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MDD Resolution No. 413 RESOLUTION NO. 413 A RESOLUTION OF THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT APPROVING THE GUIDELINES FOR THE BAYTOWN REVOLVING LOAN FUND; AUTHORIZING PAYMENT OF AN AMOUNT NOT TO EXCEED FIFTY THOUSAND AND NO'100 DOLLARS ($50,000.00); AND PROVIDING FOR THE EFFECTIVE DATE THEREOF. ****************************************************************************** BE IT RESOLVED BY THE BOARD OF DIRECTORS OF THE BAYTOWN MUNICIPAL DEVELOPMENT DISTRICT: Section 1: That the Board of Directors of the Baytown Municipal Development District hereby approves the Guidelines for the Baytown Revolving Loan Fund. A copy of said Guidelines is attached hereto as Exhibit"A" and incorporated herein for all intents and purposes. Section 2: That the Board of Directors of the Baytown Municipal Development District hereby authorizes the payment of an amount not to exceed FIFTY THOUSAND AND NO1100 DOLLARS ($50,000.00) in accordance with the guidelines referenced in Section 1 hereof. Section 3: This resolution shall take effect immediately from and after its passage by the Board of Directors of the Baytown Municipal Development District. INTRODUCED, READ and PASSED by the affirmative vote of the Board of Directors of the Baytown Municipal Development District, this the ls`day of April, 2021. DON CAPETINLO., President ATTEST: 0, � r � r ANGELA CKSON, Interim Assist- ecr �- APPROVED AS TO FORM: KAREN L. HORNER, General Counsel RAKaren Anderson\RESOLUTIONS\MDD\2021.04.01\ApprovingRevolvingLoanFundGuidelines.doc Exhibit "A" BAYTOWN MUNICIPAL DEVELOPMENT CORPORATION REVOLVING LOAN PROGRAM Policies and Procedures nom ron INTRODUCTION The Baytown Municipal Development Corporation (the "MDD"), has established the Baytown Revolving Loan Program ("BRLP"). This economic development program provides low-interest, supplemental financing to assist with business start-ups and the expansion of existing businesses for the purposes of creating jobs and enhancing private capital investment within the City of Baytown, Texas, thereby improving Baytown's economic resilience. PART I: A: ECONOMIC OVERVIEW Revolving Loan Fund Objectives: a) Assist businesses that provide permanent employment opportunities in Baytown, Texas; b) Support potential gains in property tax and sales tax; c) Stimulate and maximize private sector investment in commercial opportunities. d) Assist in the redevelopment of blighted properties, vacant land, as well as commercial, industrial, or service facilities that are located in or are relocating to Baytown; and e) Provide financial assistance to those businesses that can document the need for financial assistance or where the use of these funds may be the determining factor in locating in a City of Baytown location. B. BUSINESS DEVELOPMENT STRATEGY 1. Business Needs Entrepreneurs, existing small business owners and those interested in starting a small business in Baytown, who are looking for financial assistance through the BRLP, must provide proof of business assistance need. This shall be provided in the form of a business plan for their project and application for the BRLP. Any project looking to borrow greater than the $10,000 Small Business Micro-loan must prove job creation equal to 1 full-time equivalent position created for every $10,000 borrowed. These full-time equivalent positions must be maintained for the life of the loan. Full-time positions created for project construction or renovation will not be considered. 2. Participation Incentive Potential borrowers are encouraged to receive assistance from the Small Business Development Center ("SBDC") at Lee College. The MDD will provide a $500.00 incentive to be applied to the balance of the loan after successful completion of work with the SBDC. C. FINANCE STRATEGY 1. Financing Needs and Opportunities The key issue related to economic development financing for small businesses and entrepreneurs is typically the lack of equity they have to start or grow their business. The BRLP is meant to assist those businesses and entrepreneurs that cannot obtain 100% of economically feasible financing due to conventional interest rates and/or lending exposure limits applied by lending institutions. The BRLP is intended to supplement existing investment through the offer of low interest and subordinate financing that local lending institutions may view as "riskier" loans. At the present time, the majority of lending institutions require a business to contribute 20 to 25 percent of the total costs for an expansion or start-up project. This figure may vary depending on the project and circumstance; the scope of the project and the financial strength of the company and its ownership. The existence of a supplemental loan program makes economic development viable for the city, the business and the commercial lenders. As a gap financing tool, the BRLP will directly address the risk equity problem. By providing this financing, the BRLP will effectively reduce the amount of required risk equity. As a general rule, demand for business loans will always outweigh available funds. With the availability of this highly capitalized and flexible supplemental- financing tool, private lending institutions will be able to effectively increase their loan acceptance rate, thus meeting the demand for business loans in the market place. The increased loan approval rate will be initiated by the BRLP's ability to reduce the equity required by loan applications. 