts receivable, inventory or other working capital, a security interest may be taken in these assets, along with a security interest or mortgage in other assets of the business In the case of high tech, start-up firms the only collateral may be based on the technology or the intellectual property owned by the firm. Personal auarantees Personal guarantees will be required on all IRF loans, but may be waived if the IRF has a first mortgage or first security interest in assets with an estimated liquidation value of at least 100% of the IRF loan. They may also be waived for start-up companies in high tech industries. we, Unless waived, anyone owning 20% or more of the applicant business must provide a personal guarantee. This guarantee will pledge all personal assets as security for the IRF loan and, when appropriate, the IRF may take a mortgage or security interest in personal assets. Landlord's lien waiver A landlord's lien waiver will generally be required if the borrower is a tenant. Insurance Adequate Hazard, Liability, and other appropriate forms of insurance will be required on all IRF loans. Additionally, the IRF will obtain a lender's loss payable endorsement on the insurance policy. Key -person life insurance may be required of borrowers and assigned to the IRF as appropriate. 2.3.Standard Equity Requirements Existing and new companies Each applicant will contribute at least 10% of the total project cost as equity. The equity may come from the company's cash on hand or from a cash injection from the owners. New companies may be required to contribute more than 10% equity and, depending on the type of collateral, will generally be required to begin with a debt -to -equity ratio of not more than 6: 1. However, in the case of new, start-up, high tech companies this ratio may be higher. Existing companies will generally be required to have a debt -to -equity ratio of not more than 5: 1. The 10% equity requirement may be waived if. The IRF determines it to be more advantageous for the borrower to retain those funds for working capital purposes or The borrower has other assets available to secure the loan which have sufficient equity value to replace the 10% cash equity requirement or Subordinated debt is provided in lieu of equity or other special situations such as the case of a high tech company where in the judgment of the Board the principals have already made significant investments or commitments to the company. 27 Fixed asset vs. worhing capital loans As noted above, fixed asset loans will generally require a 10% cash equity contribution by the borrower or investors. Working capital loans may require the 10% cash equity contribution or maintain a current ratio of not less than 1: 1. 2.4.Appraisal Reports Appraisal reports will generally be required when a loan is to be used for the purchase of used equipment or an existing facility. Appraisal reports may be required when a loan is to be used to buy land and construct a new building or expand a pre -owned facility. Generally, when the collateral value appears sufficient, an appraisal will be not required. Collateral value may not be easily determinable if the property has significant debt or it is constructed for a special use. If the value cannot be easily determined, then an appraisal will be required. 2.5. Financing Not Otherwise Available The IRF will require the borrower to provide any evidence demonstrating that credit is not otherwise available on terms and conditions that permit the completion or successful operation of the activity to be financed and to verify the need for IRF financing. The method of verification will include at least one of the following: : 0 A bank turndown letter Documented list of banks contacted, funds requested, and banks' verbal response IRF analysis showing borrower's creditworthiness to be insufficient for conventional financing 3. Environmental Reviews The City of South Bend's Department of Community Investment will provide environmental reviews for IRF loans. Staff performing this function will have experience in performing environmental reviews for other Federal ly-funded projects, or will be supervised by someone with such experience. The IRF will ensure compliance with applicable environmental laws and regulations, including but not limited to 13 CFR Parts 302 and 314, the National Environmental Policy Act of 1969 and other Federal environmental mandates. OWN Staff will determine whether the project will result in a significant adverse environmental impact. The applicant may be asked to submit additional documentation as necessary to make the determination. No activity shall be financed which would result in a significant adverse environmental impact unless