Calendar

Part 1: Course Introduction/Capital Markets and Economic Development Finance Systems

WEEK TOPICS
1

Course Overview; Definition of Economic Development; Role of Finance in Economic Development

This class provides an overview of the course content and objectives, and discusses the definition of economic development and the role of financing in the economic development process.

2

Introduction to Capital Markets; Capital Market Imperfections and Financing Gaps; Local Development Finance Systems

This class covers the institutional structure and operations of private capital markets, including the direct “public” markets and the “private” markets of financial intermediaries. Discussion of these markets will emphasize their economic development role, which institutions are most important for community-based economic development, and the capital market falures and imperfections that occur in private capital markets. These market failures define the financing gaps that economic development finance programs and institutions are designed to address. A two-part framework for interventions to address captial market failures and financing gaps will be discussed. This class also introduces approaches to thinking about how capital markets and development finance relate to larger systems that influence how capital is deployed to advance economic development goals. Information on development finance in Detroit is provided to provide a context to consider the application of these concepts to a city.

Part 2: Business Financing

WEEK TOPICS
3

Business Finance Needs; Business Financing Instruments

This class looks at the many instruments used to finance business enterprises, emphasizing the difference between debt and equity, the varied forms of debt financing, and the advantages and disadvantages associated with different financing instruments. The appropriateness of different financing instruments for various stages of business development and capital needs is also discussed along with the distinct capital needs and issues faced by small firms. Empirical data on how small enterprises are financed will be compared to the expectations based on capital market and firm development stage theories. Finally, we will review the basic finance terms and calculations related to debt and equity instruments.

4

Analyzing Finance Needs I: Introduction to Accounting and Financial Statements

In this session, basic accounting principles are reviewed and the three primary financial statements produced by accounting systems are explained: the balance sheet, the income statement, and the cash flow statement. The difference between cash and accrual accounting and the relationship of financial statements to business cash flow is a key theme for this class. For students who want additional information and presentation of basis accounting concepts and financial statements, optional readings in an accounting text book and several online video lectures are available.

Term Project preferences due

5

Analyzing Finance Needs II: Evaluating Firms for Financing; Financial Statement Analysis

This class expands on the understanding of financial statements to develop analytical tools used to evaluate the financial needs of companies and find appropriate financial instruments to meet these needs. A framework for evaluating a firm for economic development financing is discussed and key financial analysis tools are introduced: ratio analysis, common size financial statements, and forecasting cash flow and debt service capacity. Two tools developed to help economic development organizations evaluate projects using community impact and triple bottom line approaches are presented in the readings and will be touched upon in class. We will also review the business financial analysis worksheet to discuss how ratio analysis and cash flow analysis is used to inform business lending decisions.

Assignment: Complete the Business Financial Statement Analysis worksheet

6

Working Capital Finance

This class focuses on working capital financing needs to understand what working capital is and why it is important to a business. The difference between “cyclical” working capital needs and “long-term” working capital needs will be discussed along with the issues involved in evaluating a girm’s need for working capital debt and extending working capital financing. A written analysis of the Crystal Clear Window Company financing request is due today and will provide a case example for exploring these topics. THe range of financial instruments and institutional sources for working capital will also be reviewed.

Crystal Clear Window Company case assignment due

7

Fixed Asset Financing

Fixed asset financing is essential for the growth and expansion of businesses. THe greater uncertainty and longer repayment terms make it more difficult for firms to secure such financing. We will look at the role of fixed asset financing in business growth, the unique issues in financing longer term capital needs, and the evaluation of a firm to extend fixed asset financing, using the Cambridge Biotech Case Study to gain insight into these issues.

8

Real Estate Financing

This class provides an overview of the real estate development process and financing issues, including key needs for economic development oriented real estate projects, the financial statements used for real estate projects, analyzing a project’s capacity to support debt and equity, and the different financial instruments and sources used for real estate projects.

Assignment: Complete the City Plaza Financial Analysis worksheet; Term Project Work Plan due

9

Analyzing Business Financing Needs III

To strengthen skills in evaluating a firm’s financial needs and capacity to support financing, this class is devoted to an analysis of the Phoenix Forge case, using a role play enactment of a Community Loan Fund Board meeting to consider the Phoenix Forge loan request.

