Misc CEcD test questions Flashcards
What is the “Triple Bottom Line”?
The 3 “P’s”
People
Planet
Profit
The triple bottom line aims to measure the financial, social, and environmental performance of a company over time.
TBL theory holds that if a firm looks at profits only, ignoring people and the planet, it cannot account for the full cost of doing business.
Define Gap Financing.
Loan required by a developer to bridge the gap (i.e. to make up a deficiency b/w the amount of mortgage loan due on project completion and the expenses incurred during construction (financing that covers the difference b/w what a project can support and the cost of development)
Define “Conflict of Interest” statement.
A conflict of interest occurs when a person’s or entity’s vested interests raise a question of whether their actions, judgment, and/or decision-making can be unbiased.
When an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities.
In business, a conflict of interest arises when a person chooses personal gain over duties to their employer, or to an organization in which they are a stakeholder, or exploits their position for personal gain in some way.
Business Retention and Expansion programs enable a community to:
1) survive economic difficulties
2) assist with expansions that add new jobs
3) increase their competitiveness in the wider marketplace
What type of investment doesn’t require state registration?
Insurance Companies
Define economic development
Program, group of policies or set of activities that seeks to improve the economic well-being and quality of life for a community by creating and / or retaining jobs that facilitate growth and provide a stable tax base.
Which of the following is NOT a role of the economic developer?
“Financier”
Utility companies are involved in business retention and expansion (depending on their policies) by:
- discounted rates
- information on available land / buildings in their service area
- energy audits to help companies reduce energy consumption
- revolving loan funds and grants to small companies and NPOs
- low cost financing for local businesses
- assistance with establishing programs to export products or services
Greenfield Development
Takes place on large tracts of land of previously undeveloped property in rural or suburban areas;
Provides competitively priced land
Fosters new job creation
Business Retention & Expansion Surveys - Follow-up timeline and tasks associated with: Immediate Short term Medium term Long term
Immediate - w/in 2 days; review surveys for assistance requests; flag any immediate risks for rapid response
Short Term - w/in 2 weeks; send thank-you; tabulate results; create file for completed surveys
Medium Term - w/in 4 weeks; ensure agencies have responded to all requests for services
Long-Term - 3-4 mths; update firms on progress in dealing with community-wide issues that impact the business climate
Redevelopment / Reuse
Processes for taking previously developed property to a higher, more productive use.
Redevelopment refers to new construction (possibly with demolition) or the process to improve an area through both new construction and property reuse.
Reuse refers to the renovation or rehabilitation of an existing building
Both encourage infill rather than sprawl, makes use of existing infrastructure and helps remove slums and blight.
Difference b/w Debt Capital and Equity Capital
Debt Capital - $$ loaned to be paid back in fixed installments on a fixed schedule; reduces the amount of equity and thus increases the variability of return on equity investment (i.e. leverage)
Equity Capital - ownership investment in a project with no predetermined schedule for payback; bridges the gap b/w debt financing and cost of the project; subordinate to debt financing
Difference b/w Debt Financing and Equity Financing
Debt Financing (i.e. loan) is a capital investment made by commercial banks that must be paid back within a specific time period based on a pre-established schedule; includes loans, bonds, transfer of capital; in return for lender’s investment, interest is charged.
Equity Financing is a capital investment that does not obligate repayment of the investment; in return for the investment, equity investors receive partial ownership in the venture; investors expect to benefit from expected appreciation in the value of their share and the payment of a portion of the earnings or dividends when the entity is profitable.
Who are the public sector players in real estate development projects and what roles does each play?
Local Gov’t (planning / zoning depts; public works depts; building inspectors) - fill the role of regulator (regulating rights of property owners, overall public interest, police power, protection of health, safety and welfare of citizens)
Economic Development Organizations (NPOs, EDOs, Chambers, redevelopment authorities, BIDs, etc.)
- fill role of facilitator (facilitating regulatory approvals, providing partial financing, providing infrastructure, improving streetscape, implementing a facade program)
- fill the role of initiator (when the EDO acquires property for development and has the following: a strong need to redevelop the property; political will to withstand the risks of development; and has expertise and resources to develop the property)
What are the characteristics of a small business?
