A loan of $150,000 has been approved for the fleet hardware and supply project by the Perham Economic Development Authority.
The EDA loan's terms are more generous than past practice, at 15 years with a 6 percent interest rate. Past practice has been a seven-year limit on loans.
The revised loan prompted a broader discussion about the EDA's role and its financing procedure, when the EDA board met Nov. 27.
Financing for the fleet project was restructured when it was discovered in October that it did not qualify for tax increment financing.
This was the key reason that the longer-term loan was necessary for the estimated $1.3 million construction project. State regulations do not allow tax increment financing for retail stores larger than 15,000 square feet--a policy aimed in large part at limiting business subsidies to mega-retailers like WalMart.
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The loss of tax increment financing will cost fleet developer Mark Tomsche at least $30,000 in additional commercial property taxes. Tomsche's total project cost is estimated at $2.8 million, and the size of the store is 28,000 square feet.
EDA director Chuck Johnson said the longer term on the loan was due to specific circumstances revolving around the fleet project, that wouldn't apply in most cases. Also, there was an urgency to finalize the financial package in hopes of completing construction this winter. In addition, the fleet project includes a 20-year Small Business Administration loan. To qualify for the federal SBA financing, a 15-year term is required--rather than a seven-year term.
The EDA approved the loan to the fleet project, but the matter prompted a discussion on loan practices for the future.
"As a group, I think we need to determine if we want to be in the business of longer-term financing," said EDA member Denise Schornack.
EDA loans are, in effect, intended to be smaller, shorter-term loans as a stop gap measure for a developer who needs some additional capital to complete a financing package. EDA loans are considered "gap" financing, to fill in where conventional bank or other financing falls short.
"As a business owner--who wouldn't want a 15-year loan at 6 percent," said Schornack, because the city-backed loans have a lower interest rate than most conventional lenders.
Also of concern with longer-term loans is that they tie up money from the city's economic development loan pool for a longer term--potentially limiting funds for future economic projects.
Another loan request, from a developer who is planning to open a computerized fitness center in Perham, was also part of the discussion. In that case, a $71,500 EDA loan was requested from the city--yet the developer had not sought bank financing first.
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"This project would probably qualify for conventional bank financing...shouldn't we require that they check with lenders before coming to the EDA?" asked board member Robin Hanson.
The EDA asked that the fitness center developer, Al Braaten, apply with other lending institutions first, and return to the city if additional financing is needed.
Again the issue revolves around what guidelines the city's EDA should establish in providing economic development loans.
