LENDING POLICY
WATERTOWN LOCAL DEVELOPMENT CORPORATION LENDING/COLLECTION POLICY AND PROCEDURES
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1.GOAL
The Watertown Local Development Corporation, New York’s goals are to enhance employment opportunity and/or stimulate community revitalization by assisting in financing where need is demonstrated.
2.GENERAL STATEMENT
The Watertown Local Development Corporation (LDC) functions as a lending institution, making loans for real estate and machinery and equipment to all qualified applicants on an equal basis. Additionally, the LDC may participate in working capital and leasehold improvement financing as deemed necessary to meet project-financing gaps. All loan procedures will be reviewed on an annual basis to insure that all rules and regulations are being complied with and that no application shall suffer any form of discrimination. Any bona fide registered business in New York State has the right to file a written loan application with the LDC.
The LDC will review applications for need of LDC funds, appropriateness of project and ability of the applicant to attain the stated goals.
The Board of Directors, at its discretion, has the ability to approve exceptions to rate, terms, collateral or use of proceeds as it deems appropriate, in order to enhance the agency’s ability to stimulate community revitalization and help spur job creation.
3. LENDING AREA
A. The loans will be made to businesses and industries situated in or having a significant positive economic impact on the Watertown area.
B. For projects located outside the City of Watertown, the Borrower must submit a written statement detailing the economic benefits of the project for the City (e.g. jobs, taxes, etc.). Any commitment by the LDC for a project located outside the corporate limits of the City of Watertown will be made subject to a majority approval of the City Council. The City of Watertown is requested to advise the LDC of the Council’s decision and the reasons therefore. The City Council is not being asked to make a determination with respect to the credit worthiness or terms and conditions of the loan as provided by the loan policies herein, but rather to focus on the positive economic impact to the City.
C. The Board of Directors from time to time, at its own discretion, may set specific parameters to enhance economic development initiatives within the community. These will be in the form of addenda attached to this policy.
4.TYPES OF LOANS
A. General
The LDC may lend funds in connection with the construction, acquisition, rehabilitation or improvement of real property, and gap working capital and leasehold improvements needs. The LDC may also participate in financing the purchase of machinery and equipment to be used and located within the area. Both types of loans must meet the following criteria:
1. There must be a demonstrated need for financing from the Local Development Corporation, which can be in the form of one of the following:
a. financing Gap – sufficient funds cannot be obtained from other sources to complete the project without the LDC’s assistance (needs to include evidence that LDC assistance is needed to subsidize, encourage or leverage other sources); or
b. feasibility – the project cannot go forward on the basis of terms offered by private and/or public funding sources; or
c. attraction/retention – the LDC loan will induce a company to move into the Watertown area, or prevent a company from leaving the area or from reducing employment (borrower must explain what other options the company is considering and why; provide evidence of economic incentives from competing areas, if available).
2. There must be a positive economic benefit to the City of Watertown as defined by:
a. job creation;
b. job retention;
c. community redevelopment;
d. community enhancement; or
e. elimination of blight.
B. Retail
In addition to the above criteria, retail projects must;
1. present evidence that proposed financing will not have a significant negative effect on other retail businesses in the community;
2. present evidence that proposed financing will result in a net increase in economic benefits (jobs, removal of blight, etc.) for the City; and
3. submit marketing plan/study.
C. Refinancing
The LDC may also participate in refinancing of a business. The Borrower must:
1. submit evidence of inability to secure suitable refinancing through other private lending institutions; and
2. submit update written business plan (including marketing study).
D. Professional Office and Housing Projects
1.The LDC may participate in the financing of professional office or housing projects that are deemed by the Board of Directors to have substantial economic impact or stimulates community revitalization.
5. MAXIMUM AMOUNTS OF LOANS
A. As a general guideline, if the application is based solely on job creation, the LDC funds will be disbursed at an approximate ratio of $20,000.00 per full-time (or equivalent) job created or retained. All jobs created are encouraged to list with the Jefferson County Employment and Training Office and with the New York State Department of Labor.
Failure to meet the job creation or job retention goals as stated in the application may mean the Borrower may be penalized by imposing a higher interest rate as stated in the loan documents or, at the option of the Board, could create a default and result in such other or further remedies/penalties as the Board may deem appropriate.
B. With every application, maximum loan amounts are limited to 40% of project costs or 10% of total LDC assets, whichever is lower.
