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

2 Overview Definition Definition Goal Goal Problem Problem Solution Solution

3 Definition:What is Leveraging? Merrian-Webster The use of credit to enhance one’s speculative capacity 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 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 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 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 purposeExamples Transit Rail Financing-Fed, State, Local Transit Rail Financing-Fed, State, Local Incentive Investments-Redevelopment, Econ Dev Incentive Investments-Redevelopment, Econ Dev CIWMB RMDZ Loan Program CIWMB RMDZ Loan Program Key Concepts Public Return on Investment Public Return on Investment Return on Equity Return on Equity Return on Investment Return on Investment

5 Goal:What is the Challenge? 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 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 Develop four leveraging strategies

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

7 Solution Mechanisms New Markets Tax Credit Equity Equivalent Investments Loan GuarantyLoan Sale Products Subordinate Loans Deferred Payment Loans Below-Market Loans

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 Goal Methodology Methodology Market Research Market Research Leveraging Strategies 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 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 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 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 Recycling and reuse is a $14 billion industry in California $55,910,300 have been made in loans through RMDZ program $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 Collateral requirements Timing of interest payments Timing of interest payments Replenishment of loan pool Replenishment of loan pool Financial incentives to increase level of participation Financial incentives to increase level of participation Perceptions of confidentiality Perceptions of confidentiality

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

16 Overview and Discussion of Leveraging Strategies

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

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

19 Financing Products AdequateInadequate Adequate Example: Established company representing low credit risk; can secure conventional bank financing Example: Established service or technology firm with few hard assets Inadequate Example: Company seeking to acquire real property with good market value but weak income stream Example: Start-up company with little operating history Collateral Cash Flow

20 Financing Products AdequateInadequate Adequate Below-Market Rate Loans Example: Established service or technology firm with few hard assets Inadequate Example: Company seeking to acquire real property with good market value but weak income stream Example: Start-up company with little operating history Collateral Cash Flow

21 Financing Products AdequateInadequate Adequate Below-Market Rate Loans Subordinate Loans Inadequate Example: Company seeking to acquire real property with good market value but weak income stream Example: Start-up company with little operating history Collateral Cash Flow

22 Financing Products AdequateInadequate Adequate Below-Market Rate Loans Subordinate Loans Inadequate Deferred Payment Loans Example: Start-up company with little operating history Collateral Cash Flow

23 Financing Products AdequateInadequate Adequate Below-Market Rate Loans Subordinate Loans Inadequate Deferred Payment Loans Collateral Cash Flow

24 Leveraging Strategies Mechanisms New Markets Tax Credit Equity Equivalent Investments Loan GuarantyLoan Sale Products Subordinate Loans Deferred Payment Loans Below-Market Loans

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

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

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. 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 LenderCDEBoard Makes $10 million market-rate loan Invests $30 million in exchange for $11.7 Million (39%) NMTC Makes $10 million long term loan (funded over 3 years)

29 New Markets Tax Credit Sources of Funds Sources of Funds –Investors that expressed interest in purchasing NMTCs such as: »Enterprise Social Investment Corporation »Bank of America »Bear Stearns Leverage Leverage –Base Case: 5 to 1, Best Case: 5 to 1 Return on Investment 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. 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 Lenders Board Small Business Expansion Fund 1. Contributes $3 million Borrowers 2. Provides up to $12 million in guarantees 3. Provides up to $12 million in loans

32 Loan Guaranty Sources of Funds Sources of Funds –California FDCs such as: »Nor-Cal FDC, »Pacific Coast Regional FDC »California Southern FDC Leverage Leverage –Base Case: 12 to 1, Best Case: 19 to 1 Return on Investment 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. 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 RASP Investor Borrowers 2. Gives Board up to $3 million in notes 3. Sells up to $3 million in loans per quarter 1. Makes up to $3 million in loans per quarter 4. Gives up $3 million in cash for relending

35 Loan Sale Sources of Funds Sources of Funds –Possible purchasers of loans such as: »Community Reinvestment Fund »Bayview Financial »SBA Receivables Leverage Leverage –Base Case: 16 to 1, Best Case: 16 to 1 Return on Investment 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. 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 BoardCDFI EQ2/PRI Investor Makes $50 million in recycling loans Bank Invests $10 million Provides $10 million loan or recoverable grant Provides $30 million credit line

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

39 Comparison of Four Strategies New Markets Tax Credit Loan Guaranty Loan Sale EQ2/PRI Simplicity(-)(+)(+)(0) Practicality(-)(0)(+)(-) Sustainability(+)(+)(+)(0) Affordability(+)(0)(+)(+) Implementability(0)(-)(+)(0) (+) Above Average, (0) Average, (-) Below Average

40 Performance Against Criteria Financing capacity: Leveraging ratio ranges from 5:1 to 19:1. 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”. 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 Market responsiveness: Proposed loan products respond to needs of different recycling companies Customer friendliness: Use of intermediaries can reduce loan approval and processing times. 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. 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