Phoenix Forge case assignment due

Part 3: Finance Tools, Federal Resources and Program Models

WEEK TOPICS
10

Municipal Finance Tools I: Municipal Debt; Industrial Development; Bonds; Qualified Energy; Conservation Bonds; Introduction to Tax Increment Financing

Multiple instruments are used to finance government capital expenditures, infrastructure imporvements, and projects. This class will provide an overview of how the municipal bond market operates and discuss the major types of municipal bond structures, their relative advantages, and potential use for financing business and economic development projects. We will also review the increasing interest in and potential to use muicipal and other bond financing for alternative energy and energy efficiency projects. Tax increment financing will be introduced in preparation for a fuller discussion of its use the next class.

11

Municipal Finance Tools II: Tax Increment Financing; Assessment Districts and PACE; Business Improvement Districts

Tax increment financing and assessment districts are effect ways to finance projects or investments where the benefits are fairly localized and revenues to support these investments can be generated from new tax revenues or fees from this local area. This class covers the issues associated with TIF and assessment district financing, and explores their application to economic development projects and plans. Detroit’s use of TIF to finance a sports arena provides an example of TIF as a project financing tool as well as questions about the best use of TIF. The Orlando downtown TIF case will be used to highlight financing and debt structure issues associated with TIF supported municipal debt. The growing use of assessment financing for energy efficiency and solar energy (PACE) will also be covered.

Complete the Orlando TIF Financial Analysis worksheet.

12

Tax Credit and Financing; Historic Tax Credits; New Market Tax Credits; State Tax Credits

Tax credit financing has become increasingly important in economic development finance, especially with the New Markets Tax Credit (NMTC) program, which is one of the most important federal programs to stimulate investment in low-income areas. With over ten years of implementation, the processes and uses for this program are well established, albeit somewhat complex and byzantine. This session is devoted to providing an overview of tax credit financing and a deeper dive to understand the NMTC program and its use to advance economic and community development goals. This class will also look at some examples of how tax credits are being used in Detroit and Michigan’s changes to its credits program.

13

Federal Programs: SBA Programs; CDFI Fund; HUD 108 Program; State Small Business Credit Initiative

This session provides an overview of key federal economic development programs administered by the Economic Development Administration, the Small Business Administration, HUD, the Office of Community Services (in the Department of Health and Human Services), and the U.S. Treasury CDFI Fund and State Small Business Credit Initiative. The Inner City Supermarket Case provides an example for examining the advantages and issues related to using different programs and issues posed by utilizing federal programs within an overall project financing plan.

Inner City Supermarket Financing case study write-up due

14

Private Market Interventions I: Guarantees and Credit Enhancement

Loan guarantee programs are one of th emost common tools used to expand capital availability to businesses through private capital markets. This class reviews the different guarantee forms, the major guarantees programs and what research indicates about their impact ath best practices. Special attention is paid to the SBA 7(a) program, including the program’s use in Detroit and associated challenges in serving the city’s low-income neighborhoods. We will also look at recent developments in federal loan guarantee programs: the Department of Energy loan guarantee program for alternative energy projects; and the State Small Business Credit Initiative created under the Small Business Jobs Act of 2010. A case study of the Emerging Technology Fund is used to explore design issues for loan guarantee programs.

15

Private Market Interventions II: Banking Regulation; Small Firms and Security Regulation; Crowdfunding; Community Reinvestment Act

Capital markets are heavily regulated and these regulations influence capital availability and how development finance practice can expand access to capital. This class provides a high level overview of equity market and bank regulations and their relevance to economic development finance. Special attention is given to the emerging issue of crowd funding and its emerging regulations; and the history of the Community Reinvestment Act, its impacts on bank capital availability, and questions about its current impact and limitations. The role of J.P. Morgan Chase in Detroit provides a case for the different ways in which a large financial institutions can contribute to urban economic development.

16

Program Models I: Revolving Loan Funds

Revolving loan funds (RLFs) are the most common alternative development finance models with the longest history and track record. This class will review some of the key strategies and approaches employed by RLFs and discuss important principles, issues, and best practices. It will also look at the recent growth of revolving loan funds to finance energy-efficient and clean energy deployment, including the creation of internal “Green Revolving Funds” within organizations. The Portland Industrial Site Loan Fund, DEGC, Philadelphia Green Works, and Portland Clean Energy Works provide contrasting cases to explore effective RLF design and management.

17

Program Models II: Venture Capital Angel Investment

Venture capital and equity-like investments are a more recent and growing model of economic development financing, especially to support technology-based business and commercial development of new technologies and products. OUr discussion will include the unique nature of these financing sources, how angel and venture capital financing differ and are related, issues involved in managing venture capital funds, the experience of state policy and newer community development venture capital funds. This class will also use a 2012 study and other materials to consider the current and potential role of angel and venture capital financing in Detroit’s economic development.

