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Finance and Tax Incentives

By Wanda Reed,2014-08-07 08:59
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Finance and Tax Incentives

    1-iv. FINANCE

    Companies looking to expand in or to Kansas and start-up companies are all looking for ways to finance their growth. Financial help can be through banks only, banking combined with other resources, or just through non-banking resources.

Banks

    SCKEDD’s area, in 2005, had a total of 143 banks with 352 offices and

    $11,232,000,000 in deposits. Over 61% of those deposits are located in Sedgwick County. It is also home to two of the largest banks in Kansas. The smaller banks have formed consortiums, and when a loan is too large for one of them they all take a part of the loan. Individual counties whose people united in an economic development effort have used this as an effective tool for project funding.

Banking Combined with Other Resources

    Funding from banks is often used as part of a total project. Other resources of funds include:

    Industrial Revenue Bonds can be used to finance 100% of the cost of land,

    building, and equipment with the only equity requirement being the cost of the

    bond issuance. They can also be used to remodel or expand existing facilities.

    All property financed through IRB’s is exempt under Kansas law (K.S.A. 79-201a)

    from ad valorem property taxation for 10 years. Issuers (cities/counties) can

    require that all, or a portion of the abated tapes be made available to local taxing

    jurisdictions in payments in lieu of taxes. The IRB issuers can also provide

    property tax abatements as an incentive for a company to locate within the

    issuer’s jurisdiction.

    Community Development Block Grants can be used as a gap financing measure in

    all of SCKEDD’s area except the city of Wichita, which is an entitlement city.

    The block grant has an economic development portion than can be used to

    provide infrastructure for a business or to provide direct financial assistance to a

    business. In both cases, the application for assistance is made by the local unit of

    government.

    The applications are submitted in any of twelve rounds each year. The jobs saved

    or created must have a benefiting percentage to people of low-to moderate income

    of 51% or higher. The maximum economic development block grant award is

    $35,000 per job created or retained, and has a maximum of $750,000 per request.

    A business may not receive more than $1.5 million per community on a

    cumulative basis.

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    Applications approved for infrastructure are 50% grant and 50% loan. The benefiting business will pay back the loan over a 10 year period of time at a 2% interest rate. The repayment will be in the form of special assessments.

    Applications approved for loans to a business have terms of up to 3.5% below prime and a duration dependent upon the type of assets (land and building, machinery/equipment, working capital) being financed.

Kansas Economic Opportunity Initiatives Fund (KEOIF)

    The 1994 Legislature established the Kansas Economic Opportunity Initiatives Fund (KEOIF) in recognition of the need to assist Kansas communities and businesses when an economic emergency or unique opportunity arises. Awards are based on:

• A major expansion of an existing Kansas commercial enterprise

• The potential location in Kansas of the operations of a major employer

    • The award of a significant federal or private sector grant which has financial matching requirements

    • The departure from Kansas or substantial reduction of the operation of a major employer

• The closing of a major federal or state institution or facility

    Possible uses of KEOIF funds include site and facility construction, improvements, equipment purchases, and other project-related costs associated with the establishment or expansion of a Kansas facility.

    Projects are generally performance based, zero per percent, forgiveable loans over a five-year period. Annual reports are required to verify job creation and payroll performance against contractual commitments.

Investments in Major Projects and Comprehensive Training (IMPACT)

    The IMPACT program is a funding mechanism designed to respond to the training and capital requirements of major business expansions and locations in the state. IMPACT may be utilized by the individual businesses or consortiums of companies adding new jobs. The program is typically reserved for those projects involving at least 100 new jobs at a higher-than-average wage level. Projects with less than 100 new jobs may be funded but must involve wage levels significantly higher than average.

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    IMPACT costs are financed through tax-exempt, public purpose bonds issued by the Kansas Development Finance Authority. These bonds are retired through the revenue received from statewide employer withholding taxes. Individual bond size may not exceed 90% of the withholding taxes received from the new jobs over a ten-year period.

    The maximum amount of assistance for which a company qualifies is directly tied to the number of new jobs created and the taxable wages of those jobs over ten years. If the company is unable to create jobs in sufficient numbers to generate withholding tax revenue according to its annual projections, the business may be required to repay a portion of the funds on a shared basis with the state. If the company leaves the state before the bonds are retired, the full cost must be repaid, less any withholding tax contributions collected prior to the company’s departure.

Tax Increment Financing (TIF)

    Tax Increment Financing is a real estate redevelopment technique applicable to industrial, commercial, and residential projects. TIF covers the costs of publicly provided improvements by using the anticipated increases in real estate tax revenues to retire the bonds sold to finance qualifying redevelopment costs (K.S.A. 12-1770 et. Seq.).

    Monies raised through Tax Increment Financing may be used for initiatives selected and administered by local governments, such as land acquisition, land and building cost subsides (write-downs), structure rehabilitation, and public improvements.