that impact is to be mitigated to the point of insignificance. When necessary to ensure compliance, any required mitigation shall be made part of the loan conditions. Staff will determine whether the project involves new above -ground development within a floodplain based on a review of the proposed development against FEMA Flood Insurance Rate Maps. No activity shall be financed which would result in new above -ground development in a 100 year floodplain, per E.O. H 988. This determination will be made by reviewing the proposed development against FEMA Flood Insurance Rate Maps. Staff will determine whether the project will be located within or adjacent to any wetland area. The applicant may be required to provide wetland delineation information as necessary. No activity shall be financed which would result in alternation of any wetland or in any adverse impact on any wetland without consultation with the U.S. Department of the Interior Fish and Wildlife Service and, if applicable, a Section 404 Permit with the Army Corp. of Engineers shall be obtained. IRF staff shall notify the State Historic Preservation Officer (SHPO) of each approved loan that involves significant new construction and expansion and request and receive comments on the effect of the proposed activity on historic and archaeological resources prior to closing of the loan. In cases where the SHPO has recommended actions or has determined an adverse impact, the IRF and loan applicant must work with the SHPO to address any issues identified before the loan is closed. All loan applicants are required to provide information regarding whether or not there are hazardous materials such as EPA listed hazardous substances (40 CFR 300), leaking underground storage tanks, asbestos, polychlorinated biphenyls (PCB) or other hazardous materials present or adjacent to the affected property that have been improperly handled and have the potential of endangering public health. If deemed necessary, the loan applicant may be required to perform or provide evidence of performance of a Phase I Site assessment to identify possible sources of contamination, a Phase 11 Site Assessment to test soil and/or groundwater samples, and a Phase III Site Remediation involving mitigation of applicable contaminants. No activity shall be financed which involves unresolved site contamination issues. The loan applicant shall be responsible for working with the appropriate state environmental agency office to resolve any issues before any loan can be approved for the affected site. 29 4. Loan Write -Up Components of the loan write-up generally include the following: Business name Owners' name and ownership percentages Business location Type of business Business history Participating bank and amount of bank loan Non -replacement of private lending sources Type of business organization (e.g., corporation, S-corporation, partnership, etc.) Source and use of funds Company management ability Description of product Production capability Market conditions Collateral, including recommendation on additional collateral needs, appraisal, or environmental reports (Phase 1, bank checklist, etc.) Repayment ability Financial statement spread, including historical, interim, and projected Analysis of financial statement spread Guarantors' net worth Consistency with IRF financing policy Results of environmental review if required Staff recommendation to approve or deny, including terms and conditions 5. Procedures for Loan Approvals 5.I.Procedures for loan approvals are as follows: Staff interviews loan applicant Staff prepares loan write-up and presents to IRF Board IRF Board reviews, approves or denies loan, along with terms and conditions 5.2.Documentation of IR-F Board decisions IRF Board decisions are documented by minutes of the meeting, which are approved by the IRF Board at a subsequent meeting. The minutes provide the following information: Date and time of the meeting Members, staff, and guests in attendance as well as absent members Date of loan write-up Summary of staff presentation and Board discussion 30 Motion to approve or deny loan request Terms and conditions of loan approval 5.3.Notification of borrowers Upon approval by the IRF Board, staff prepares an Offer of Loan letter signed by the Board Chairman which is sent to the applicant. This letter states the amount of the loan being offered and the terms and conditions under which the offer is being made, C. LOAN CLOSING AND DISBURSEMENT PROCEDURES 1. General Closing Requirements A potential borrower will be required to sign documents stating compliance with all applicable Federal requirements including, but not limited to, compliance to Davis -Bacon wage requirements (if