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Overview of the Leveraging Concept in Economic Development

Overview of the Leveraging Concept in Economic Development. Prepared for the California Integrated Waste Management Board Victor Hoskins Vice President UrbanAmerica, LP August 12, 2002. Overview. Definition Goal Problem Solution. Definition:What is Leveraging?. Merrian-Webster

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Overview of the Leveraging Concept in Economic Development

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  1. Overview of the Leveraging Concept in Economic Development Prepared for the California Integrated Waste Management Board Victor Hoskins Vice President UrbanAmerica, LP August 12, 2002

  2. Overview • Definition • Goal • Problem • Solution

  3. Definition:What is Leveraging? Merrian-Webster • The use of credit to enhance one’s speculative capacity Irving Bonios Co. Real Estate Dictionary • The use of financing to allow a small amount of cash to purchase a large property investment Economic Development • The use of capital by a public or non-profit institution to stimulate public, non-profit or private investors to finance an investment to achieve a public purpose

  4. Definition:What is Leveraging? Economic Development • The use of capital by a public or non-profit institution to stimulate public, non-profit or private investors to finance an investment to achieve a public purpose Examples • Transit Rail Financing-Fed, State, Local • Incentive Investments-Redevelopment, Econ Dev • CIWMB RMDZ Loan Program Key Concepts • Public Return on Investment • Return on Equity • Return on Investment

  5. Goal:What is the Challenge? • Enable CIWMB to leverage annual available funds of $3.5 million to $10 million annually in a manner that is consistent with the financing needs of recycling companies in California • Develop four leveraging strategies

  6. Goal:What is the Challenge? • Creating a Sustainable Financing Program • Leveraging existing and anticipated resources • Blending RMDZ funds with investment resources from Private or Public organizations to reduce waste by meeting the financing requirements of recycling businesses

  7. Solution

  8. Discussion of Leveraging Options for the RMDZ Loan Program Prepared for the California Integrated Waste Management Board Betsy Zeidman, Milken Institute Paul Pryde, Capital Access Group Bill Schmidt, Milken Institute August 12, 2002

  9. Overview • Goal • Methodology • Market Research • Leveraging Strategies

  10. Goal • Enable CIWMB to leverage annual available funds of $3.5 million to $10 million annually in a manner that is consistent with the financing needs of recycling companies in California

  11. Methodology • Research • Assessed recycling and reuse market in California • Analyzed current pool of Recycling Market Development Zone loans • Conducted interviews with past loan recipients and current Zone Administrators • Developed four leveraging strategies

  12. Key Findings from Industry Research

  13. Key Findings from Market Research: • Recycling and reuse is a $14 billion industry in California • $55,910,300 have been made in loans through RMDZ program • Growth stage of companies in loan pool • Use of loan proceeds • Average interest rate of loan pool

  14. Key Findings from Industry Research:Barriers to Access and Use of Current Program • Collateral requirements • Timing of interest payments • Replenishment of loan pool • Financial incentives to increase level of participation • Perceptions of confidentiality

  15. Key Findings from Industry Research:Top Current Financing Sources • Private Investment • Private Lending • Government and Charitable

  16. Overview and Discussion of Leveraging Strategies

  17. Criteria Used to Evaluate Leveraging Strategies • Financing Capacity • Financial Stability • Market Responsiveness • Customer Friendliness • Affordability

  18. Capital Needs • Types of Capital • Equity • Debt • Subordinated • Senior • Dependent on Growth Stage • Development-stage and small low-growth companies • Early-stage growth companies • Established, expansion-oriented companies

  19. Financing Products Collateral Cash Flow

  20. Financing Products Collateral Cash Flow

  21. Financing Products Collateral Cash Flow

  22. Financing Products Collateral Cash Flow

  23. Financing Products Collateral Cash Flow

  24. Leveraging Strategies

  25. Assumptions • Current: • Established 48% • Early-Stage 38% • Start-Up 14% • Borrowers • All strategies use same three products • All strategies can be done in isolation or combined • All strategies leverage Board’s $3.5 million into $10 million of loanable funds on a sustainable basis • Target: • Established 50% • Early-Stage 30% • Start-Up 20%

  26. FINANCE PROGRAMBusiness Model Assets Mezzanine loans Deferred payment loans Borrowers Senior below-market loans Cash is converted into “earning assets” by making recycling loans and investments 2. Debt and equity represents cash that can be invested and loaned. Capital Sources Debt Equity • 1 Institutions make debt • and equity • investments in exchange • for interest or shares. Liabilities/Capital

  27. New Markets Tax Credit • A new federal incentive program under which taxpayers are allowed to reduce their federal income tax payments by 39 percent of the amount invested in a qualifying Community Development Entity (CDE)– a for-profit organization that makes business loans and investments in low-income areas.