    Tax Increment Financing works for both privately owned land and publicly owned land to be sold for redevelopment. TIF is possible only if private development would not occur without public improvements. Advance developer commitment to the project is essential. TIF cannot be used speculatively to prepare a sire for development.

    Businesses have found that TIF offers several distinct advantages. TIF implementation allows the financing of land acquisitions and improvements with tax-free borrowing. Thus, interest costs are reduced. Also, TIF offers businesses the opportunity to purchase renovated sites and/or buildings at sub-market costs.

Rural Development Administration

    The U.S. Department of Agriculture, Rural Development (RD) Cooperative Service provides loans for business and industrial development. RD assistance is provided in the form of a loan guarantee of up to 90% of the principal and interest for guaranteed loans of $2 million or less, 80% for loans over $2 million but less than $5 million, and 70% for loans over $5 million. Applicants apply for industry

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    loans through private lenders. Business and industry loans are limited to a maximum of $25 million.

    Funds for the business and industry loan program may be used to finance construction, conversion, acquisition, equipment and machinery, inventory, and working capital. This program is available throughout SCKEDD’s area except within the city limits of Hutchinson and Wichita due to the population limitation of the project.

Small Business Administration (SBA) 504 Program

    The U.S. Small Business Administration (SBA) 504 Loan Program provides long-term, subordinate, fixed-rate financing for fixed assets or real estate loans with a maturity of twenty years including machinery and equipment with a life of ten or more years. Assets appropriate for purchase under the 504 program include land and buildings, building renovation, and machinery and equipment.

A maximum of $1.5 to $2.0 million can cover up to a 40% of a project’s cost.

    Small manufacturers, as defined by SBA, cannot exceed $4 million. The minimum SBA loan amount is $50,000. One job should be created or retained for every $50,000 loaned as applied to the total portfolio. Other programs may be used in conjunction with 504 loans to provide working capital or fixed-asset financing for larger projects. Application preparation and servicing of the loans is done by an SBA Certified Development Company (CDC). SCKEDD is the CDC for its entire area and assists small business concerns develop the loan applications.

Small Business Administration (SBA) 7(a) Loan Guarantee Program

    The U.S. Small Business Administration (SBA) 7(a) Bank Loan Guarantee Program is the primary SBA mechanism for financing user-owned or operated business expansions. The program is used to provide long-term, low down payment financing for a variety of needs including fixed assets and working capital.

    The SBA may guarantee up to 85% of a loan not to exceed $150,000 or 75% of a loan up to $2 million with the maximum guarantee being $1.5 million. User financing applies to activities in which the borrower used or occupies the assets purchased with the loan. This stipulation disqualifies developers. The 7(a) financing option applies to costs associated with expansion and acquisition of assets including working capital. These loans may be seven years in length, but are generally five years. The maximum terms for loans on machinery and equipment is ten years; they are usually five to seven years in length. The term for loans for renovation, remodeling, and leasehold improvements is generally less than ten years, and those for new construction and land acquisition may extend up to 20 years.

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    For-profit businesses are eligible for loan guarantees subject to certain size standards that vary according to business types. General size limitations are listed below:

• Manufacturing--maximum number of employees may range from 500-1,500

    depending on product manufactured.

    • Wholesale-- maximum number of employees may not exceed 100.

    • Services--sales may not exceed $32.5 million, depending on the industry. The average size standard is $6.5 million in average annual receipts. • Retailing--sales may not exceed $26.5 million, depending on the industry. Most have a size standard of $6.5 million in average annual receipts.

Kansas Technology Enterprises Corporation (www.ktec.com)

    The Kansas Technology Enterprise Corporation (KTEC) operates several programs which provide financing (and other assistance) for “high-tech” Kansas

    business. These programs include early seed capital and grants for research and development, equipment and facilities, training, and technical consultation.

Certified Kansas Venture Capital Companies

    The Kansas Venture Capital Company Act facilitates the formation of private venture capital companies. These private companies make equity investments to aid the creation and expansion of Kansas businesses. Funds are best suited for businesses that exhibit high levels of growth and profitability but are unable to obtain conventional financing.

    The following types of businesses are not eligible for funding under this program.

• Oil and gas exploration and development

    • Real estate development or appreciation

    • Banking or lending operations

    • Retail

    • Service*

    *The 1994 Legislature expanded the guidelines for this program to include companies within SIC groups 70 through 89 if the company can demonstrate that greater than 50% of its revenues are derived from sales outside the state of Kansas, from sales to Kansas manufacturing firms within SIC groups 20 through 39, or from a combination of both.