- Innovation (more innovative in terms of product and processes)
- Community Ties (less likely to relocate and more likely to hire local residents)
- Flexibility (adapt more quickly to rapid changes in market demand)
- Limited Capital (half of small businesses start with less than $20K)
- majority fail w/in first 18 mths of operation
- 40% of start-ups survive the first 5 years; 10% survive the first 10 years
- majority offer lower wages and fewer benefits
Define business incubator
Entity that nurtures and supports young companies until they become viable, providing them with affordable space, technical and management support, equity and long-term debt financing & employment.
The 3 basic objectives in creating an incubator are 1) to spur technology-based development; 2) to diversify the local economy; and 3) to assist in community revitalization.
Define technology incubator
It’s a business incubator program with the specific objective of fostering innovation and developing creative technology ideas, often requiring specialized equipment, labs, facilities, etc.
They are generally affiliated or supported by universities because of the financial, technological and research resources available at these institutions in order to commercialize their products.
3 main components:
- innovation friendly space
- technology assistance
- access to financing
What is the difference b/w:
Business Incubator
Technology Incubator
Business Accelerator
Business Incubator supports young companies until they become viable - low rent office space; shared support services; network oppys
Technology Incubator focuses on innovation and high tech businesses - affiliated with universities for access to financial, tech and research support
Business Accelerator gives developing companies access to mentorship, investors and other support that help them become stable, self-sufficient businesses.
Companies that use business accelerators are typically start-ups that have moved beyond the earliest stages of getting established. They have moved beyond incubator stage and entered their “adolescence,” meaning they can stand on their own two feet but need guidance and peer support to gain strength.
List the benefits to establishing an incubator program from the business perspective.
- Lower rent costs
- Support services (admin, office equipment use, labs, training, consulting, mgmt advice, etc.)
- Networking oppys (share ideas and resources)
- Access to employment (universities, research hospitals, other incubator businesses)
- Access to funding sources
- Partnership development
What is break-even analysis?
The exact sales level at which sales cover costs. The venture will neither make money or lose money.
It helps ensure the variable costs will remain at acceptable levels as sales grow. It can establish several break-even points for different sales and cost estimates (best, worst and most likely) that a business could encounter.
Calculated as:
Fixed Costs / Gross Margin x Variable Costs
What are technology clusters?
Concentrations of interdependent firms related through their industry activities. They can be linked 1) vertically - buyers and sellers; or 2) horizontally - competing businesses in similar markets or that share resources.
Clusters enhance the competitive advantage of a region by enhancing the technology sectors that show great potential for growth and diversification, to become a strong base of the economy.
What are the 2 driving forces of technology innovation?
Technology-Push - when an inventor develops an idea, product or service it is NOT in direct response to a market demand.
Technology-Pull - when an inventor attempts to fulfill an unmet need of an existing market, or how to meet a particular need.
List the innovation drivers
Presence of research institutions Access to capital Support of entrepreneurial development Foreign Direct Investment Educated & talented workforce State and local commitment Established technology infrastructure Broadband infrastructure Quality of place
What is the difference b/w technology deployment and technology commercialization?
Tech Deployment - A) activities that assist businesses in applying advanced available technologies in their existing operations, or (B) activities that assist businesses in the development and manufacture of new products derived from advanced available technologies
Tech Commercialization - when a technological innovation is brought to the marketplace, it’s called commercialization. It includes activities from concept development to product manufacture; transitioning technologies from the research lab to the marketplace & can occur through 1) data / information; 2) know-how / expertise; 3) right to make / use / sell; or 4) embedded technology in software / machinery
Define gap analysis
A gap analysis process allows organizations to determine how to best achieve their business goals. It compares the current state with an ideal state or goals, which highlights shortcomings and opportunities for improvement.
What are the Neighborhood development strategies?
Most effective when used in combination with each other.
1) Community Building - neighborhood-wide, social events to encourage active participation in the community.
