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The terms ‘IDA’ and ‘EDA’ are often used interchangeably, but whatever the locality calls them, they are economic conduits for business recruitment and expansion in their city or county. These non-profit authorities are charged with building and diversifying both employment and the locality’s tax base.

Virginia Community Capital works with municipalities to spur economic development by lending to their development authorities. In our work across Virginia, we’ve found some authority leaders are unaware of how to borrow money from private lenders to support their mission — and some are even unaware they can do so. They may be reliant on state funding (which can take months or years to materialize), or think their only recourse is the bond market, which brings with it significant legal and brokerage expenses. In fact, grants, bonds, loans and other creative financing sources can all play a part in an authority’s capital stack.

A recurring theme in my work with IDAs and EDAs is assisting those that are recruiting companies from outside the country, where typical American banks won’t underwrite loans to the foreign firm due to inconsistent accounting practices and currencies. In other cases, the locality operates a business incubator with a pre-revenue company, set for growth, yet with no financial standing to get a loan.

In these two scenarios, we allow the IDA/EDA to serve as the borrower on the firm’s behalf. The loans — which finance equipment, working capital, real estate, construction, or property improvements — are backed by the city or county in which the authority is located. We require this moral obligation because the non-profit authority may not have the income to support a monthly loan payment. These obligations — meaning the locality is good for the payment if the authority cannot pay — are approved as a resolution through the respective city council or county board of supervisors.

Once the loan is closed, the authority will lease the financed building or equipment to the business with similar terms and conditions as the VCC loan (see below on how this can work). Some authorities add a servicing fee to cover their costs.

Going beyond financing, we view ourselves as a partner for authority’s transaction and want to see it come to fruition. In fact, it is helpful for the locality to have an expert like VCC at the table, even if we don’t end up financing the project. We have partners we can tap to create more robust loan packages, such as other lenders (as our lending limit is $5.4 million) or connections to more creative financing streams.

As an example of the latter, we know of other creative funding streams, such as Virginia’s Tobacco Region Revitalization Commission, which awards grants in formerly tobacco-dependent communities using proceeds of the national tobacco settlement. There are many other financing options for authorities available in Virginia – but you have to know where to look.

This is especially important as IDAs and EDAs are in competition with other localities and states. Local economic incentives, paired with a nicely structured loan package, can win the business.

So, if you’re at an EDA or IDA and stuck in “the way things have been” when it comes to finding capital, maybe it’s time to think outside the box. I’m happy to talk.

Interested in learning more? Contact Cindy Green Snider, AVP and Small Business Loan Officer at Virginia Community Capital.

How does the IDA/EDA loan process work?

It begins similar to almost any other loan.

• We review the last three years of audits (comprehensive annual financial reports) from the IDA/EDA and the city/county.
• We review the company being assisted — including its last three years of tax returns, and most recent financial information. We also want to take a peek at its business plan.
• Based on the loan request, we provide a term sheet that breaks down the requirements and rate.
• If approved, we’ll provide a commitment letter with loan details and closing conditions.

Normal loan conditions apply. If a building is needed, as is usually the case, a real estate appraisal is required unless the tax appraisal provides a value sufficient to cover our loan-to-value requirements. In addition, an environmental site assessment is required to determine potential or existing concerns prior to lending, though there are exceptions.

Here’s where the process becomes more unique for an IDA/EDA.

• The IDA/EDA prepares a lease agreement with the business they are assisting, usually with terms that mirror our loan. It is not unusual for the IDA/EDA to add an administrative fee to cover their costs and risk exposure.
• The business pays the lease payment to the IDA/EDA.
• The IDA/EDA pays the loan payment to VCC.
• VCC will take an “assignment of the lease” on the note, which means if the IDA/EDA defaults, the business would make payments directly to VCC.
• The bank also receives the first-lien position on the real estate or equipment funded with the loan.

Of course, every loan varies, but these are the basics.

Want to learn more? Watch Cindy’s recent webinar, Innovative Financing & Job Creation Resources for EDAs and IDAs.