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Capacity Building Through Revenue Recapture

Capacity Building Through Revenue Recapture. How to structure your deal and use revenue recapture to support operations, local investments and special uses. Phil Christopherson Executive Director IDEA Inc. Revenue Recapture IDEA Inc. Model. Mission and objectives of IDEA Inc.

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Capacity Building Through Revenue Recapture

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  1. Capacity Building Through Revenue Recapture How to structure your deal and use revenue recapture to support operations, local investments and special uses Phil Christopherson Executive Director IDEA Inc.

  2. Revenue RecaptureIDEA Inc. Model • Mission and objectives of IDEA Inc. • Promote economic diversification by helping businesses grow and expand so Riverton’s and Fremont County’s economic future is more secure • Provide a continuous, financially viable economic development entity independent of state and local funding which ensures a consistent drive toward diversification and a strong economic future. • A self funded organization that does not rely on continuously obtaining grants, memberships, donations, tax revenue or the local government

  3. Revenue RecaptureIDEA Inc. Model • How IDEA is accomplishing their objectives • Own land and buildings that are leased to local businesses for their operations • Utilize Wyoming Business Council BRC funding and debt secured by the business and repaid by the business to pay for the land and buildings • IDEA is obligated to recapture the grant funds provided by the state • Have investigated to varying degrees a total of 22 different projects • Have completed four projects: • Brunton • BTI • Smart Start Child Care • Alco Building

  4. Revenue RecaptureIDEA Inc. Model • How is this working for IDEA Inc. • Monthly Gross revenue from projects • Brunton $19,722.47 • BTI $3,000.00 • Smart Start $5,192.70 • Alco Building $11,362.00 • Total: $39,277.17 ($471,326 per year) • Each of these projects used a 1.5 million dollar BRC grant and debt financed by the business • total of 6 million dollars in BRC grant funds to recapture

  5. Revenue RecaptureIDEA Inc. Model • How is this working for IDEA Inc. • Monthly expenses from projects (primarily loan payments) • Brunton $16,554.22 • BTI $2,211.36 • Smart Start $4,492.70 • Alco Building $4,605.27 • Total: $27,863.55 ($334,362. per year)

  6. Revenue RecaptureIDEA Inc. Model • How is this working for IDEA Inc. • Net operating revenue from projects: • Monthly – $11,413.62 • Yearly – $136,963.44 • Approximately 29%of Gross revenue from BRC projects is being used for operational expenses • The Net operating revenue is being used for the following: • Operating costs – staff, training, office expenses, etc • Approximately 38% of the 29% • Building improvement and maintenance • Creating a savings fund for future projects • Investigating a business innovation center • Developing entrepreneurship program in conjunction with Central Wyoming College and other local schools

  7. Revenue RecaptureIDEA Inc. Model • Additional benefits from the IDEA Inc. Recapture Model • Net equity gain from the projects • IDEA Inc. owns the land and the buildings • Each month as the loans are paid off by the tenants the equity that IDEA Inc. has in the property grows • For last year IDEA’s equity in all of the project combined grew by $211,000.00

  8. Revenue RecaptureIDEA Inc. Model • What does this mean? • IDEA Inc. is recapturing the BRC funds granted by the state • $136,963 per year in project revenue – steady income • $211,000 per year in equity gain – increases each year • IDEA Inc. is building a solid financial future that is not dependant upon donations, memberships, grants, tax money or local government

  9. Revenue RecaptureIDEA Inc. Model • Why would a business participate Project Financing Example using a BRC Grant 1. BRC Grant 1,500,000.00 2. Required Match (10%) 166,666.00 3. Extra Financing Required 200,000.00 Total Project Cost: 1,866,666.00 Sources of funds Item 1: IDEA Inc. and WBC Items 2 & 3: Business (financing or cash) Recurring Cost to the business** Lease - 4% of total grant per year: 60,000.00* Monthly cost: 5,000.00* Cost of financing $366,666/ year: 42,048.60 (8% for 15 years)Monthly cost: 3,504.05 Total Costs (Lease & Financing) Per year $102,048.60 Per month $8,504.05 • * This is the initial lease rate – the lease rate will be adjusted at defined renewal periods for inflation • ** Leases will be triple net – the lessee pays for taxes, insurance and maintenance