2) Place Oriented - focuses on enhancing the quality of nature as well as the built environment to create and maintain a place where existing residents want to stay.
3) Business Oriented - focuses on providing financial and technical support to neighborhood businesses to help them face challenges; create jobs; increase the tax base; encourage local shopping; improve quality of life
4) Workforce Development - critical to business retention & expansion; a well-trained workforce, combined with effective training programs, can give a community a competitive advantage, because it cannot be easily duplicated.
List the advantages and disadvantages of Public-Private EDO’s
Advantages:
- Greater flexibility in conducting ED activities
- Greater degree in hiring, firing, salaries, etc.
- Not part of a gov’t structure and have more autonomy
- Can take greater risks (no public elections / office)
- Can use public resources and powers without public limitations
- Funding from both public and private sources
- Can eventually be financially self-supporting thru mgmt, service fees and membership dues
Disadvantages:
- Limited accountability becuz it’s not under the same degree of public control as public agencies
- Limited accountability could impact their public or private sector representation on their board
- Limited accountability can restrict their freedom of action
What is the difference b/w the SBA 504 and SBA 7(a) programs?
SBA 504 - provides long-term, fixed rate financing to small businesses for major fixed assets (land, buildings, equipment).
- includes a secured loan with a senior lien from a private lender & covers up to 50% of project costs
- includes a secured loan with a junior lien from the CDC (backed by 100% SBA-guaranteed debenture) & covers up to 40% of the cost
- includes a 10% equity contribution from the small business
SBA 7(a) - general business loan program
- Zero subsidy loan program financed through fee income to the SBA from borrowers & lenders
- offers extended repayment terms; negotiated interest rate; can apply for either working capital or fixed assets
- Eligibility criteria include:
1) operate for-profit
2) meet SBA definition for small business
3) do business in the USA
4) have reasonable invested equity
5) use alternative funding sources (personal assets) before seeking financial assistance
6) demonstrate a need for loan
7) use funds for sound business purpose
8) not delinquent on other outstanding debt
What is the difference b/w a Community Development Corporation (CDC) and a Bank CDC?
Community Development Corporation - Non-profit orgs that can obtain federal and private support
- governed by local residents, businesses & community leaders through BOD elected from CDC membership
- serve impoverished populations
- most work on housing issues (altho some do economic development)
Bank CDC - bank sponsored community development corporation is a way for banks to contribute to economic revitalization by investing in local businesses or real estate investment projects that benefit low-moderate income groups.
What is the difference b/w monitoring, evaluation and benchmarking?
Benchmarking - quantifiable measures of economic competitiveness and quality of life that can be collected on a regular basis. Use to measure a region’s economic status and progress against comparable regions. (The standard by which something is measured.)
Monitoring - tracks performance or outcomes; is essential for carrying out the evaluation of the project.
Evaluation - compares outcomes to specific benchmarks with the purpose of judging a program, improving its effectiveness, and/or informing programming decisions.
What is the difference b/w business climate and quality of life?
Business Climate - usually referred to as the attitude of local gov’t toward business, but can also consider attitudes of the labor force and local business networks.
Quality of Life - aka general living conditions; describes the cultural, historical, recreational, natural and other characteristics of a community; subjective; no measurable definition
- includes housing availability, public services, educational system, crime rate, cultural / recreational activities, personal taxes, etc.
What is the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA) or “Superfund”
- Started in 1980
Objectives:
1) provide a means of identifying and ranking hazardous waste sites;
2) create a source of funds to finance site clean up;
3) establish liability to both damage caused and cleanup among site owners, businesses generating the waste, waste haulers and wast disposal operators.
What is the Small Business Innovation Research (SBIR)?
SBIR funds high-risk research & development efforts with excellent commercial potential.
The purpose of the program is to
1) stimulate technological innovation
2) bring small businesses into the federal R&D process
3) encourage participation by disadvantaged and minority persons
4) increase private sector commercialization of federal R&D
Define gap financing
Loan required by a developer to bridge the gap, i.e. to make up a deficiency b/w the amount of mortgage loan due on project completion and the expenses incurred during construction; financing that covers the difference b/w what a project can support and the cost of the development).