Certified Local Seed Capital Pool

    The local seed capital pool is a fund established to provide capital for small businesses. Funds are available to:

• Develop a prototype product or process

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    • Produce a marketing study to determine the feasibility of a new product or process

    • Create a business plan for the development and production of a new product or process

    Kansas law requires that local seed capital pools be certified by the Secretary of Commerce, KDOC. When seeking certification, each local seed capital pool must demonstrate that its purpose is to encourage and assist in the creation of Kansas businesses. It must also show that it intends to provide maximum opportunities for the employment of Kansans by making seed capital available to Kansas businesses. One hundred percent of the funds invested by the local seed capital pool must be invested in Kansas businesses.

    A Kansas business (for purposes of certified seed capital pools and Kansas Venture Capital) is any small business owned by an individual, partnership, association, or corporation domiciled in Kansas, including foreign-owned subsidiaries doing business primarily in Kansas or having substantial production in Kansas.

    Each local seed capital pool establishes its own philosophy of investment in Kansas businesses. An annual compliance review is conducted by the KDOC.

Kansas Venture Capital, Inc. (www.kvci.com)

    Kansas Venture Capital, Inc. (KVCI) is a statewide risk capital system designed to meet the special needs of businesses throughout Kansas. The system seeks to create private risk capital for investment in smaller Kansas businesses.

    All funds invested by Kansas Venture Capital, Inc. must be invested in Kansas businesses solely for the purpose of adding value to goods or services produced within the state.

    Most corporate businesses that meet the SBA definition of a small business qualify for KVCI assistance. There are restrictions against financing for relending or reinvesting. While KVCI may prefer manufacturing and production businesses due to their proven potential to equity investors, this preference does not preclude any business from receiving an examination of its investment potential. Any type of business can apply to the KVCI for assistance. The KVCI functions as a Kansas Certified Venture Capital Company and therefore is subject to the guidelines of the program.

SCKEDD’s Programs That Serve Its 14 County Area:

    SBA 504 and 7 (a) programs were previously defined.

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    Economic Development Administration (EDA) Revolving Loan Program (RLF)

    These funds were granted to SCKEDD to be used as gap financing or as loans of last resort. The program operates in all fourteen counties and makes loans up to $300,000, subject to availability of funds. The term of the loan is based upon the item(s) being financed. The interest rate is determined by a risk factor and can go to 4.25% above prime. Jobs must be created or saved, and the overall portfolio must maintain a 2:1 leverage ratio. Financing is available for most business needs; however, restructuring of existing debt is generally not eligible.

Intermediary Relending Program (IRP)

    These are funds borrowed by SCKEDD from Rural Development. The funds serve as gap or last resort financing, and are used for direct loans of $250,000 or less. The IRP requires a 25% match from other sources. All 14 counties are eligible except inside the cities of Hutchison and Wichita. Most of the needs of a start-up or existing business can be financed. However, restructuring of existing notes and payment of taxes are not eligible uses. Terms of the loans are keyed to the average life of the project. Interest rates compare to the RLF and do not compete with it. Collateral for the loan must be first or co-first position. There are no job or Davis-Bacon requirements. Projects can combine loans from both the RLF and IRP.

Microloan Program

    SCKEDD has borrowed funds from SBA. These funds are used to make loans when the total project does not exceed $105,000. The microloan itself cannot exceed $35,000. The loans can be for any purpose except real estate purchase and debt refinancing. All areas of SCKEDD’s 14 counties are eligible. Loans above $25,000 must have a bank turndown. The term is up to six years. The interest rate is set within guidelines provided by SBA when SCKEDD borrows the funds. Free training and technical assistance are provided to all borrowers.

    Other Resources

    Other resources include those listed above that can also be done without a bank being

    part of the project: they do not include the SBA 504, SBA 7(a), Rural Development

    Business and Industry Loan Guarantee.

     County Microloan Program

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    Counties apply, on a competitive basis, for CDBG funds to create county microloan programs. The Kansas Department of Commerce & Housing (KDOC) administers the funds. Grants up to $100,000 are awarded to the counties. The microloan programs can make loans up to $15,000. The loans must go to businesses with five or fewer employees, and 51% of the jobs created/saved over the entire county portfolio must go to low-to-moderate income persons. The CDBG funds are true grants to the counties and do not require repayment if a loan is defaulted. Training and technical assistance are required as part of the county program.

EDA Public Works and Economic Adjustment

    Economic Development Administration provides grants for infrastructure improvements to assist companies in the creation of jobs. An area’s eligibility is based upon the distress factors of low per capita income, unemployment rate above the national average, unemployment or economic adjustment problems. Grants vary from 50 to 80 percent depending upon the severity of the distress.

Kansas Department of Transportation Economic Development

    The program was made possible by the enactment of the Comprehensive Transportation Program by the 1999 Legislature, which continued the program started in 1986. Any local unit of government or state agency may apply. The project must “have the potential to enhance significantly the income, employment, sales receipts, and land values of the st, and selected surrounding area…”. Applications are submitted August 1

    the spring of the following year.

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