applicable), EDA's non - relocation requirements, Civil Rights Act requirements and assurance of benefits to low income persons. Per federal regulations, all RLF loan documents shall include language stating that the RLF borrower shall protect and hold the Federal government harmless from and against all liabilities that the Federal government may incur as a result of providing the RLF Grant to assist directly or indirectly in site preparation or construction, as well as the direct or indirect renovation or repair of any facility or site. Bank loan documents A copy of bank loan documents is obtained at, or prior to, loan closing to verify the private lender financing. Equity injection documentation Documentation is obtained to verify the equity injection. This may consist of canceled checks, bank statements, or other evidence. Other general closing requirements include thefollowing: • Evidence of required insurance, either a policy or binder showing the IRF as loss payee or mortgagee • Certificate of occupancy if loan was for construction • Borrower's payment of IRF loan fees and out-of-pocket costs 31 0 Landlord's lien waiver if borrower is a tenant Evidence that other special conditions have been met (e.g., county residency, appraisal values, satisfactory Phase I environmental report, etc.) 2. Loan Closing Documentation Requirements Loan Closing Checklist is attached as Appendix B. Special timing requirements: • Title commitments for real estate purchases are obtained the day of, or day before, closing. Mortgages are filed and recorded immediately after the closing. Title policies are ordered after the loan closes. • If a UCC search is required, this is done as close to the closing date as possible. UCC financing statements are filed immediately after the closing. 3. Loan Agreement Provisions Each loan agreement will clearly state the purpose of each loan. All IRF loan documents will protect and hold the Federal government harmless from and against all liabilities that the Federal government incurs as a result of providing an IRF grant to assist directly or indirectly in site preparation or construction, as well as the direct or indirect renovation or repair of any facility or site. All IRF loans will include call stipulations for instances of non-compliance with Federal statutory and regulatory requirements that apply to activities carried out with IRF loans. 4. Loan Disbursement Requirements 0 General requirements for drawing funds Invoices are generally required before loan funds are disbursed. On occasion, the borrower is required to make a deposit to order equipment. In this case, a joint payee check is issued to the borrower and equipment supplier, Staff disburses funds based on a purchase order and/or list of equipment being purchased. Receipt is confirmed at the annual field audit. 0 Requirements for drawing working capital loans Funds may be disbursed in whole at closing upon receipt of invoices for inventory purchases, or a listing of eligible receivables. Funds may also be disbursed over time, based on increased sales and/or receivables, 0 Requirements for new construction loans 32 Construction loans are generally funded on an interim basis by the participating tender until construction is complete. IRF funds are generally disbursed after the following: Compliance with Davis -Bacon requirements is verified Certificate of occupancy is issued Invoices are submitted Update on our title work (insured draw) and/or certified certificate of completion by borrower In the event the IRF provides interim construction financing, then disbursements would generally be made after the following: Compliance with Davis -Bacon requirements is verified Invoices are submitted Update on our title work (insured draw) and/or certified certificate of completion by borrower that confirms construction is being completed in accordance with representations in the application and approximates the percent complete as represented by the invoices 0 Requirements for drawing on loans to start-up, high tech firms Generally loan funds for start-up, high tech firms will be disbursed over time as certain milestones are achieved. The milestones will have date specific deadlines attached to them in order to more closely monitor performance. An illustrative listfollows: Review of technical feasibility/performance capabilities of prototype product is completed (if one is required it is reviewed by the IRF Board and any technical experts the Board concludes are needed to assist it with the review) Initial market assessment is completed Product requirements for successful launch in various markets are identified (review by the Board and technical experts again may be required) Examination of the potential for developing ancillary disposable products is completed (thus permitting revenue additional to just selling the product) Completion of a business plan Product launch D. LOAN SERVICING PROCEDURES 1. Loan Payment and Collection Procedures Borrowers make payments by check based on an amortization schedule of their loan provided at loan closing. Payments are received by the loan servicing officer and given to the accounting department who then posts them to the computerized servicing program. All payments are then submitted to the IRF Bank Agent for deposit. 