I BOARD 1 EXECUTIVE DIRECTOR 1

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BOARD AGENDA: 1/26/10 ITEM: 7.1

THE REDEVELOPMENT AGENCY OF

THE CITY OF SAN JOSE

MEMORANDUM

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BOARD

1

EXECUTIVE DIRECTOR

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SUBJECT: UPDATED SMALL BUSINESS LOAN PROGRAM GUIDELINES

SUBJECT:

SEE BELOW RECOMMENDATION

DATE:

JANUARY 14,20 10

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It is recommended that the Redevelopment Agency Board adopt a resolution approving the proposed revised guidelines to clarify procedures and streamline guidelines of the Small Business Loan Program.

OUTCOME

Approval of the proposed guidelines and list of eligible business types will allow the program to proceed with enhanced clarity of purpose.

BACKGROUND

The Small Business Loan Program (SBLP) and lending guidelines were first approved by the Redevelopment Agency Board on June 25,2002. The SBLP

program was operated out of the Office of Economic Development under a Project Service Memorandum Agreement with the Redevelopment Agency from June

2002 until June 2008, at which time it transferred to the Redevelopment Agency.

This program has helped to maintain small businesses, provide sales tax revenues and has helped to provide jobs. Since its inception, the SBLP program has made

30 loans for a total of $1,206,000. There are currently 18 active loans: $436,000

has been repaid and, to date in FY 2009 -10, $28,739 in principal and interest

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Redevelopment Agency Board

SMALL BUSINESS LOAN PROGRAM REVISIONS

Page 2 January 14,2010

A revision to the lending guidelines was approved on January 13,2009. That revision made several changes to respond to current economic conditions, added a loan advisory committee, changed the allowable uses of loan proceeds and

expanded the SBLP service area to include the SNI and Neighborhood Business Cluster Redevelopment Project Areas.

On April 21,2009, the Agency Board further revised the guidelines and findings required under Community Redevelopment Law to expand the SBLP service area to include a limited area in the downtown that was adjacent to but not within a Redevelopment Project Area (the "Gap Area"). The SBLP will continue to be funded by non-tax increment sources of revenue, allowing SBLP funds to be used for operating and business expenses typically not eligible for Redevelopment assistance.

This memorandum proposes further revisions and streamlining of the SBLP guidelines to clarify procedures. (See Attachments A & B) Attachment C provides a summary comparison between the previously approved guidelines of January and April 2009 and the currently proposed revision.

ANALYSIS

To effectively continue implementation of the Small Business Loan Program, it is necessary to clarify the processes, procedures and decision making in the program. Attachment A details the revised guidelines for the continued application of the

SBLP and Attachment B lists the types of retail businesses eligible for the program.

Significant changes to the guidelines include basic eligibility and loan

characteristic elements. Eligibility changes include: a) reducing the gross revenue maximum &om $6,000,000 to $2,000,000 for each small business, and b) the small business must have fewer than 100 employees. Loan characteristics have changed to meet the current budgetary challenges as follows: a) the maximum loan term is five years and b) the maximum loan amount is $25,000, to meet the budget constraints.

Because the previously approved Small Business Administration listing of eligible retail businesses is extensive, those businesses with revenues over $2,000,000 per year have been eliminated. Examples of those excluded include: new and used car dealers, gasoline service stations, warehouse clubs, supermarkets, mail-order

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Redevelopment Agency Board Page 3 SMALL BUSINESS LOAN PROGRAM REVISIONS January 14,2010

houses and household appliance stores. Some other retail businesses are not eligible for SBLP loans. These include: liquor stores, nightclubs, strip clubs, tobacco stores, mobile food wagons, and other types of alcohol and exotic product1 service businesses.

Under the revised guidelines, the Executive Director will have the authority to periodically review the term, maximum loan amount and interest rate and adjust them to reflect market conditions.

EVALUATION AND FOLLOW-UP

Updates will be provided to the Agency Board, as appropriate.

PUBLIC OUTREACH/INTEREST

The proposed action does not meet any of the criteria for added outreach efforts. This staff report will be posted on the Agency's website and made available for public review in the Agency's public lobby area.

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Criterion 1: Requires Council action on the use of public funds equal to $1 million or greater.

Criterion 2: Adoption of a new or revised policy that may have

implications for public health, safety, quality of life, or financial/economic vitality of the City.

Criterion 3: Consideration of proposed changes to service delivery,

programs, or staffing that may have impacts to community services and have been identified by staff, the Board or Council, or a community group that requires special outreach.

COORDINATION

This proposed action has been coordinated with the Agency's General Counsel.

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Redevelopment Agency Board

SMALL BUSINESS LOAN PROGRAM REVISIONS

Page 4

January 14,2010

FISCAL IMPACT

There is no funding impact associated with this action. Funds are available in the Agency's Adopted FY 2009-2010 Capital Budget, Merged Area, Downtown Business Improvement & Loans, Small Business Loans Program sub-project line for future loans under the new guidelines.