18

Program Models III: Community Development Financial Institutions (CDFIs); Community Development Credit Unions; Community Development Loan Funds

Community based and controlled financial institutions have been a small but rapidly growing source of development finance. These institutions, referred to as Community Development Financial Institutions (CDFIs) are privately funded through local deposits, loans, and philanthropic support. We will review the two major institutional models: credit unions and loan funds, the particular benefits, issues and constraints inherent in these models, and the emergence of large multi-faceted CDFIs that combine a core financial intermediary with other related development and policy functions. The Los Angeles study reviews CDFIs’ collective contribution to addressing housing and economic developments needs on a city-wide basis and provides a way to look at the effectiveness of CDFIs as a system and institutional policy to pursue community and economic development goals. The Cleveland CDFI case provides an opportunity to look at how a city can apply and support the CDFI model in light of changing market conditions and economic development priorities.

19

Program Models IV: Microenterprise Development

The capital and technical assistance needs of very small businesses pose special challenges. Over the past two decades, numerous programs have been developed to support the creation and financing of “micro-enterprises” as strategies to alleviate poverty, assist the unemployed and stimulate local job and income generation. In this class, we will examine the microenterprise development and lending program models and practice. Lisa Servon’s article an assessment of microenterprise development in Michigan and the Lawrence Working Capital Program, will provide the basis for class discussion on ways to heighten the impact of microenterprise programs.

Cleveland CDFI System case write-up due

Part 4: Management of Development Finance Institutions

WEEK TOPICS
20

Issues in Program Management: Program Planning and Design; Financial Models and Projections

The first step in developing successful economic development finance programs is defining clear goals and designing a program to achieve these goals on a sustainable basis. In this session on program planning and design, we consider how finance programs relate to an organization’s mission and strategy, how market analysis can be conducted and inform institutional strategy, and new program or product development. We will use the term projects to explore the challenges, issues, and approaches to program planning and design. Continuing the theme of development finance as a system, we will consider approaches to analysis and planning for the overall finance system.

21

Term Project Presentations

This class will be used to review and discuss term projects. Each team will make a 15 minute presentation on their project, analysis and preliminary recommendations. The presentation will be followed by questions and class discussion.

22

Term Project Presentations

This class will be used to review and discuss term projects. Each team will make a 15 minute presentation on their project, analysis and preliminary recommendations. The presentation will be followed by questions and class discussion.

23

Issues in Program Management: Marketing and Origination; Underwriting and Structuring Investments; Servicing and Portfolio Management

The core competency in operating loan funds is making good decisions on which loans or investments to make, and effective oversight of these deals to help keep them on track and resolve problems. This class will focus on these activities, including the options for organizing and managing theses functions and best practices in the field, and approaches to incorporating more comprehensive “triple bottom line” metrics into investment decisions. Effective program management with limited resources – typical of public sector and community organizations – is prominent concern along with linking financing programs to other economic development resources. The Rural Enterprises case will be used to explore challenges and effective practices in managing development finance operations.

24

Issues in Program Management: Capital Management and Recapitalization

With limited resources and capital needs that far exceed available funds, economic development finance programs are constantly challenged to manage financial assets to maximize capital for new investments and to expand their capitalization. This session will disucss the policies and tools to enhance the use of assets and expand institutional capital resources and discuss how to manage assets and liabilities for maxiumum effectiveness. The Manufacturing Fund case will look at different approaches to capitalization and use of financial models to assess recapitalization options.

Manufacturer’s Fund Recapitalization case write-up due

25

Revisitng Finance Ecosystems; Detroit’s Development Finance Systems

This class will revisit the question of how economic development finance operates as a system and the role of practitioners in strengthening and improving the system’s effectiveness, using Detroit as the focus and drawing on what we have learned from the many reading and term projects.

26

Course Conclusion

The final session will look back over the semester’s work to identify key themes and conclusions related to economic development finance. Posisble areas of discussion include: how have your views evolved on the role of financing in economic development? What principles should guide economic development finance activities? What can we say about best practices in designing and managing programs and institutions? Can development finance institutions survive as an alternative to conventional capital markets? What key challenges do they face?

Term Project reports due

Course Info

Learning Resource Types

notes Lecture Notes
group_work Projects with Examples