33 2. Loan Monitoring Procedures Trackingfile When a loan is closed, it is added to the tracking file so that information required in the loan agreement is assured of collection on a timely basis. The following are items typically included for each loan on the tracking file: • Quarterly financial statements (generally, monthly financial statements are only required for start-up businesses) • Annual financial statements, prepared by an independent certified public accountant • Annual insurance renewals, with IRF as loss payee and/or mortgagee • UCC re -filings — 5 years • Payment of real and personal property taxes Other special loan conditions may be added to the tracking file for specific loans (e.g., hazard insurance, list of milestones for high tech loans, etc.) Credit1performance review and site visit For secured loans an annual credit review and site visit for each loan is prepared by the loan servicing officer for review by the IR-F Board and typically covers the following: • Business financial information and credit analysis • Compliance with loan terms and conditions • Comparison of actual versus projected job creation and retention • Report on the annual site visit, including discussion with borrower's management and visual inspection of the IRF's collateral and its condition • For high tech and start-up loans and loans where collateral coverage is below one to one more frequent performance reviews will normally be necessary. These may be as often as monthly and include budget discussions as required based on financial reporting, 3. Loan Files and Loan Closing Documentation 3. I.Filing system and contents Each loan normally has four (4) separate files covering the following: Application file #1 Application Commitment letter Correspondence related to the application period Board Meeting Minutes reflecting approval of the loan 34 Loan closing file #2 Loan closing checklist Loan Agreement Installment Term Note Security Agreement Business Mortgage Personal Guarantee Corporate Guarantee UCC Financing Statements Subordination and Inter -creditor Agreement Landlord Lien Waiver Assignment of Leases Escrow Agreement Amortization Schedule Evidence of credit is not available Financial statement file #3 Monthly or quarterly company prepared financial statements Annual financial statements prepared by an independent CPA Monitoring file #4 Hazard and liability insurance policies Key -person life insurance, if required Evidence of property tax payments Annual insurance certifications General correspondence Job reports Site Visit Reports Post -closing correspondence A single file pertaining to all active loans contains all annual credit reviews and all duplicate reports on annual site visits for all companies; this separate file is maintained at the request of the IRF Board. 3.2.Safekeeping of original loan documents The loan closing file, including all original loan documents, is held by the IRFs Bank Agent and is kept in a fireproof container. A duplicate of the loan closing file is kept by the IRF staff for loan servicing purposes. 35 4. Job Creation Monitoring A letter is sent out to borrowers each January asking them to verify their employment numbers as of the previous year-end, 5. Defaulted Loans Monthly computer generated reports are reviewed by the loan servicing officer to determine delinquencies. Delinquent accounts receive a series of telephone calls and letters until they are 60 days past due. Once an account becomes delinquent by 14 days, then it generally becomes subject to a delinquent penalty of 5% of the payment amount due. A standard item to be included on the agenda of each meeting of the IKF's Board will be loan delinquencies. A summary of actions taken and new defaults that have occurred since the previous Board meeting will be considered as circumstances warrant. Procedures for Handling Loans Over 90 Days in Arrears • After 90 days, the loan servicing officer prepares a loan specific delinquency report for the IRF Board to review and determine the appropriate action to be taken. • Board action on the delinquent account may range from calling the loan due, to a temporary deferral of payments, to restructuring. Each action will be determined based on the circumstances of the delinquency, and will be appropriate to protect the IRF's capital, and still be responsive to the needs of the borrower. Priority of payments on defaulted IRF loans. When an IRF Recipient receives proceeds on a defaulted IRF loan that is not subject to liquidation such proceeds shall be applied in the following order of priority: (1) First, towards any costs of collection; (2) Second, towards outstanding penalties and fees; (3) Third, towards any accrued interest to the extent due and payable; and (4) Fourth, towards any outstanding principal balance. 