CDFA Spotlight: Marketing an IDB Program

CDFA Spotlight:
Marketing an IDB Program

Industrial Development Bonds (IDBs) are an important, but often under utilized financing option for small industrial companies for several decades. Many companies that could benefit from IDB financing lack the basic knowledge or understanding of the program, resulting in companies incurring additional costs through traditional funding avenues or putting off expansion plans indefinitely.

An effective and targeted marketing plan is an essential component of running a successful IDB program. Relationship building and an open information exchange can help issuers insure that their IDB programs are more widely utilized. This article highlights the practices of five of the nation’s top IDB programs and the methods they use to market these programs.

Overview of IDBs

IDBs are really corporate bonds disguised to look like municipal bonds. IDB financing where a state or local government allows a private user, like a manufacturing company, to benefit from the government’s status as a tax-exempt entity and its ability to issue debt obligations at tax-exempt rates. As the ultimate recipient of the proceeds of the bonds, the private user benefits because the interest on the obligations is tax-exempt and therefore bears a lower interest rate than comparable taxable financing. For example, IDBs may sell at rates 30 percent below Prime on a variable interest rate basis or 2-4 percentage points lower than taxable alternatives. IDBs are typically issued through state or local industrial development authorities on a “conduit“ basis, meaning the issuer does not back or secure repayment of the bonds. This “conduit” financing technique has been around for more than 70 years, but only over the last 25 years has become readily available in almost every state.

Despite the wide availability and advantages of IDBs, small manufacturing companies often overlook them. IDBs may be glossed over for several reasons, including a general lack of understanding of how municipal finance works, the process of securing an IDB or general knowledge about the program. In any case the following examples of IDB program marketing and promotion offer basic strategies to promote the program’s benefits.

Massachusetts Development Finance Agency (MassDevelopment)

The Massachusetts Development Finance Agency (MassDevelopment), the state’s finance and development authority, works with businesses, financial institutions and local officials to encourage economic growth across the commonwealth. MassDevelopment is the primary issuer of IDBs in Massachusetts. However, MassDevelopment’s IDB program is just a portion of the financing tools they offer. In 2007, MassDevelopment helped to finance more than 200 deals worth more than $2 billion. They completed 16 IDB deals in 2007 for a total IDB issuance of almost $53 million. MassDevelopment focuses its programs at the local level, with regional offices to better serve and understand the needs of the communities. Key elements of their marketing program include:

Education: Staff must be trained appropriately. Merely, understanding the use and purpose of IDBs is not enough to produce a successful program. The staff is taught to take a sales approach when marketing their IDB program. Just because you have funds available and a desire to help local businesses does not mean that local companies are aware of the advantages IDBs offer.

Outreach: To successfully market itself, MassDevelopment uses a business approach. This means being proactive in outreach efforts as well as being responsive to the needs of perspective borrowers. Like a business, MassDevelopment uses direct mailing and media coverage to increase exposure of their programs.

Concur and Divide: MassDevelopment utilizes five regional offices and several other business development locations to help foster and build relationships and contacts in the communities. Furthermore, regional offices allow for better understanding of local needs and customs. For a state agency, this changes the dynamic of the issuer-borrower relationship. Instead of a large, centralized state agency, MassDevelopment creates a more interactive, personal relationship. It makes the process of using an IDB much less intimidating for prospective companies.

Relationship Building: Local and state development and business leaders need to have an open dialogue for optimum program performance. MassDevelopment forms “teams” that include experts from all areas of the IDB transaction. This allows people in different fields to understand the entire process of financing with IDBs.

Web site: The MassDevelopment Web site provides access to their annual report, which clearly details the agency’s achievements during the pervious year, goals moving forward and steps being taken to improve visibility of IDB program (http://www.massdevelopment.com/about/annual.aspx).

Industrial Development Authority of the City of Los Angeles (IDA)

The Industrial Development Authority of the City of Los Angeles (IDA) is a conduit bond issuer, formed in 1982 by the Los Angeles City Council. The IDA, governed by a board appointed by the Mayor and Council, enables bonds to be issued with a tax-exempt status, but does not pledge city funds to repay the bond debt. Since its inception, the IDA has directly issued or facilitated more than $2.3 billion in bond issues. The IDA works closely with a team of qualified financial professionals who process bonds in a timely, accurate and cost-effective manner. A thorough marketing plan has generated interest in IDBs and financed a wide variety of projects.

Priority: The IDA Board’s recognition of the importance of marketing begins with the Marketing Sub-Committee. The Sub-Committee meets regularly to evaluate the effectiveness of current marketing efforts while developing new vehicles and elevates the program’s current profile.

Outreach: The IDA markets its past successes to encourage increased usage of the IDB program. This includes applying for industry awards and sending out blast e-mails to more than 1,000 media outlets. The IDA’s Web site also documents their successes (http://ida.lacity.org/benefits.html). Additionally, the IDA builds strong relationships with business in the area through IDB education and outreach efforts. Furthermore, the IDA conducts a local industry survey to better understand the needs of the local community.

Targeted Marketing: The IDA has recognized the importance marketing plays in their programs success. The agency has hired experts to assist in program branding and targeted marketing campaigns. The IDA also uses targeted mailings to spread the word about their IDB program to small manufactures that might benefit from the program.

Cross Collaboration: The IDA works across city departments to ensure maximum exposure of IDA programs.

Education: The bond issuance requirements and procedures are clearly explained to perspective companies. They describe the process in three phases and provide typical time frames for the completion of each phase. (http://ida.lacity.org/bonds_ip.html). This helps applicants better understand what to expect when applying for IDB financing.