2. The MDD and its economic development staff will be responsible for the continued success of the BRLP. Responsibilities will include, but are not limited to marketing the BRLP, application review & assistance, working with the lending institution on loan closing, loan servicing and monitoring the loans and programmatic reporting to the City Council. Fiscal responsibilities are managed by the MDD in conjunction with the lending institution. The BRLP Committee will be responsible for the final application review as well as the approval or denial of the loan application. Additional responsibilities of the BRLP Committee include loan waiver recommendations, modifications of loan terms and the recommendation of policy changes. The BRLP Committee will also make recommendations to the lending institution on when to begin foreclosure actions or pursuit of defaulted loans. 3. BRLP Niche Financing The BRLP Program will provide longer term, low interest rate loans to businesses that have the highest probability of successfully creating new jobs, competing in the local marketplace and diversifying the economy. Funds will be available to any size business and may fund start-ups or expansions. While funds will primarily be used for fixed assets, application for working capital will be considered. D. Financing Policies 1. Lending Area The eligible lending area includes all areas within the city limits of the City of Baytown. 2. Allowable Borrowers The loan program shall be available to private business only to include industrial, commercial, retail and service sectors. Private businesses in all stages of development shall be eligible for funding, so long as they meet the criteria specified herein. For the purposes of this program a Private business is defined as a "dba," "LLC," "LLP," "C" or "S" Corporation. 3. Allowable Lending Activities Loans can be used for activities such as construction of buildings, reuse and modernization of facilities, purchase of machinery and equipment, purchase of inventory, and other similar activities approved by the BRLP Committee. 4. Prohibited Lending Activities The following will not be funded by the BRLP: • Speculative activities, such as land banking and the construction of speculative buildings, since they do not normally result in long-term job creation or retention. • Loan activities and economic benefits resulting from activities that are not located within the eligible area. BRLP assistance must be withdrawn if for any reason the activity financed is moved from the eligible area. • Loans for the purpose of investing in high interest accounts, certificates of deposit or other investments. • Loans used as a loan guarantee program. • Loans used as a substitute for private capital. • Loans of which would create a potential conflict-of-interest for any current member of the BRLP Committee, elected or appointed official, or staff who reviews, approves or otherwise participates in decisions on BRLP loans. • Loans which will be used to acquire equity position in a private business. • Loans which will be used to construct public buildings or infrastructure. • Loans which will subsidize interest payments on an existing bond(s). • Loans which will provide the equity contribution required of borrowers. • Loans which will enable a borrower to acquire an interest in a business either through the purchase of stock or through the acquisition of assets, unless the need for BRLP assistance is sufficiently justified. • Loans which will refinance existing debt, unless in compliance with applicable program regulations. 5. Loan Size There are 2 loans available in this program: • A Micro-loan meant for an initial start-up opportunity not to exceed $10,000. This loan can help an entrepreneur get into business or a small business get started. This loan is meant to assist with inventory, F,F&E, leasehold improvements, etc. for a new business enterprise. The applicant needs to meet the requirement of having 10% equity into their project (for example purposes a $10,000 loan would need $1,000 of personal equity). It is expected that a Micro-loan will create and retain 1 full-time equivalent job throughout the life of the loan. • The Macro-loan with a maximum amount not to exceed $100,000. This loan is meant for expansion or relocation of existing businesses within the City of Baytown. It is expected that for every $10,000 borrowed at least 1 full-time equivalent job is created and retained for the life of the loan. The applicant needs to meet the requirement of having 10% equity into the project and it would be expected that additional private financing would be required in addition to this loan. A participant of either loan program must be