C. Microenterprise Loan Program (Attachment)
6. EQUITY CONTRIBUTION OF BORROWER
A minimum equity contribution of 10% of the total eligible project costs is required of the Borrower. The equity contribution required for a start-up business may be greater, depending upon the circumstances.
7. INTEREST RATES AND REPAYMENT TERMS
Interest rates on the LDC loans will be determined by the Board of Directors. The interest rates will be on fixed rate basis. Repayment terms for real estate loans range from 10 to 20 years; repayment terms for machinery and equipment purchases range from 5 to 10 years.
8. DISBURSEMENTS OF LOANS
Real Estate Loans – disbursements will be made on a take-out on completion basis. The LDC will require all proper releases, Certificate of Occupancy, etc., prior to advancement of funds.
Machinery & Equipment Loans – disbursements will be made to the Borrower upon delivery, installation and satisfactory operation of the equipment.
9. CLOSING FEES
The Borrower shall pay all costs connected with the issuance of the loan. A fee of 1% of the requested loan amount will be charged at closing.
10. DOCUMENTS
The LDC will require the completed written application, as well as all legal documents necessary to perfect its security interest as required by its attorneys and to fully comply with all Federal regulations.
11. RESPONSIBILITY OF ELIGIBILITY AND LOAN REVIEW COMMITTEE
The President will appoint the two WLDC representatives of the Board and a third member to serve on this Committee for the purpose of initially determining the eligibility of a prospective loan and analysis of the application for presentation to the Board. Upon receipt of the application, the members will review the completed application and provide a written summary to the Board at the next scheduled meeting. Completed applications must be submitted to the Eligibility and Loan Review Committee at least thirty (30) days in advance of the meeting to insure its inclusion on the agenda.
12. RESPONSIBILITY OF BOARD OF DIRECTORS
The Board will maintain an active Eligibility and Loan Review Committee. The Board will review all loan requests in addition to the recommendations of the Committee at their regular scheduled meetings. The CEO will prepare a letter advising the Borrower of the Board’s decision. If approved, the letter, among other things, will set forth the general and specific terms and conditions under which the LDC is willing to grant the loan; such as the interest rate, repayment period, expected collateral, etc. The letter will also advise the proposed Borrower that he will be obligated to pay all costs incurred by the LDC in connection with his application, even if the loan does not close as expected. The letter must include an expiration date allowing a reasonable time for the proposed Borrower to meet the terms and conditions of the loan. The CEO will present to the Board a written report of all delinquent accounts for the Board’s review.
13.COLLECTION PROCEDURE
This is the general policy information and is always subject to the Executive Director’s recommendation on a loan by loan basis. It does not alter any of the terms and conditions of any loan documents.
The LDC will administer the following collection policy:
A. 15 days delinquent
When a loan is 15 days delinquent, a late payment notice is sent by the staff to the Borrower.
B. 30 days delinquent
When a loan is 30 days delinquent, a telephone call is made to the Borrower from the LDC staff in order to define the reason for the delinquency. The regular monthly billing is sent to the Borrower, which will include the two months payment due plus a late fee, as stated in the
Note.
C. 45 days delinquent
When a loan is 45 days delinquent, a letter is sent to the Borrower from the LDC staff indicating the account is now over 30 days due. The letter should specify the amount due and that payment must arrive in the LDC office no later than 10 days from the date of the letter. A follow-up telephone call is made to the Borrower from the staff of the LDC indicating same.
D. 60 days delinquent
When a loan is 60 days delinquent, a letter is sent to the Borrower from the LDC staff indicating the account is in default with payments 60 days past due. The letter should indicate that a meeting with the LDC staff is necessary to set up a schedule to correct the default, which will be presented to the Board of Directors for consideration. Further, the Borrower must be advised that if a repayment schedule is not adhered to, the CEO shall have the discretion and authority to turn the account over to the LDC’s attorneys with instructions to begin legal proceedings to collect the full amount of the debt.
E. Foreclosure and/or Repossession
In the event of foreclosure and/or repossession, the LDC will advance funds necessary to protect its security interest and comply with the default rights allowed by its Security Agreement for payment of real estate taxes, insurance premiums, legal fees, disbursements…etc. These disbursements will be maintained in an asset account of the LDC until the result of the sale of the asset is known. In the event the costs are not recovered from the proceeds of the sale, they will be charged against the expenses of the LDC. In addition, if any portion of the principal balance not previously reserved against is not recovered at the time of sale, the excess will be charged as a nonrecurring expense.