  10. Revenue RecaptureIDEA Inc. Model • Why would a business participate • Project Financing Example using private financing only and not a BRC Grant (for comparison) • Total Project Cost: $1,866,666.00 • Source of funds - Business financing • Recurring Cost to the business • Cost of financing $1,86,666.00 • (8% for 15 years)Monthly cost: $17,838.83 • Total Costs for private financing • Per year $214,065.96 • Per month $17,838.83 • Compare BRC funding vs. Business funding • BRC Funded project (from the previous example): • Total Costs (Lease and Financing) • Per year $102,048.60 • Per month $8,504.05 • Savings for the business by using a BRC grant over Private financing • Per year $112,017.36 • Per month $9,334.78

  11. Revenue RecaptureIDEA Inc. Model • Key elements to make this work • The business must be committed – financially, managerially, operationally • Get at least 1% up front • They are responsible for the match • The match can be cash either from the company or from a loan from a bank of their choosing – the debt payments will be included in the monthly lease payments • The business will guarantee the loan • The bank should be very willing and eager to participate – A large part (if not most) of the equity will be grant funds – this means limited risk to the bank • They are responsible for any amount over the grant and the match • They do not own the land or building – at some point they can make an offer to purchase

  12. Revenue RecaptureIDEA Inc. Model • Key elements to make this work • The project must cash flow!!!! • The monthly financial gain must be greater than the monthly expenses • IDEA uses 4% of the grant amount (as a rule of thumb) plus loan payments on the match (and extra money from the bank loan) to set the lease rate • No promise to sell or selling price listed in the lease • Provision in the lease for the business to pay the tax consequences to IDEA for an early loan payoff or project buy out. • The business must get a good deal – better than they would have gotten by going to the bank or other lending institution – we are trying to help good businesses grow faster

  13. Revenue RecaptureIDEA Inc. Model • Key elements to make this work • Do not take business away from local contractors or developers – If we bring the deal we get the deal, we do not go out and steal other peoples deals. • Keep the project moving – short delays in making decisions quickly add up to long project delays that cost a lot of money to fix on the back end of the project. • Establish a project schedule with key decisions scheduled • Do not let project design take all of the project time leaving no time for construction • Be upfront and honest with what you can and cannot do • Explain the project timeline – it is not fast • Explain project priority at the WBC – there is none • Explain the finances clearly

  14. Revenue RecaptureIDEA Inc. Model • Key elements to make this work • Make sure the business is up to the task of completing the project and staying in business • Get solid financials from the business – If they are coming to you because a bank will not work with them are you willing to take on the risk the bank was not willing too? • They must have the business acumen and managerial ability to run the business and the project • They must have someone assigned to the project for the life of the grant project (writing the grant, designing the project and building the project) who can make the decisions needed and make commitments for the business that will be required

  15. Revenue RecaptureIDEA Inc. Model • Final Comments • IDEA Inc. is in the infancy of our long term strategic plan. • Phase 1: 15 – 20 years building a financial foundation for future success • Start programs to help local business grow and succeed • Develop a well organized and run organization with board members who are committed to the success of the community over their own personal success and recognition • No pay, no recognition, no financial benefit, no membership • Entrepreneurship • Innovation Center • Business recruiting as opportunity presents • Phase 2: 10 years and beyond • Develop our own projects without using BRC or other grant funding • Have a fully functioning Innovation center • Provide loans and grants to local businesses and non-profits • Fully operating entrepreneur programs at Central Wyoming College and the local High Schools

  16. Revenue RecaptureIDEA Inc. Model Questions? Thank You

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