What is the difference b/w a general partner and a limited partner?
General Partner - co-owner(s) of a venture liable for all debts and obligations, as well as management and operations of the partnership. The GP can have control of the business and take actions which are binding on the other partners.
Limited Partner - forfeits the right to manage the affairs of the business; in return, their liability exposure is no more than the money invested in the venture.
Define Industry Clusters
Geographic concentrations of related businesses that are complementary or competing. Regions identify clusters as targeted businesses for future planning and marketing efforts
2 Types:
- Vertical (suppliers & buyers)
- Horizontal (similar businesses competing or sharing resources)
Define Land Banking
A program that preserves industrial space for a city.
A city or local development authority acquires and holds land until a developer steps forward with a proposal for its use as an industrial site.
What is a microloan?
A very small, short-term unsecured loan given to people without credit history or the collateral necessary to obtain a conventional loan.
Loans available through local lenders or the SBA’s 7(m) Microloan Program
How does SBA define a ‘small business’?
A business with fewer than 500 employees
What is a multiplier?
A quantitative estimate of the impact of a project (in dollars, jobs created, demand)
What is a Neighborhood Development Organization?
A community-based organization accountable in some way to the residents of its target area and whose purpose is to initiate and sustain neighborhood economic development.
List the progression in sources of equity capital from smallest to largest in monetary value.
- Owner’s Money ($50 - 100K)
- Family / Friends ($100 - 250K)
- Angels ($250K - 1M)
- Seed Capital ($50K - 3M)
- Venture Capital ($2M - 50M)
- Banks & Gov’t Programs ($5K & up)
- Private Placements ($500K & up)
- IPOs ($5M & up)
Define SWOT Analysis and how to do it
A tool used in the economic development planning process to assess a community’s competitive advantage through its Strengths, Weaknesses (current factors from within a community that can be changed), as well as tis Opportunities and Threats (future factors from outside the community that cannot be changed).
When conducting a SWOT analysis… (Ch 5 Strat. Plng)
- probe further to determine underlying attributes (i.e. what makes it an strength or oppy; what’s the cause for the weakness or threat)
- compare strengths and weaknesses to other communities or benchmarks
- categorize by relevance and degree of impact
(Strengths - major assets vs limited assets)
(Weaknesses - corrected immediately, in the short-term, in the long-term or never)
- Neutral factors - those similar to other communities
- Develop a matrix to plot out Strengths, Weaknesses and Neutral factors
- evaluate Oppys and Threats in terms of impact, probability of occurrence & capacity to influence
- develop a matrix to plot out Oppys & Threats
- Use SWOT Analysis to set direction for the strategic planning efforts and provide a factual basis for economic development goals and strategies
- SWOT Analysis determines:
* existing / potential competitive advantages
* challenges being experienced or will be
* obstacles to reaching goals
* environment of the local economy
* available resources to implement the plan
- develop matrix showing all Strengths, Weaknesses (Y-axis) and Opportunities, Threats (X-axis)
- rate and rank - prioritize factors to determine importance to the community’s future
- ask external partners to provide ratings; collect data from peer communities to compare
What is Tax Increment Financing (TIF)?
A mechanism to capture the future tax benefits of real estate improvements to pay the present cost of those improvements. A local jurisdiction does this by freezing property tax assessments at a base year. In future years, all the tax revenue up to the base year assessment continues to go to the taxing jurisdictions (city, county, schools, etc.). However, the incremental tax revenue collected from rising property values is allocated to the TIF district through its governing authority.
Identify the strengths & weaknesses of TIF.