If the LDC should become the owner of the collateral by means of the default proceedings, the reserve shall be charged against the loan balance to reduce the book value of the asset to an amount equal to the then current market value.
Based on this formula, should a specific valuation reserve be established and the borrower successfully corrects the past due status of the obligation, the LDC may recover the amount of the specific reserve provided.
14. REPORTS TO BE KEPT
The original loan documents should be kept in the Office of the LDC. In addition to these, the following reports are to be kept and updated as needed:
1. current financial reports – updated annually
2. evidence of insurance ( includes hazard insurance and flood insurance, if required by the loan documents) – updated annually
3. UCC-1 Financing Statements – updated every five years
4. Real Estate Tax – verify tax obligations have been met (needed at time of closing an annually)
5. Annual Employment Report
It is the responsibility of the LDC staff to receive and update the above documents. Once received, they are to be reviewed, summarized and analyzed for future trends. Any irregularities or questionable trends would be brought to the attention of the Eligibility and Loan Review Committee for further consideration.
15. ENVIRONMENTAL RISK CONSIDERATION
To reduce the LDC’s potential environmental liability the LDC will require an environmental audit prior to closing on loans secured by real estate. The audit shall be paid for by the applicant, conducted by an outside consultant and reviewed by the CEO and report to the Eligibility and Loan Review Committee. Any environmental risk factors resulting from this report must be fully disclosed to the Board of Directors before the loan is closed. Situations such as structures built over a sanitary landfill or a municipal waste disposal site, and the presence of asbestos, spills, spoil or ground water contamination are examples of a reasonable basis for immediate declination of the application.
16. APPRAISALS
The loan amount cannot exceed the appraisal of real estate or equipment. All loan requests of any type will require a current appraisal report. Each appraisal will be completed by a qualified and approved appraiser and be an estimate of the current market value. All loan requests that involve the purchase of machinery or equipment must include the invoice showing the value of the machinery and equipment at the time the loan is made. The CEO will review prior to approval of the loan and report to the Loan Review Committee.
17. SPECIFIC VALUATION RESERVE
The CEO shall review the status of the loan portfolio on an annual basis using the adopted Internal Loan Review/Risk Rating system. Each loan will be assigned a risk rating of 1, 2 or 3 with a corresponding reserve as follows:
1) Satisfactory 5% - The loan performs as originally agreed for six consecutive months;
The Board of the LDC is satisfied that the original problem causing the
delinquency has been corrected;
2) Watch 10% - The Borrower can show a profitable operation for the six-month
period of satisfactory performance set forth in No. 1 above
3) Substandard 15% - Notwithstanding 1 and 2 above and in the event the collateral value is less than the loan balance, the amount in excess of the value will continue to be reserved until the loan performs for 12 consecutive months and profitability extends to 12 months.
The cumulative percentage of each loan shall be reserved for bad debt. If the cumulative amount of each loan exceeds the reserved amount, the Board shall reserve additional funds to make up the shortfall.
INTERNAL LOAN REVIEW/RISK RATING
The Watertown Local Development Corporation’s (WLDC) Internal Loan Review/Risk Rating Program has been established to play an integral part of the "safety and soundness" of the organization as well as being a foundation upon which its credit policies and procedures are based. It is designed to provide concise and accurate assessments of the quality of the overall loan portfolio and of concentrations of credit risk.
The Internal Loan Review Program provides an "early warning system", a means of identifying those credits that warrant special handling and/or a greater degree of monitoring for deteriorating situations.
The loan rating definitions have been written to resemble those used by Banking Institutions and Federal and State regulators. As such, the loan rating system provides outside auditors with a method of measuring the WLDC’s asset quality and adequacy of the Allowance for Loan Losses.
In order to maintain and properly administer the Internal Loan Review/Risk Rating Program, the CEO and Executive Assistant/CFO are required to monitor their loans on a semi-annual basis 1/31 and 6/30 and discuss with the Loan Reivew Committee and make changes to the existing risk ratings (when appropriate), in accordance with the WLDC Risk Rating Format.
GENERAL RISK RATING DEFINITIONS:
In assigning a risk rating, it is important to note that not all or even most of the criteria must apply in order for a loan to fall into a loan-rating category. Certain specific criteria deserve more attention than others and therefore should have a greater influence on the overall risk rating. It is often possible that a certain single criteria such as cash flow, delinquency or industry conditions could influence the upgrading or downgrading of a credit.