6. Typical Write -Off Procedures When the Staff members determine a loan is uncollectible, then a delinquency report will be presented to the IRF Board recommending the loan be written off. This action by itself does not mean the IRF will no longer pursue collection of the debt, rather all means of collection will be pursued, unless it is further determined that the cost of collection will exceed the proceeds from such pursuit. Write-offs will be accounted for as a bad debt expense in the year in which the action is taken to write off the account. 79R E. ADMINISTRATIVE PROCEDURES 1. Accounting The IRF establishes a separate bank account with the Bank Agent where all repayments and interest income are to be reflected. Staff will ensure that the IRF is operating in accordance with Generally Accepted Accounting Principles (GAAP). 2. Administrative Costs The IRF funds are maintained in a separate banking account at the Bank Agent. Monthly bank statements are issued by the bank. Before an invoice is paid, the invoice is stamped as approve and signed by Department of Community Investment Accounting and IRF staff. The invoice is then forwarded to the Bank Agent for payment from the bank account. The administrative expenses are not to exceed IRF income. The administrative and other expenses will comport with EDA procedures and regulations. From the monthly bank statements, the accounting area prepares a computerized report which tracks all income and expenses since the inception of the IRF. As mentioned previously, loan payments are collected by IRF's loan servicing officer and forwarded as soon as possible to the IRF's Bank Agent for deposit and recording. All sources of income are tracked by the Bank Agent, and a report of cash receipts and disbursements is issued on a monthly basis. This report shows cash on hand and all outstanding loan balances. Based upon the Bank Agent's report, IRF staff creates a balance sheet and income statement. This information is then used to make sure the IRF spends no more than 50% of its income on administrative costs. The IRF is also audited each year, thus providing a double check that all loan payments and income sources have been accounted for properly. 3. Capital Utilization and Cash Balance The IRF will use its capital and manage its cash position in accordance with the current and future EDA regulations. 4. EDA Reporting The IRF must ensure compliance with all EDA requirements. Staff will file a semi- annual or annual report with the EDA. The IRF's reporting frequency will be determined by EDA. 5. Audits The EDA revolving loan funds are subject to an annual audit in accordance with 2 CFR Part 200.501. The IRF must be shown every year on the City of South Bend Schedule of Federal U�xpenditures. 37 APPE NDICES The following appendices are standard documents and forms used by the IRF. They may be modified to fit the particular circumstances of a loan. 38 APPENDIX A INDUSTRIAL REVOLVING FUND City of South Bend APPLICATION DATES, FILING PROCEDURE, Applications are reviewed and acted upon within (30) thirty days of filing. Applications are to be filed with the Department of Community Investment, City of South Bend. REQUIRED DOCUMENTATION Applicants are required to submit certain docurnentation which will allow the Revolving Loan Fund Board to fairly evaluate the request. Depending on the circumstances of each loan, applicants will be asked to submit: LApplication fee of $ 1,000 which is refundable if the loan is denied; 2.13ank commitment letter stating why the bank cannot finance the entire project; 3.Three years of historical financial statements (income statements, balance sheets and cash flows); 4.Corporate, partnership, or individual tax returns for the past three years if the financial statements are not audited; 5.lnterim financial statements not more than 90 days old; 6.Projected balance sheet and income statement and cash flows for, at least, two years after the loan is made including all assumptions; 7.Personal financial statements for all principals; 8.Resumes of principals and key members of management; 9.Summary business plan; 10. Statement of the project sources of funds and uses of funds; 11. List of collateral being offered to fully secure the IRF loan; 12. Detailed contractor's estimates or vendor invoices as applicable; 13. Appraisal when available; 14. Purchase agreement when available; 15. Environmental reports when available. 