  28. New Markets Tax Credit Investors Invests $30 million in exchange for $11.7 Million (39%) NMTC Lender CDE Board Makes $10 million market-rate loan Makes $10 million long term loan (funded over 3 years)

  29. New Markets Tax Credit • Sources of Funds • Investors that expressed interest in purchasing NMTCs such as: • Enterprise Social Investment Corporation • Bank of America • Bear Stearns • Leverage • Base Case: 5 to 1, Best Case: 5 to 1 • Return on Investment • Base Case: 32.98%, Best Case: 33.30%

  30. Loan Guaranty • A risk-sharing partnership between CIWMB and one or more existing small business loan guarantors – preferably with a California Financial Development Corporation (FDC) that provide guaranties of up to 80 percent on small business bank loans of up to $350,000.

  31. Loan Guaranty 3. Provides up to $12 million in loans Lenders Borrowers 2. Provides up to $12 million in guarantees 1. Contributes $3 million Small Business Expansion Fund Board

  32. Loan Guaranty • Sources of Funds • California FDCs such as: • Nor-Cal FDC, • Pacific Coast Regional FDC • California Southern FDC • Leverage • Base Case: 12 to 1, Best Case: 19 to 1 • Return on Investment • Base Case: 10.23%, Best Case: 14.37%

  33. Loan Sale • Selling loans to secondary market investors, such as the Community Reinvestment Fund, and using the cash to make more loans. Interest rates on the loans would be structured so that loans would be sold at a premium.

  34. Loan Sale 2. Gives Board up to $3 million in notes RASP Borrowers 1. Makes up to $3 million in loans per quarter 4. Gives up $3 million in cash for relending 3. Sells up to $3 million in loans per quarter Investor

  35. Loan Sale • Sources of Funds • Possible purchasers of loans such as: • Community Reinvestment Fund • Bayview Financial • SBA Receivables • Leverage • Base Case: 16 to 1, Best Case: 16 to 1 • Return on Investment • Base Case: 0.01%, Best Case: 15.30%

  36. Equivalent Equity Investments • Forming a financing partnership with an established non-profit Certified Development Financial Institution (CDFI) that would agree to use funds obtained through PRIs, low-interest loans that foundations provide, or EQ2s, long-term, low interest loans made by commercial banks to community development organizations.

  37. Equivalent Equity Investments Borrower Makes $50 million in recycling loans EQ2/PRI Investor Board CDFI Provides $10 million loan or recoverable grant Invests $10 million Provides $30 million credit line Bank

  38. Equivalent Equity Investments • Sources of Funds • Organizations that have made EQ2 or PRI investments such as: • Ford Foundation • Citibank • F.B. Heron Foundation • Leverage • Base Case: 5 to 1, Best Case: 5 to 1 • Return on Investment • Base Case: 0.06%, Best Case: 12.50%

  39. Comparison of Four Strategies (+) Above Average, (0) Average, (-) Below Average

  40. Performance Against Criteria • Financing capacity: Leveraging ratio ranges from 5:1 to 19:1. • Financial stability: Loan-loss reserves, blend of below-market rate and market interest rates produce adequate cash flows to finance losses and to sell loans at no less than “par”. • Market responsiveness: Proposed loan products respond to needs of different recycling companies • Customer friendliness: Use of intermediaries can reduce loan approval and processing times. • Affordability: Below-market rates, extended loan terms and deferral of interest and principal payments will reduce loan repayment burdens.

  41. Discussion of Leveraging Options for the RMDZ Loan Program Prepared for the California Integrated Waste Management Board Betsy Zeidman, Milken Institute Paul Pryde, Capital Access Group Bill Schmidt, Milken Institute August 12, 2002

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