TIF Strengths:
- property owners pay the normal tax burden
- property tax increment is eventually returned to the tax rolls
- TIF bonds are not typically counted against a jurisdictions debt cap
- public funds are not required
- incremental tax revenues are reinvested back into the targeted redevelopment area
- TIF can stimulate private development in the redevelopment area
- Can be used as a performance based benefit if the developer is returned the amount of the increment
- TIF is a reliable source of funds as federal / state grants become increasingly sparse
TIF Weaknesses:
- Where property taxes are low, the impact of the tax increase may be marginal, generating little revenue for the redevelopment agency
- TIF is complex and costly to administer
- Project might fail or property values don’t increase
- Freezing the tax base means no add’l revenue for increase service demands from other taxing jurisdictions (schools, fire, etc.)
- Political fallout from school districts
What is the Workforce Investment Act of 1998?
Federal gov’ts effort to adapt workforce training system to current economic conditions. The economic impact of WIA includes:
1) decentralizing decision-making to the local level
2) allowing local businesses to determine skill needs
3) adapting training to local growth patterns
4) promoting inclusion of economic development principles in plans
5) requiring states to submit economic development plans with the WIA implementation plan
What is Mixed-Use Development?
3 or more different but complementary land uses that are developed as part of one synchronized / comprehensive project.
What is the difference b/w Mixed-Use Development and Smart Growth?
Smart Growth is a comprehensive development strategy that makes efficient use of land, utilizes existing services and infrastructure, & promotes a variety of transportation and housing options.
Mixed-Use Development is 3 or more different but complementary land uses that are developed as part of 1 synchronized / comprehensive project.
Define consensus building
Process that requires all stakeholders to be involved, engaged, fully informed & equally empowered to participate in developing a shared vision, agreement or strategy.
It is the support, justification and validation for a strategic plan.
It requires negotiation to find common ground in order to solve problems or pursue oppys.
What are 3 questions to ask a site selection consultant after a site visit?
- Do you have any remaining questions about our community?
- Does this site meet the criteria & qualifications of your client’s search?
- How can we send the requested additional materials / information to you?
Explain Input-Output Analysis
An analysis of industry clusters by regional business transactions.
It analyzes the inputs rec’d from other industries in relation to the outputs sold to other industries.
It reveals the extent to which a change in demand affects local output, income and employment.
It identifies industries that best fit the community’s resources and business environment…How well does the community’s resources meet the needs of a particular industry?
Below is an example of an input-output table for an economy with two sectors. As the first row shows, the agriculture sector produces 500 units of outputs in total, of which the majority – 320 units flow into the manufacturing sector as inputs for its production. 100 units are delivered to households directly as final demand, and the remaining 80 units are consumed by the agriculture sector itself as fodder and seeds, for example.
https://cdn.corporatefinanceinstitute.com/assets/input-output-analysis1.png
What is the difference b/w Quality of Place and Quality of Life?
Quality of Life - describes the cultural, historical, recreational, natural and other characteristics of a community (i.e. affordable housing, short commutes, green space, family friendly environment); important in Biz attraction and retention; subjective term; no measurable definition
Quality of Place - provide diversity in all aspects of life including education, culture & recreation that supports different types of people in different stages of life; important in attracting a quality workforce - especially for high-tech industries
Define clusters
Aka agglomerations or industry clusters; regional groupings of related firms; often identified as prime targets for marketing and development efforts.
Concentrations of competing, complementary and interdependent firms within industrial sectors.
Enhances the competitive advantage of a region by enhancing the tech sectors that show potential for growth and diversification, to become a strong economic base.
Usually develop / grow as a result of specialized amenities & support services in a region (not in a localized area).
Define regional innovation system (RIS)
Supports the innovation ecosystem.
Development at a regional level is seen as the best scale at which to promote innovation.
Key elements include:
- business networking to promote matching ideas & resources
- technology transfer to protect intellectual property while accommodating its commercialization
- workforce development to match job seekers’ skills with those demanded by employers
What are the regional amenities and support services needed to develop and grow technology industry clusters?
1) Support Firms (technicians, consultants, attorneys) that specialize in providing services to firms operating in the technology industry cluster
2) Network of financial institutions or venture capitalists that specialize in providing capital to firms operating in the technology cluster industry
3) Major research university that supports the cluster through specialized research and academic programs
How are business networks beneficial to supporting technology industry clusters?
