AGENDA TITLE:
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Adopt Resolution Authorizing City Manager to Execute a Professional Services Agreement with California Capital Small Business Financial Development Corporation, a California Public Benefit Nonprofit Corporation, dba California Capital Financial Development Corporation, to Implement Underwriting and Administration of the Hometown Microloan Program, and to Further Authorize the Expenditure (Not to Exceed $450,000) (CM)
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MEETING DATE:
November 15, 2023
PREPARED BY:
Astrida Trupovnieks, Business Development Manager
recommendation
RECOMMENDED ACTION:
Adopt a resolution authorizing the City Manager to execute a Professional Services Agreement with California Capital Small Business Financial Development Corporation, a California Public Benefit Nonprofit Corporation, dba California Capital Financial Development Corporation to implement underwriting and administration of the Hometown Microloan Program, and to further authorize the expenditure in an amount not to exceed $450,000.
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BACKGROUND INFORMATION:
The Hometown Microloan Program will provide business loans not to exceed $50,000 to entrepreneurs and small businesses with ten or fewer employees who have experienced barriers to traditional sources of capital. The loans will be limited to Lodi-based applicants who will deploy the loan proceeds within the City limits. The Hometown Microloan Program reflects the City Council’s strategic vision of expanding and diversifying economic opportunities specifically by creating conditions for economic growth of small businesses, as shown in strategic initiative 2B. Extensive outreach to eligible borrowers will be conducted by California Capital, City staff and community partners including the San Joaquin Small Business Development Corporation, SBA and local lending institutions who all participated in the planning and design of the Hometown Microloan Program over the past twelve months.
California Capital, a CDFI-certified non-profit lender, will provide a turnkey implementation of the Microloan Program equipped with ample organizational capacity, qualifications, and over forty years of experience. By providing eligible borrowers with capital on flexible terms, loan recipients will be able to build credit and demonstrate loan readiness for capital provided by traditional lenders for their continued business growth.
At the October 3, 2023, City Council Shirtsleeve Session, City Council provided direction to move forward with both a fee-based and leveraged capital approach for the Hometown Microloan Program offered by California Capital, one of two respondents to a Request for Proposals dated August 16, 2023.
This program proposal and scope of services is provided in Exhibit A, attached.
The fee-based approach will lend $340,000 in capital provided by the City of Lodi. Loan fees serving as compensation to California Capital is in accordance with the schedule illustrated in Exhibit B, also attached. Please note the loan fees and estimated number of loans is based on an average loan of $21,250.
The fee-based approach utilizing capital provided by the City of Lodi will return principal and interest as repayments to a revolving loan fund for making additional loans.
The leveraged capital approach will provide $250,000 in loan capital from California Capital’s sources of funds to borrowers. In addition to paying fees as shown in Exhibit B, the City will buy down the interest rate to five percent for Lodi borrowers. Loan fees, estimated number of loans, and interest buydown amounts are based on an average loan of $50,000.
The interest rate to Lodi borrowers will be five percent. This is 3.5 percentage points below the current prime rate of 8.5 percent. It is .33 percentage points below the current federal funds rate which is the rate staff originally proposed as a not-to exceed interest rate at both City Council Shirtsleeve Sessions on January 24, 2023 and October 3, 2023. The rate will be reviewed at least annually by the City of Lodi to determine whether the federal funds rate is sufficient to reflect the level of risk. The interest rate will not exceed three points below the prime lending rate unless approved by Lodi City Council. California Capital will monitor the federal funds rate, provide its risk assessment and recommendations as interest rates change.
City Council can be assured the Hometown Microloan Program will be borrower-centric and relationship- based. This means that experienced staff will implement a lending approach which emphasizes ongoing loan monitoring, close communication with the borrower, assistance in developing required borrower documentation, and the implementation of proven strategies designed to avoid delinquencies.
It is important to note that Main Street Launch (MSL), the other Hometown Microloan Program bidder, contacted staff after the October 3rd Shirtsleeve Session offering to also develop a revolving loan fund in the amount of $500,000 from its own capital. However, this would cost an additional $90,000 in loan fees to be paid by the City. The alternative would involve passing on the loan fees to the applicant. After analyzing this request, the recommendation is to postpone consideration of the proposal from MSL to assess demand for microlending in the community, the ability for the market to absorb another provider and available resources from the City to dedicate to additional microlending.
Staff has examined the California Capital lending policy, underwriting criteria, and loan servicing procedures. These items are in alignment with mission-based industry standards and agree with the goals and objectives of City Council’s strategic vision. These documents are attached in Exhibit A. Therefore, staff recommends City Council adopt the resolution authorizing the City Manager to execute a professional service agreement with California Capital Small Business Financial Development Corporation.
STRATEGIC VISION:
2B. Economic Development: Expand and diversify economic opportunities.
FISCAL IMPACT:
Funds are available in the FY 2024 Community Programs Fund operating budget.
FUNDING AVAILABLE:
Account No. 36510102.75028
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Melissa Munoz
Accounting Manager
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Astrida Trupovnieks
Business Development Manager
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Andrew C. Keys
Interim City Manager