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Executive Director Attachments

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THE REDEVELOPMENT AGENCY OF THE CITY OF SAN JOSE

Small Business Loan Program

I. PROGRAM OBJECTIVES

The San Jose Redevelopment Agency is providing a Small Business Loan

Program (SBLP) for the purpose of assisting small, ground level, storekont retail businesses in the listed Redevelopment Project Areas and, consistent with the findings in the resolution adopted April 21,2009, in the Gap Area. For detailed maps and boundaries of Redevelopment Project Areas, go to

www.sjredevelopment.org/maps.

The loan program's objectives are to (1) stabilize small retail businesses, (2) create or retain jobs, (3) increase sales tax revenues, (4) enhance the immediate area's economic climate and (5) support other redevelopment programs.

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11. ELIGIBILITY

To be eligible for the Small Business Loan Program (SBLP), a business must meet all of the following criteria:

a. The business must be located in a Redevelopment Project Area or the Gap Area. Redevelopment Project Areas are Downtown, Neighborhood

Business Districts (NBD), Strong Neighborhood Initiative Areas (SNI), and Neighborhood Business Clusters (NBC). The Gap Area is the area

bounded by the following streets - on the south by West Santa Clara Street, on the west by Market Street, on the north by Julian Street and on the east by Fourth Street.

b. The business must have less than 100 employees.

c. The business must have less than $2,000,000 dollars total revenue per year. d. The business must be a ground-level storekont retail store.

e. The business must either be a tenant, a subtenant, or the owner of the space they are in.

f. The business must be a retail store as defined by Attachment B.

g. No more than one application per business owner is allowed every five years.

h. Business owners with multiple businesses or interests in multiple businesses can only apply for one business.

As a Policy matter, certain mixed use businesses and other non-traditional businesses are not eligible for the SBLP as detailed below under Article VII, Definitions.

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111. ADMINISTRATIVE PROCEDURES

Agency staff is responsible for reviewing loan applications for eligibility and completeness. Applications must include all the information requested in the loan application and checklist and any related information requested by Agency. Agency staff will prepare a review of the loan application for completeness and

eligibility and inform the applicant of the results. Ineligible loan applicants will be notified accordingly. Loan applications with missing documentation will not be processed until the missing documentation is received. Applicants will be notified of any missing documentation.

Agency staff will review the completed loan applications of eligible applicants for credit worthiness.

a. If the loan application is found to be credit worthy, the loan application will be forwarded to the Credit Advisory Committee (CAC) with a

recommendation from the Agency staff.

b. If the loan application is found by the Agency staff not to be credit worthy, a letter will be sent to the applicant explaining the reasons for denial. When the CAC approves a loan request, a Legal Document Request (LDR) is made for loan documents. Additionally, insurance requirements, loan conditions, reporting requirements, check disbursement and timing will be explained to the applicant.

The loan balance may become immediately due and payable in fill upon a default including any of the following events:

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the business is sold (2) the business is closed for more than 90 consecutive clays for any reason (3) the business changes ownership (4) the business no longer operates in a Redevelopment Project Area or the Gap Area (5) the borrower violates any loan agreement covenants requiring full payment or (6) any material misrepresentation in the loan application is found after closing.

The Executive Director will have the authority to periodically review the term, maximum loan amount and interest rate to reflect market conditions and make adjustments thereto.

IV. LOAN CHARACTERISTICS

a. The maximum term of the SBLP loan is five years.

b. The interest rate is 3%, periodically adjusted by the Executive Director. c. The maximum loan amount is $25,000.

d. The loan can be used for working capital, equipment, fimiture, fixtures, inventory and other normal and reasonable business uses.

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e. Refinancing high-interest, business credit-card debt with up to 25% of the loan proceeds is allowed.

f. Loan proceeds cannot be used for speculative investments, owner loan repayments, payment of owed taxes and real estate financing.

g. Additionally, funds provided under the SBLP may not be used for leasehold improvements, specifically "construction, alteration, demolition, installation, or repair work done under contract".

h. Repayment terms are fixed principal and interest payments. i. Loan payments will be due at the first of each month.

j. Late charges of 5% of the loan payment will apply if payment is received after the 1 0 ~ of any month.

V. UNDERWRITING

The Agency staff and the CAC will use the five C's of credit to evaluate requests for loans. The five C's are cash flow, capacity, credit, collateral and character. a. Cash Flow - The business must be able to pay all debt, including the SBLP

loan. A ratio of 1:l debt service is acceptable. Profit for the business must be able to provide for owner's salary, taxes, and working capital reserves. Sales and profits for the business may be compared to Robert Morris Statement Studies for industry standards and averages. Business plan

projections by the applicant generally not in conformance with Robert Morris Statement Studies will be examined very closely and may be denied. Cash flows less than a 1: 1 ratio andlor negative cash flows will be a sufficient reason for loan denial.