1) a means of aggregating and projecting the voice of the cluster
2) help EDOs better understand the cluster
3) help mobilize private sector leadership
4) help brand a region
5) allows for sharing of ideas / resources which often leads to new joint relationships to develop new products or enter new markets
Define Net Present Value
The value of future cash flows in today’s dollars.
Today’s value of the total discounted future income stream in a development project. It determines the property value considering its income potential.
Takes into account the time value of money and oppy costs.
The time value of money means a dollar today is worth more than a dollar in the future. The difference is the oppy cost.
Example - when money is invested in real estate, its owner is foregoing other potential investments that could also generate a return. The foregone cost of these other investments is called the oppy cost. The investment in real estate foregoes an investment in stocks, which could earn a return of 10 - 12% per year.
What is the formula in calculating Net Present Value?
Present Value = Future Value/(1+r)n
Where r = the discount rate; n = time
Define Current Ratio
Most common measure of short-term credit.
Current Ratio = Current Assets/Current Liabilities
What is Cash on Cash Return?
Cash Flow divided by Equity.
Without financing its referred to as Return on Assets (ROA)
With financing its referred to as Return on Equity (ROE)
Rate of return that calculates the cash income earned on the cash invested in a property.
What is financial leverage?
The use of borrowed money.
It reduces equity and thus, increases the risk of variability on the return on equity.
The objective of leverage is to borrow money at a rate lower than the expected ROA, resulting in a higher expected investment return.
Define Debt Ratio
It evaluates how safe a loan is. The lower the debt ratio, the better the risk for the lending institution.
Debt Ratio = Total Liabilities/Total Assets
What does a business use capital for?
Working Capital needs - the most liquid assets; inventory, pay short-term debt, day-to-day operating expenses
Fixed Asset needs - longer-lived assets; plant, property and equipment
How long is the maturity of a short-term, medium-term and long-term loans?
Short-Term - less than 1 year (usually for working capital or lines of credit)
Medium-Term - 2-5 years (fund receivables, inventory and fixed assets; most common for EDOs)
Long-Term - more than 5 years (longer-lived assets)
What are types of unsecured loans and how are they used?
Unsecured Loans are similar to promissory notes, finance specific assets, use the proceeds to pay off the loan and do not rely on collateral.
Trade Credit - b/w goods supplier and customer, where supplier doesn’t require advance payment.
Line of Credit - b/w borrower and bank, where bank provides access to money, for set term and stipulated amount; borrower pays interest on actual amount borrowed but not on max loan amount.
Commercial Paper - b/w corporations and investors to fund payrolls, inventory or working capital
Secured bonds are called __________ bonds. Unsecured bonds are called ___________ bonds.
Collateral
Debenture
List the 3 ways bonds can be sold.
1) Competitive sale - issuer sells to underwriters through a competitive bidding process.
2) Negotiated sale - the underwriter is selected prior to the bond sale and given exclusive right to purchase at an agreed upon price.
3) Private Placement - bonds sold directly from the business to an investor (insurance companies)
What are the 4 main types of loans?
1) Recourse (debt holder has recourse to the personal assets of the borrower to satisfy payment)
2) Nonrecourse (debt holder does not have recourse to the personal assets of the borrower to satisfy payment)
3) Secured (loans backed by collateral)
4) Unsecured (loans not backed by collateral)
What are the 3 types of short-term secured loans?
1) Accounts Receivable (secured by money owed to the firm by its customers (accts rec)
2) Inventory Loans (secured by inventory)
3) Time Sales / Lease Sales (business sells an asset to the lender and leases it back)
What are the 3 types of medium / long-term secured loans?
1) Term Loans (secured by an asset)
2) Construction Loans (secured by a pledge of the proposed structure and land)
3) Real Estate Mortgages (secured by promissory note and mortgage deed)
Typical bond maturities range from ____ to ____ years.
10 to 40 years
List the 3 types of financial statements used to evaluate a business.