The loan rating definitions are as follows:
1 - SATISFACTORY:
The borrower is responsible for the credit. Loans rated 1 would be included in the "Pass" category. The definition of this rating is as follows:
a. Financial statements are current, of good quality and in adequate detail.
b. Financial condition is generally on par with the industry average.
c. Earnings are generally profitable; however, occasional losses may occur.
The rating would also apply to properly capitalized and liquid start-up
company that has yet to establish a track record of profitable operations.
d. Cash flow has been and is expected to be sufficient to meet debt service requirements.
e. Borrower consistently adheres to repayment schedule for principal and interest.
f. Borrower generally adheres to all loan covenants, however, occasional requirements for waivers, modifications or amendments may occur but liquidity and capitalization remain acceptable.
g. Industry outlook is generally acceptable.
h. Both the integrity and the ability of management (or the individual) are good, with ability to be proven.
i. Collateral offers comfortable support and is typically somewhat better than policy guidelines. Guarantors add tangible support.
2 - WATCH:
Assets in this category contain higher risk profiles but not to the point of justifying a classification of Substandard due to the fact that the credit is generally current and paying as agreed. Loans rated 2 would be included in the "Pass" category. The definition of this rating is as follows:
a. The financial statements may be missing, seriously outdated, of poor quality, or lacking in important details. If this is the case, the officer must investigate whether the non-receipt of financial statements on a timely basis is a meaningful red flag indicating the borrower is in trouble. If the statements have not been received six months after date of fiscal year end, the officer must prepare a brief file entry justifying the continuation of the existing rating, if appropriate based on other sources of knowledge of the credit or initiating a downgrade to whatever rating the officer believes is warranted based on their findings.
b. Financial condition is below the industry average and/or needs improvement.
c. The borrower is experiencing negative trends and/or erratic or unstable financial performance relative to industry norms. The borrower may have suffered a substantial loss in a recent period or moderate losses over a period of more than 18-months; however, losses have not been to the degree to have adversely affected the balance sheet.
d. Cash flow has generally been adequate but, if existing trends continue, may be potentially inadequate to meet projected debt service requirements. On an exception basis, the officer may consider a Watch (rather than lower) rating based upon an adequate secondary source of cash flow. Reliance on a secondary source can be used to justify a Watch rating only when that source is liquid, when its continuing availability has been verified, and when the WLDC has legal rights to it.
e. Borrower generally adheres to repayment schedule for principal and consistently for interest. On an exception basis, a loan with delinquent payment(s) and/or maturity date missed may continue to qualify for a Watch rating if a well-defined plan to bring the payment(s) current within a reasonable timeframe. If the plan calls for a takeout or payoff of the loan, the source of repayment must be a reliable one.
f. Borrower may have violated one or more financial or other covenants, liquidity and/or capitalization may need improvement.
g. Industry outlook may be unfavorable.
h. The integrity of management (or individual) remains good.
i. Collateral offers moderate coverage and is typically at policy limits. There is perhaps some reliance on soft assets. Guarantors add nominal financial support.
3 - SUBSTANDARD:
A substandard asset is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the WLDC will sustain some losses if the deficiencies are not corrected.
A general rule of thumb is that a relationship that previously required the normal degree of monitoring begins to absorb an inordinate amount of the officer’s time for servicing and/or to incur an increasing amount of carrying costs. The existence of any of the following conditions warrants consideration for a Substandard rating:
a. The financial statements may be missing, seriously outdated, of poor quality, or lacking in important details. If this is the case, and there are other reasons to believe that the financial condition of the borrower has deteriorated, then the loan officer should strongly consider classifying the relationship Substandard.
b. Financial condition is less than satisfactory.
c. The borrower is experiencing negative trends and losses.
d. The primary source of repayment is inadequate to meet current debt service requirements, and, unless present conditions improve, it is potentially inadequate to meet projected debt service requirements. The borrower may have reached the point of employing its secondary source of cash flow. Although the secondary source may be difficult to quantify, it must appear supportive based on reasonable analysis and be generally marketable under normal conditions.
e. Borrower inconsistently adheres to repayment schedule for principal and interest. The Substandard rating may also apply when interest is current but principal is delinquent and a defined plan to resolve the situation within a reasonable timeframe has not yet been established.
f. Borrower may have violated one or more financial or other covenants, resulting in unsatisfactory liquidity and/or capitalization.
g. Industry outlook may be unfavorable.
h. Either the integrity or the ability of management may be in question.
i. Collateral may not provide sufficient protection. Guarantors add minimal financial support.
j. Borrower closes business