b. Capacity - The loan request and business will be examined to ensure that the facility is adequate for the business plan objectives. The owner's industry experience and education will be a material consideration. The amount of cash the owner has invested into the business will be a material

consideration. Applicants with no industry experience in the business may be denied. The applicant who has financed their business with 100% debt may be denied. A leverage ratio in the Balance Sheet greater than 4: 1 is cause for denial. A current ratio less than 1: 1 is cause for denial.

c. Credit - A person's credit history is material to approving any current loan request. Accordingly, credit reports will be ordered and examined. An

average FICO score of 650+ is positive. Mortgage loans, car loans, credit cards, store cards which have been paid as agreed are positive. Credit

histories with no judgments, tax liens, collections or bankruptcy are positive. A business bankruptcy within the past two years is cause for an automatic denial. Consistent late pays on numerous accounts is cause for denial. Negative credit histories with understandable explanations may still be

forwarded for CAC consideration.

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d. Collateral - Collateral is always required in some form. Normally, a lien is placed on all business assets (past/current/future) thru a UCC-1 filing and

Security Agreement. Other forms of collateral may be required including Deeds of Trust, Pledge of Funds, Guarantors, and Co-signors. Collateral ratios will be at least 1.5:1, if not greater. An inability to offer any collateral may be grounds for loan denial.

e. Character - The applicant's entrepreneurial attitude and demonstrated business acumen will be examined and assessed with a recommendation to the CAC.

For certain businesses, specialized consultants may be provided to the business in order to do an operational assessment for CAC consideration.

VI. SERVICING AND COLLECTION

The servicing of SBLP loans closed will be administrated by the Redevelopment Agency's Finance Division with support from the Downtown Division. The Finance Division will set up the account, inform the borrower where and how to make their payments and send the borrower monthly remainders. The downtown support staff will contact the borrower to insure compliance with reporting

requirements, to assist the borrower in improvements to his business and to insure continued contact between the Agency and the small business. The Agency maintains an Administrative Policy for servicing and collection efforts.

VII. DEFINITIONS

a. Retail Store -Retail stores are defined in Attachment B. Only those businesses falling within the listed descriptions listed are eligible for the

Small Business Loan Program.

b. Ineligible Retail Stores - In general, the ineligible businesses are liquor stores, nightclubs, strip clubs and other alcohol and exotic type businesses. Convenience stores or restaurants with alcohol sales over 60% of gross receipts are not eligible for the SBLP. Tobacco stores, medical marijuana retailers and mobile food wagons are not eligible for the SBLP.

c. Mixed Use Business -Mixed use business is defined as a business which sells products and provides services to the public. This type of business must be evaluated on its own merits for eligibility as a retail store. For example, a beauty salon selling retail products and providing multiple services such as hairstyling is a mixed use business.

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d. Ground Level Storefront Retail -A ground level storefront retail store is defined as a retail store which is not located in the basement of any structure, not on the mezzanine level, nor on the upper levels. It is at ground level, facing the main street of its location at sidewalk level.

e. Where the singular is used throughout this document, the plural is implied and plural uses may be interchangeable.

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Schedule of Eligible Retail Stores

Information regarding NAICS descriptions may be found at www.naics.com.

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HIGHLIGHTS OF CHANGES TO THE SBLP GUIDELINES

GUIDELINES

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APRIL 21,2009 GUIDELINES

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DECEMBER 8,2009 ELIGIBILITY

1. No limit on number of employees

2. Gross revenues not to exceed $6,000,000 per year

3. No limit on number of applications 4. No limit on multiple businesses

ADMINISTRATIVE PROCEDURES 1. Material misrepresentation in the loan

application not mentioned

2. Executive Director can adjust the interest rate periodically

LOAN CHARACTERISTICS 1. Maximum term is 10 years

2. Maximum loan amount is $50,000 UNDERWRITING

1. Business must be breaking even or making a profit

2. Is a start up business that is a good credit risk

3. Business was profitable for a majority of the last 3 years and has a net loss of no more than the last six months

4. Ratio Analysis as follows: a. Cash flow coverage of 1 : 1

b. Collateral ratio of 1.5:l c. Current ratio of 1: 1

d. Leverage not to exceed 4;l

ELIGIBILITY

1. Number of employees limited to 100 2. Gross revenues not to exceed $2,000,000

per year

3. Loan applications limited to one per business owner every five years

4. Loan application limited to one business only

ADMINISTRATIVE PROCEDURES 1. Upon finding material

misrepresentations in the loan

application the loan balance will become immediately due and payable

2. Executive Director can adjust the interest rate, maximum amount of loan and term periodically

LOAN CHARACTERISTICS 1. Maximum term is 5 years

2. Maximum loan amount is $25,000 UNDERWRITING

1. Use the five "C" of credit to underwrite loan requests as follows:

a. Cash Flow b. Capacity c. Credit d. Collateral e. Character ATTACHMENT C 1 DEFINITIONS 1. None DEFINITIONS 1. Retail Store

2. Ineligible Retail Stores 3. Mixed Use Business

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