Balance Sheet - shows financial position at a specific point in time
Cash Flow Statement - provides information on a company’s cash receipts and payments
Income Statement - summarizes the income and expenses and profitability over a specific period of time
Define Current Assets
Those assets that will mature into cash within 12 months.
Define maturity
The amount of time before an investment or debt comes due.
How are Revolving Loan Funds capitalized?
Either public (CDBG, EDA or USDA) or private funding sources.
Borrowed money will have to be paid back from the cash flow; Grant funds are not repaid and can be revolved back into the RLF.
RLF’s operate through the repayment of loans made that are recycled into future lending. As loans are repaid, the principal and interest return to a loan pool to be lent to other businesses. The success of the program depends on the collection of existing loans.
What is the purpose of a Revolving Loan Fund (RLF)?
The purpose is to both complete capital assembly and precipitate capital formation (NOT to serve as a substitute for commercial lenders). RLFs typically fill the gap b/w the amount of capital needed by a business and the amount provided by conventional lenders.
What are the advantages and disadvantages of RLFs?
Advantages -
- do not need federal or state gov’t charters to operate
- are not subject to regulatory supervision
- can be established w/o the time and cost of meeting those 2 hurdles
- financing policies can be set based on EDO goals
Disadvantages -
- accountability and oversight are reduced
- can operate w/o adequate expertise, policies or systems to manage the funds
- mismanagement can lead to poor credit decisions and risky loans
Describe a Microloan Program.
Provides small loans to eligible new and existing small businesses.
Max amount up to $50K (average $13K)
Short-term and unsecured (max term 6 years; average 40 mths)
Variable interest rates (generally 8 - 13%)
Made to people w/o credit history or collateral to obtain a conventional loan
What is a Micro-Enterprise Program (MEP) and list the 3 models used to help entrepreneurs?
MEPs serve individuals seeking to create a new business and existing small businesses with credit and development assistance
- majority of clients are immigrants, minorities, women and low-income individuals
- provide more training than lending
3 Models:
1) Peer Group Lending (lender limits risks and funds multiple small businesses under 1 single shorter-term loan; businesses depend on each other for success and work together to support each other
2) Individual Lending (loans to individual business not eligible for traditional loans; offer training and technical assistance; larger loans for longer-terms)
3) Training-Led (focus on formal training classes regarding core business planning and practices; can also offer access to credit)
Why do public entities use bonds to finance projects and services?
1) Bonds help communities spread the cost of a project over its expected life span
2) Bonds allow a “buy now - pay later” ability as most communities rarely have cash available to cover large-scale capital projects
What are the forms of public use bonds?
1) General Obligation (GO) Bonds - backed by the full faith and credit of the gov’t entity
- repaid with general revenue, taxing proceeds collected or borrowing
- fund uses that do not have a revenue source (gov’t offices, roads, schools)
- limited by debt caps
- may require approval by a public referendum
2) Public Use Revenue Bonds - payable solely from the earnings of a particular project or facility constructed with the bonds
- revenues from the project backed with a ‘debt service reserve fund’ which is usually pre-funded with a bond issue
- funds projects with a revenue source (parking, utilities, toll roads, universities, etc.)
- only tax-exempt if they meet the pubic use test
- example - parking facility constructed through use of revenue bonds that will be repaid from the parking structure’s income
What are Private Activity Bonds?
A bond that does not fall under the public use definition
Include industrial revenue bonds or industrial development bonds issues by the gov’t and used for private purpose benefitting individuals or entities
Can be either tax-exempt (if qualified) or taxable
List the types of Private Activity Bonds allowed by the Internal Revenue Code (IRC).
Qualified Revenue Bonds Qualified Exempt Small Issues Enterprise Zone Bonds Exempt Facility Bonds Qualified Nonprofit Bonds Qualified Mortgage Bonds Qualified Student Loans Industrial Development Bonds
What is an Arbitrage Restriction?
Regulations to ensure issuers of tax-exempt bonds do not re-invest the proceeds of the bond sale at a higher yield than that of the bonds themselves.
Interest earnings in excess of the bond yield must be rebated back to the federal gov’t.
