Economic development tool for cities dissolved

An economic development tool for metro-area cities has fallen victim to the economy.

Officials in two dozen participating cities and other entities are deciding their next step after the board of the Twin Cities Community Capital Fund (TCCCF) voted to dissolve in late September.

Since TCCCF was spun off from the statewide Minnesota Community Capital Fund (MCCF) in 2005, it has worked with cities and private banks to connect small businesses with gap loans to allow them to invest in property and equipment. Participants included Blaine, Brooklyn Park, Woodbury, Waconia, Belle Plain and others, plus Hennepin County and Great River Energy.

TCCCF originated the loans, then turned them around for sale in the secondary capital markets, similar to the way banks sell mortgage notes. It enabled city economic development directors to leverage investments of $50,000 to $200,000 into loans ten times that amount.

"It would just kind of give us a little higher playing field than a community that was not part of the program," said Curt Larson, Blaine's economic development specialist.

In January 2008, for example, Brooklyn Park used the fund to help Master Transfer Co. secure a $542,000 gap loan to reach the $1.17 million needed to buy a 5-acre parcel to store and service its fleet. The city's connection to capital was the key that allowed the trucking company to locate in Brooklyn Park, said Chad Master, the company's chief operating officer.

The statewide fund remains solvent, said Scott Martin, TCCCF president and CEO. It started up debt-free, thanks to a $250,000 Blandin Foundation grant. Metro cities have been encouraged to join the Minnesota fund.

Until the market's collapse in the fall of 2008, the Twin Cities fund originated 14 loans ranging from $200,000 to $1.5 million -- about $7.5 million around the metro area, Martin said. The proceeds of a start-up loan from participating cities and an origination fee tacked onto each loan kept the fund solvent.

Its last loan, $1.5 million to a Minneapolis private school, was processed in June 2009.

"The business model was based upon access to capital, with capital coming from large financial institutions, mostly Wall Street-based institutions that were readily buying loans as investments because they would perform," Martin said.

"The model doesn't work when the secondary market isn't buying loans."

No loans meant no revenue, Martin said. Rather than spending down its cash on hand, the board voted at its Sept. 28 meeting to shut down.

Woodbury, which participated at the fund's highest level, for now will probably put the refund into its Economic Development Authority account. The city has not yet made plans to shift to the statewide fund, said Planning and Economic Development Manager Janelle Schmitz.

The City Council was philosophical about the loss of about $10,000, she added, saying it was worth $2,000 a year to have access to capital for Woodbury businesses even though no loans actually panned out.

"It was one of those things where you want it to be there if somebody should need to access those dollars," she said.

Cities that transfer their assets to the statewide fund may have to continue to sit tight until the markets recover, Martin said. However, the group is launching two smaller loan programs, one for energy efficiency improvements and another for businesses seeking a first mortgage. Both will be funded by a private investor.

MCCF is also looking at other sources of funding or security, including a proposal to have the state guarantee at least part of each loan.

"It's not surprising that this fund folded," he said, "because these are exceptionally difficult times for everybody and these difficult times I'm sure haven't spared funds like this."

Still, Martin says he believes in the model and that under "normal" circumstances the fund would have thrived.

"If we could say for a fact that two or three months from now we'd be back to normal, maybe we would not have made that decision," he said. "But I couldn't tell them that."