39 APPENDIX A (cont.) APPLICATION FORM 1. General Information 11. Management 111. Advisors IV. Total Project Cost V. Project Information VI. Proposed Financing VII. Exhibits VIII. Project Benefits IX. Authorization of Applicant for Release of Information X. Signatures 40 APPENDIX A (cont.) BUSINESS PLAN OUTLINE 1. EXECUTIVE SUMMARY 11. MARKE T ANALYSIS A. Description of total market B, Industry trends and projections C. Target markets D. Competition E. Goals III. PRODUCTS AND/OR SERVICES A. Description of produGts or services B. Proprietary position (patents, copyrights, and legal/technical considerations) C. Overview of competitors' products or services IV. MARKETING STRATEGY A. Overall strategy and goals B. Pricing policy C. Sales terms D. Methods of selling, distributing, and servicing products V. MANUFACTURING PROCESS A. Materials B. Source of supply C. Production methods, capacities VI. MANAGEMENT PLAN A. Form of business organization B. Board of Director's composition C. Officers: Organizational chart and responsibilities D. Resumes of key personnel E. Staffing plan 41 F. Facilities plan, planned capital improvements and scheduling G. Operating plan, schedule of upcoming work (one or two years) including projected research and development efforts VIL FINANCIAL DATA A. Financial history (three years to present) B. Two years financial projections (first year by month or quarter if business is a start-up) I . Profit and loss statements 2. Balance sheets 3. Statements of cash flow 4. Capital expenditure estimates C. Explanation of projections D. Sources and uses of funds; summary of attempts to finance outside of IRF; effect of IRF in leveraging other lending sources E. An interim financial statement that is not older than ninety (90) days Vill. ADDITIONAL REQUIRE, Q INFORMATION A. Describe net direct impact upon St. Joseph County employment B. Describe net direct impact on area business and the local economy C. Nature and extent of available securities/guarantees (collateral) D. Proposed repayment schedule E. Net impact upon tax base and any proposed tax abatement action F. Nature and extent of equity participation G. Personal financial statements of all principals owning 20% or more of the business (personal financial statements may be requested for other principals) H. Bank commitment letter, including a statement the bank will not finance more than they have committed to 1. Bank "turndown letter" indicating the need for IRF financing or any evidence showing that credit not otherwise available 42 APPENDIX B LOAN CLOSING CHECKLIST BUSINESS NAME: CLOSING OFFICER: CLOSING DATE: COMPLETED DOCUMENT DESCRIPTIONS NAME LOAN AGREEMENT INSTALLMENT TERM NOTE SECURITY AGREEMENT BUSINESS MORTGAGE PERSONAL GUARANTEE CORPORATE GUARANTEE UCC FINANCING STATEMENTS SUBORDINATION AND INTER -CREDITOR AGREEMENT LANDLORD LIEN WAIVER ASSIGNMENT OF LEASES ESCROW AGREEMENT AMORTIZATION SCHEDULE ORIGINATION FEE ($1,000) LOAN APPLICATION BOARD MEETING MINUTES PROMISSORY NOTE BANK TURNDOWN LETTER COMPLETED: INITIALS OF LOAN OFFICER NAME: IF NOT COMPLETED, NAME OF PERSON COMPLETING & DATE AS A SUBSTITUTE THE IRF'S ATTORNEY MAY PROVIDE A CHECKLIST. 43 APPENDIX C LOAN PROCESSING CHECKLIST 1. COMPLETED APPLICATION 11, COMPLETE BUSINESS PLAN A. Market Analysis 1. Description of total market 2. Industry trends and projections 3. Target markets —4. Competition 5. Goals B. Products and/or Services 1. Description of products or services 2. Proprietary position (patents, copyrights, legal &technical considerations) 3. Overview of competitor's products or services C. Marketing Strategy 1. Overall strategy and goals 2. Pricing policy 3. Sales terms .4. Methods of selling, distributing, and servicing products D. Manufacturing Process 1. Materials 2. Source of supply 3. Production methods and capacities E. Management Plan I . Form of business organization 2. Board of Directors composition 3. Officers: organizational chart and responsibilities 4. Resumes of key personnel 5. Staffing plan 6. Facilities plan, planning capital improvements and scheduling 7. Operating plan, scheduling of upcoming work (one or two years), including projected research and development efforts 44 .F. Financial Data 1. Business historical financial statements for three years 2. Business interim financial statements less than 90 days old 3. Business