in good standing with the MDD and City i.e. not in litigation against the MDD or City or owing monies for utilities, judgements, fines, having unresolved code enforcement issues, etc., and may only carry one revolving loan at a time. 6. Interest Rate The minimum interest rate of the program is 4%. The interest rate shall be established at the time of the BRLP Committee approval of the loan. The Committee may vary the interest rate, within said limitations, as a function of the amount, equity security and purpose of that loan. Additionally, the Committee may vary the interest rate for applicants that exceed job creation and retention goals; hire displaced workers, women, minorities, disabled, long-term unemployed and underemployed, and/or low- and moderate-income employees. 7. Terms The term of the micro-loan shall not exceed 5 years. The term of the macro-loan shall not exceed 10 years. The BRLP Committee may approve an exception to this policy if unforeseen circumstances are met by the borrower. The term will vary as a function of the amount, equity, security and purpose of the loan. Loans made for fixed assets will generally have a longer term. Loans for working capital expenditures generally will not exceed three (3) years. Loans for machinery and equipment shall not exceed the established useful lifetime of the equipment. Payment shall be made on a monthly basis. Loans will be reviewed within a minimum of two (2) years, and may be callable at the time of review if circumstances prove the loan is either no longer required. In order to encourage early repayment of a loan, a borrower may repay a loan without incurring a prepayment penalty. 8. Fees Administrative costs associated with this Program will be paid from interest earned on the invested recaptured loans and loan closing fees. 9. Equity and Collateral The borrower will be required to provide a minimum of ten percent (10%) equity into the project. All loans shall be secured by collateral in an amount equal to one hundred percent (100%) of the face value of the loan. Collateral requirements may vary as a function of the loan amount, equity and purpose. A secured subordinate position to another lender may be permitted. Assets other than cash that are used for collateral must be documented by appraisals or other appropriate valuation techniques. In projects involving direct working capital loans, the BRLP Program will obtain collateral, such as liens on inventories, receivables, fixed assets and/or other available assets of borrower(s). Such liens shall be subordinate only to existing liens of record and other loans involved in the project unless otherwise made subordinate by law. When appropriate, the borrower will be required to provide life insurance, fire hazard or normal business insurance on all assets for the term and in the amount of the loan with the MDD being the beneficiaries of the insurance proceeds should an incident arise where insurance proceeds are used. Where required, the borrower shall also obtain flood insurance on property assigned as collateral and in the amount of the loan with the MDD being the beneficiaries of the insurance proceeds should an incident arise where insurance proceeds are used. In the event that the BRLP Committee determines it is necessary or desirable to act to protect or further the interest of the loan, the Committee will make such recommendation. 10.Start-ups Funds will be available to any size business and may fund start-ups. The policies for start-ups will be considered on a case-by-case basis dependent on the apparent risk. 11.Working Capital The loan program shall be available to private industrial, commercial, retail or service business borrowers needing fixed assets and/or working capital financing to locate, expand, or retain their operation within Baytown. BRLP loans shall not subsidize or refinance existing business loans. 12.Credit Not Otherwise Available To be approved for the BRLP program, applicants must provide a signed bank letter demonstrating that full credit for their project is not otherwise available on terms and conditions financed. E. PORTFOLIO STANDARDS AND TARGETS 1. Target Percentages The policies for start-ups will be considered on a case-by-case basis dependent on the apparent risk. However, loans for start-ups are not to exceed 50% of the BRLP portfolio. Loans for fixed asset financing are not to exceed 25% of the BRLP portfolio. Loans for working capital may be considered. Working capital loans are not to exceed twenty-five percent 25% of the BRLP portfolio. 