New York City Economic Development Corporation (NYCEDC) (through the New York City Industrial Development Authority)

The New York City Economic Development Corporation (NYCEDC) is the primary vehicle of economic development in New York City. IDBs and other private-activity bonds are issued through the New York City Industrial Development Authority (NYCIDA), which is administered by the NYCEDC.

Targeted Marketing: The NYCEDC markets their IDB financing with other incentives to increase the attractiveness of their program. These include an exemption from sales tax (8.375 percent in New York City) on materials used to construct, renovate or equip a facility. The city also offers real estate tax reductions that are phased out over a 20- to 50-year period. Given the cost of real estate in New York, this strategy has been very successful.

Education: NYCEDC meets with prospective borrowers to ensure that the IDB program will be cost-effective for their business needs. Evaluation of all financing options will guarantee that IDBs are only being issued for those projects that will benefit the most.

Web Site: The NYCEDC (www.nycedc.com) and NYCIDA Web sites (www.nycedc.com/Web/FinancingIncentives/NYCIDA/IDA.htm) provides clear steps, forms and requirements of the IDB process. The NYCIDA also lists success stories and a sample list of projects that have been financed.

City of Minneapolis

The city of Minneapolis’ IDB program is administered by the Community Planning and Economic Development Department. The CPED was established in 2003 and includes several city departments. The CPED serves as the IDB conduit-issuer for the city of Minneapolis and Hennepin County.

Web Site: Like other successful IDB programs, information and outreach is key. Minneapolis’ Web site clearly documents the various programs available and provides examples of projects financed.

Outreach: As the department’s IDB service area has grown to include all of Hennepin County, so have their outreach efforts. CPED know has relationships with more than 30 different local business associations, making their program move accessible.

Targeted Marketing: Minneapolis takes a broad-based approach to its marketing efforts. CPED markets the IDB programs to different ethnic communities in the city. Forms and brochures are available in seven different languages (http://www.ci.minneapolis.mn.us/cped/business_finance_home.asp).

Education: The department Web site (www.ci.minneapolis.mn.us/cped/economic_development_home.asp) offers a pre-application form that helps city employees guide companies towards the appropriate program based on their eligibility. This helps to streamline and condense the process as it weeds out companies that are not eligible for financing.

Arkansas Development Finance Authority (ADFA)

The Arkansas Development Finance Authority (ADFA) is the largest issuer of tax-exempt financing in Arkansas. Their IDB program was created in 1985, the same year ADFA was formed. ADFA replaced the previous finance authority that concentrated on housing development. ADFA has retained the former responsibilities of the old authority while adding economic development as a core function.

Web Site: ADFA’s Web site (http://www.arkansas.gov/adfa/) offers all the necessary forms, applications and pre-applications. ADFA also posts sample applications to demonstrate what is expected. To further elevate the stress level for first time borrowers, the Web site also contains a “Sequence of Events” page to demonstrate the process and stages of securing tax-exempt financing.

Education: Like most organizations, ADFA has its educational materials in electronic form available through their Web site. All necessary information for understanding ADFA’s program is available online, and the authority continuously adds materials and resources.

Outreach: ADFA’s public presentations go beyond program definitions and spreadsheets. Rather, ADFA focuses its public message on the economic impact of its program by providing statistics on the number of jobs created and quality of life improvements resulting from either directly or indirectly from ADFA financing. This message is delivered throughout the state to both civic and professional organizations.

Conclusions

IDBs have seen a major resurgence over the past three years. As resources at both the state and federal level continue to diminish, local economic development finance agencies will continue to search for sources of capital and affordable financing for small/medium sized manufacturers. IDBs are the cornerstone assistance tool for small manufacturing firms. Proper oversight and directed marketing efforts can yield a more successful IDB program.

Based upon these and other examples, CDFA has identified several key factors that contribute to the successfully marketing an IDB program.

Outreach and Education: To receive maximum return on investment, an IDB program should be marketed to the community. It is important to make sure that potential users and their representatives have sufficient understanding of the offerings and how they may benefit companies. It is also be helpful to hold presentations with local chamber of commerce organizations, banks and business groups.

Packaging: Not only should the program be marketed as a stand-alone financing option, but also as an element of a larger more comprehensive financing package, such as in conjunction with local real property or sales tax exemption programs.

Targeted Marketing: Issuers should think creatively in marketing IDB programs to the right audience. Often small to medium size manufacturers are unaware of the financing options available to them through this program. Targeted program marketing and promotion of success stories in the media and online will cultivate new projects and drive demand.

Partnerships: Banks and other financial institutions can serve as a key partner. With the right marketing information, banks can be an active partner in promoting the benefits of IDBs to potential clients. Partnership is key to building a successful bond program. Issuers should work to build relationships with local realtors, banks and other financial institutions. Issuers should also build strong relationships with various economic development and like-minded organizations. These networks can help to build a referral network and enhance issuers programs.

Concur and Divide: Many communities have also found success by having representatives located throughout their jurisdiction. This helps to build relationships and product awareness with potential clients. In addition, placing a staff member on local boards and/or commissions that promote economic development will provide a greater focus on the available bond financing options.

Communication: Good communication is recommended throughout the bond issuance process. An open channel of communication should be maintained among all involved parties. It is important to keep all parties informed as the bond issuance progresses.

Web Site: It is imperative to maintain an up-to-date Web site with essential information about the IDB program. The Web site is a key point of contact with the business, investment and manufacturing communities and should contain information about the IDB program, how it operates, the application process as well as general marketing content. Often a Web site is the initial place of contact for information about the IDB program.

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.

Council of Development Finance Agencies
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