projections for two years (including a list of assumptions) 4. Recent financial statements of affiliate or subsidiary companies (if appropriate) 5. Personal financial statements from each owner controlling 20% or more of the business 6. Sources and uses of funds 7. Summary of attempts to finance outside of Fund 8. Effect of Fund in leveraging other lending sources G. Additional Required Information I . Describe net direct impact on County employment 2. Describe net direct impact on area business and the local economy 3. Nature and extent of available collateral/guarantees 4. Proposed repayment schedule 5. Net impact upon tax base, and any proposed tax abatement 6. Nature and extent of any equity participation 7. Bank commitment letter III. PLAN REQUIREMENTS A. Target Area 1. City of South Bend B. Target Industry 1. Any NAIC Code except agriculture, forestry, fishing and hunting, mining and public administration C. Portfolio Standards 1. Job/Cost ratio a. Project cost not greater than $35,000 per job; or b. Portfolio not greater than $35,000 per job 2. Public/Private leverage ratio a. Project leverage ratio not less than 2:1; or b. Portfolio leverage ratio not less than 2:1 c. Does not include other public funds 3. Types of projects a. Start-ups not to exceed 3 0% of poi tfo lio assets b. Expansions not to exceed 100% of portfolio assets c. Retentions not to exceed 100% of portfolio assets d. Industrials not to exceed 100% of portfolio assets e. Fixed assets not to exceed 100% of portfolio assets f. Working capital not to exceed 50% of portfolio assets 45 D. Maximum Loan is 25% of Portfolio Assets, or less E. Standard Loan Term 1. Maximum equipment terin is 10 years 2. Maximum real estate term is 20 years 3. Maximum working capital is 3 years; or 4. No longer than term of supporting sales contract except for high tech start-ups F Interest Rate —1. Minimum interest rate a. 4% below WSJ prime, but b. Not less than 4% per annurn. 2. Higher interest rate based on a. Start-up risk b. Conventional financing at later date c. Ability to afford higher rate G. Principal and/or Interest Deferral 1. Not to exceed 2 years and only if cash flow is seen to be temporarily too low ,H. Equity and Collateral Requirements 1. Project includes at least 10% equity 2. Collateral a. Secured only with assets financed, or b. Secured with additional assets 3. Personal guarantees a. Required, or b. Waived due to first security position on assets with an estimated liquidation value equal to loan or waived for high tech start-up companies 4. Landlord's lien waiver 5. Key -person life insurance (if necessary) Verification IRF is Not Substituting for Private Capital -1. Bank turndown letter, or -2. List of banks contacted, funds requested and banks' responses as verified by IRF loan officer, or -3. IRF analysis showing borrower's creditworthiness to be insufficient for bank financing, or 4. Any evidence showing credit is not otherwise available 46 .K. Other Federal Requirements 1. Environmental adverse impact a. Flood plains b. Wetlands c. Significant historical or archeological properties d. Drinking water resources e. Non-renewable natural resources .2. Relocation a. Project does not relocate jobs from outside commuting area .3. Flood hazard insurance (required if applicable) 4. Handicapped access (required only if loan is to finance a construction project to which the public will have access) 5. Davis -Bacon (applies to all construction projects) a. Contact Division of Financial and Program Management to arrange for monitoring IV. Fees and Other Costs A. Origination Fee of $1,000 B. Service Fee at 0.5% of Outstanding Loan Balance C. Attorney Fees D. Title Policy and Insurance 47 APPENDIX D A RESOLUTION OF THE BOARD OF DIRECTORS OF THE INDUSTRIAL REVOLVING FUND OF SOUTH BEND, INDIANA WHEREAS, the Industrial Revolving Fund of South Bend, Indiana, was established in 1975 through a grant of $5 million from the U.S. Economic Development Administration to the City of South Bend, Indiana. WHEREAS, the Industrial Revolving Fund of South Bend, Indiana, formulated a Revolving Loan Fund Plan per the requirements of the grant, Such Plan was submitted to the Economic Development Administration. Subsequent changes in the requirements of the Economic Development Administration required the submission of a revised revolving loan fund plan. Such Revised Revolving Loan Fund Plan has been submitted to the Economic Development Administration. NOW, THEREFORE, the Board of Directors for the Industrial Revolving Loan Fund of South Bend, Indiana, hereby formally ratifies and accepts the Revised Industrial Revolving Fund Plan. Dated this day of _, 20—. Chairman Director Director Secretary Director Director 48