2. Private Sector Leverage The portfolio shall average a ratio of 2:1 private to public dollars. No funds shall be advanced from the loan fund if sufficient funds are available from other sources at terms which will permit the project to operate with satisfactory income and cash flow to sustain the business in a profitable manner. The loan will be the minimum necessary to assure project success. The applicant will be required to document, by correspondence from a lending institution, that they cannot otherwise finance the amount requested from the BRLP. Private investment can be classified as leverage if it is made with twelve (12) months prior to the approval of a BRLP loan and as part of the same business development project, and may include capital invested by the borrower or others. Other investors may include financing from private entities. F. LOAN SELECTION CRITERIA Economic development staff will complete an initial review of each application. The review shall include an assessment of the business capacity to operate successfully, the extent to which the proposal meets the stated purposes of the program, credit and collateral analysis, cash flow analysis, and market feasibility of the proposed business to determine if an applicant is eligible for loan funds. Applicant, in support of its application, will also submit support documentation in the form of bank rejection letters or other outside documentation to determine if a financing gap exists and whether BRLP financing is necessary. Economic development staff will have the option of returning application packages which lack critical documentation or assurances, such as a loan commitment for the private share of the financing. Staff will be available to provide technical assistance or will provide appropriate referral assistance for businesses initially deemed ineligible under the BRLP Program. After the review, staff will present the application to the BRLP Committee for consideration. The staff presentation to the Committee will include a discussion of the strengths and weaknesses and any recommendations and suggestions they may wish to submit on each project. The BRLP Committee shall review each application for financial feasibility, security and ability to satisfy the purposes and priorities of the Program. The Committee shall approve, by majority vote of the full Committee, applications that meet program guidelines and that are financially sound. The Committee shall not approve any application, either tentatively or conditionally, if there are not sufficient funds currently in the program account. The decisions of the Committee are final and without right of appeal. G. PERFORMANCE ASSESSMENT PROCESS Annually, the BRLP Committee and economic development staff will review the goals and objectives of the Program to verify if it is meeting its objectives. If, after the review of the goals and objectives, the Committee decides to modify the Program, staff will prepare the modifications based upon the Committee recommendations. The written modifications will be presented to the Committee for its final approval prior to forwarding to the MDD Board for action. PART II: REVOLVING LOAN FUND OPERATIONAL PROCEDURES A: ORGANIZATIONAL STRUCTURE 1. BRLP Committee The Committee shall be administered by a three (3) member loan committee which will have skills and experience in business and/or financial management. They are established as a delegated authority and appointed by the MDD Board. The Committee will operate under the Open Meetings Act and Public Information Act. The three-person committee shall consist of: • A representative of Baytown City Management's office; • A representative from the City's Finance Department; and • A representative of a local lending institution. The BRLP Committee shall meet on an as-need basis to review, approve or deny loan assistance. A majority vote of the Committee shall be required for loan approval. The Committee duties include the approval or denial of loans, recommending foreclosure actions, waivers and/or modifications of loan terms and the oversight of program policy. All recommendations and changes in program policy require approval from the MDD. A quorum will be required for the BRLP Committee to conduct business. A quorum will consist of a majority of the three (3) committee members. B: LOAN PROCESSING PROCEDURES 1. Standard Loan Application Requirements The following list of information must be submitted prior to application consideration: • Completed and signed application; • Financial Balance Sheet for the last 2 years, dated within 90 days of application; If the applicant is a new business this can be waived by the Committee; • Income statement for the last 2 years, dated within 90 days of application; • Income and expense projections for at least 2 years; • Aging of Accounts Receivable and Accounts Payable if available; • Personal balance sheets for each principal(s) owning 10% or more of the company; • Cost estimates for machinery and equipment purchases and new construction and/or renovations; • Appraisal for purchase of building and/or land; • Commitment letter for private financing; and • 10% equity injection Information that the Applicant believes is confidential shall be conspicuously marked "Confidential" on each page containing the confidential information. 2. Credit and Financial Analysis Staff will work with the participating lending institution to determine the viability of an application. Upon receipt of a completed application, staff will review each application based on the requirements of this program and industry accepted credit and financial analysis techniques. The staff may enlist the assistance of legal and financial professionals to complete the review. The credit and financial analysis may include; but is not limited to the following: • Review of Business Plan • Review of Profit and Loss Statement • Review of Balance Sheet • Review of Personal Financial Statement • Credit Check • Operating Cycle Analysis • Ration Analysis • Capital Expenditures Analysis • Reconciliation of Net Worth 3. Loan Write-Up Following the submission of a loan application, economic development staff will prepare a loan summary for submittal to the BRLP Committee. Information in the summary includes, but is not limited to the following: • Project description/use of funds • Type of business • Number of jobs created and retained • Job/cost ratio • Private: Public leverage ratio • Collateral and BRLP position • Source and use of funds • Staff recommendation for loan application • Commitment letter for private financing (attachment to Loan Summary) The BRLP Committee shall receive the Loan Summary and Loan Application 72 hours prior to the meeting for its review. The applicant will be invited to the meeting to present its case for funds to the committee. Each applicant is encouraged to bring its banker or developer to the committee meeting, so the committee can get a complete understanding of the project. 4. Loan Approval Procedures Staff will present the application and loan summary to the BRLP Committee for consideration and action. The staff presentation shall include a brief analysis of the strengths and weaknesses and any recommendations and/or suggestions that may apply to the application. The business owner will make his/her presentation to the BRLP Committee. The Committee shall review each application for financial feasibility, security and the ability to satisfy the purposes and priorities of the BRLP Program. The Committee shall approve or deny, by majority vote of the Committee, all applications. The decisions of the BRLP Committee are final and without right of appeal. The BRLP Committee decisions are documented through minutes of the meetings. Following the approval or denial of a loan application by the Committee, staff will contact the applicant in writing to notify of the Committee decision and to review conditions of the loan if approved. A copy of the letter is also sent to the participating lending institution. C. LOAN CLOSING AND DISBURSEMENT PROCEDURES Loan recipients will receive draft closing documents prior to the loan closing. Economic Development staff will ensure the documents have been reviewed by the applicant for accuracy. A Closing Document Certification must be signed by the applicant. Also, the recipient shall provide evidence of final private financing. This will generally be in the form of a commitment letter from the participating financial institution. The loan recipient shall also provide evidence of their equity injection into the project, such as a copy of the check deposited at their financial institution. Loan recipients will be required to provide the documentation to the cash participation seven (7) days prior to the loan closing date. 1. Loan Closing Documents Standard documents that are required for the closing of a loan through the BRLP program include the following: • Original Signed Loan Application • Contract/Agreement • BRLP Committee Meeting Minutes Approving the Loan • Personal and/or Corporate Guarantee/Promissory Note • Security Agreement(s) • Deed or Mortgage as Applicable • Note 2. Loan Agreement Provisions The contract and security agreement are executed by the loan recipient and economic development staff. All other documents are executed by the loan recipient. These documents are completed for all loans involving the purchase of fixed assets, machinery/equipment, inventory and/or working capital. In addition, a mortgage is completed and filed for businesses that receive funds for the purchase/renovation of land and/or building(s). Also, a Uniform Commercial Code (UCC) form is filed for those loans that utilize program fund for the purchase of machinery/equipment, inventory, furniture and fixtures. Staff works with the participating lender in conducting UCC searches, if needed. The mortgage and UCC are executed by the loan recipient and staff. Following the recording of the loan documents by the first party collateral holder, the mortgage and the UCC documents are filed with the appropriate parties. These documents are recorded as soon as possible by staff in order to secure collateral position. 3. Loan Disbursement Requirements A form will be provided to the loan recipient at the loan closing in order to document fund disbursement. D. LOAN SERVICING PROCEDURES 1. Loan Repayment BRLP loan recipients will receive monthly statements from the lending institution administering the loan ten days prior to the loan payment due date, the first of each month. Monthly payment amounts and collection procedures are detailed in the note executed by the loan recipient. Economic Development staff shall receive a monthly statement of each loan from the lending institution. Current loan status information will be included in the statement with the unpaid principal balance and payment status. If the loan recipient is delinquent on payments, the amount and the delinquent months will be indicated on the statement. 2. Loan Monitoring As it would with any loan, the lending institution will monitor all aspects of the loan including payment amounts, payments made on time, past due loans, etc. To verify compliance with the BRLP goals, economic development staff may visit the business at any time to check on the progress of the business, check on the collateral used for the loan, check on the job creation and retention and provide the loan recipient an opportunity to discuss the progress of the business and to request answers to any questions that may arise. 3. Closing Loan Files Standard documents that are required for the closing of a loan through the BRLP Program, include, but are not limited to, the following: • Loan Agreement • Note • Personal and/or Corporate Guarantee • Security Agreement • Tax ID • DUNS # The contract and security agreement are executed by the loan recipient and economic development staff. All other documents are executed by the loan recipient. These documents are completed for all loans involving the purchase of fixed assets, machinery and equipment, and/or working capital. The BRLP loan files contain all pertinent information of the loan recipient and their project. The original loan application submitted to the BRLP Committee is placed in the loan file. Documents that are incorporated in this file section include: project description, private lender commitment letter, proposed project costs, description of collateral, personal financial statements of any individual owning ten percent (10%) or more of the business, and historical and projected financial statements. A copy of the BRLP commitment letter to the loan recipient is the final item in the loan application section. For privacy purposes, all loan applications and files will be stored in a secured area at City Hall and the same will be expected at the lending institution. 4. Job Creation Economic Development staff will monitor job creation and retention of the loan recipient each year. 5. Defaulted Loans Up to 90 Days Loan payments are due on the first day of each month to the lending institution. Loan recipients are informed of the procedures used for delinquent payments at the time of closing. The information is also included in the contract and note, which the loan recipient receives. The BRLP Committee is kept informed of any loan recipient that is delinquent on loan repayments. Delinquent loan procedures from the lending institution administering the loan will be followed. The following are typical examples of procedures for delinquent loans: a. After a delinquency of thirty (30) days, a 30-day letter is sent to the loan recipient by the lending institution and followed up by a phone call. b. After a delinquency of sixty (60) days, a 60-day letter will be sent. c. Upon receipt of the copy of the written notice, staff will contact the business, determine the degree of the problem and take the necessary steps for payment compliance. If no resolution is made, a BRLP Committee Meeting will be called to discuss actions that may be taken against the borrower including foreclosure of the loan or restructuring of the loan or suspension of principal payments, with interest only payments, for a specified time period. 6. Procedures for Handling Loans Over Ninety (90) Days Delinquent Loan recipients that continue to be delinquent on loan payments, even following assistance from the BRLP Committee and staff, shall be considered in default of the terms of the loan if the loan is not brought current within one year. The BRLP Committee must approve to initiate default proceedings against the loan recipient. Staff shall give notice to the lending institution to proceed against the borrower who is in default. The loan recipient shall be responsible for any and all attorney's fees and expenses to enforce collection of the loan. 7. Loan Write Off Procedures If a loan remains in default and proper legal efforts have been taken to collect payments but are unsuccessful, the BRLP Committee can proceed with a recommendation to the MDD to request final approval to write off the debt. The loan will be reclassified as a Bad Debt Expense in the month the MDD acts on the recommendation to write off the loan. E. ADMINISTRATIVE PROCEDURES 1. Accounting The lending institution shall provide Economic Development staff a combined monthly statement listing each loan. This report separates the principal and interest portion of the payment, as well as provides information on payment fees. This information is then compiled into a monthly financial summary and provided to the BRLP Committee for their review. The summary shall include information on interest earned on the account and the amount of interest to be utilized to cover administrative expenses. 2. Audits BRLP funds are subject to an annual audit. The full value of the BRLP (outstanding loans and available cash) must be shown every year.