| ECONOMIC DEVELOPMENT MADE SIMPLE
By Joseph P. Fullop III Ph.D.
I have watched in awe for years, the struggle communities have had trying to attract industry into their industrial parks. Monumental efforts have been launched in the form of bidding wars for jobs. Unbelievably complex mixed portfolios of grants and debt have been assembled in order to accommodate new industry. Tax abatements issued by the community, (at the taxpayer expense), are dolled out without hesitation. The sad part of this is that most of the communities give everything they and the State have to the top 5% major corporations and only whatever is absolutely necessary to get by with to smaller corporations. In many cases local businesses that need expansion capital usually don't receive a hard look. Local politics and jealousy retard expansion for local business and small corporations.
The answer to attract industry can be summed up in one word, FINANCING. When the average person contemplates the word "financing", they automatically assume that it must take the form of debt. This is true to an extent. There are many forms of debt and ways to structuring it. The banking community usually has representatives that sit on every community Board of Economic Development. This is not an automatic plus for the Board. I have witnessed through the years this presence tends to retard the creativity of the board itself, and worse yet, people have a habit of taking what they believe to be the course of least resistance, regardless of the long term consequences. Conventional debt is not the best way to finance industry. There is nothing special about it. Every community offers the same solution. Therefore a bidding war develops over who can offer the most grants or tax abatements, with taxpayers dollars, to the business or corporation in question. Sound familiar?
The absolute best way to finance an industry can be achieved by selling some form of security that is custom tailored to the needs of the industry targeted.
Millions of dollars are leaving the community and the state daily in the form of investments. These dollars are leaving for one reason; neither the State nor the Cities have anything for the people to invest in. The amount of money available is unbelievable. It never ceases to amaze me that no one is even noticing that these dollars have left the area. People are going to invest in their future one way or another. "Why not invest in the future of your community and receive more than you would have from a Wall Street investment"? A simple system can be initiated within the local Office of Economic Development that can create and offer these securities to the public and thereby generate jobs without any cost to the taxpayer. Syndications of this type will actually generate money for the community that can be spent locally as their needs may dictate. Enough money can soon be generated to a community, using this form of financing, to allow it to eliminate real estate taxes completely, why not?
The first response to this approach is always the same. " Is this LEGAL"? Yes it is legal, without any question. It is legal under State and Federal Securities Laws and Constitutional Law. There are, of course, restrictions that must be complied with whenever you deal with any form of security. The opposition is more political than legal. The good OLE' Boy Club (that deals with bond issues) will immediately feel threatened. This is a real issue because once a community learns how to do this they have no need to issues bonds in the future.
The second big issue; "Is the community liable for the investors return or solvency?" No they are not, if the right security is used. There are many forms of securities. The security that needs to be utilized for Economic Development, is called a "Community Development Limited Partnership (CDLP)" as defined under the "Federal Community Reinvestment Act" as amended. This form of security has all the necessary attributes needed to customize the needs of the business and will open the door of banks for investment as well.
The basic form of a CDLP is a Limited Partnership. A Limited Partnership is based on contract law not corporate law. Contract law is literally infinite. Its only limitation is the imagination and creativity of the author and it cannot contract to do an illegal act. In 1969, the Federal SEC decided that cities who were acting as a conduit for the sale of securities with Industrial Development Bonds (IDBs), without the full faith and credit of the city backing the security, had to be limited to the size of the offering allowed under a 3A exemption claim. The SEC ruled after some amending that a city could sponsor the sale of a security, without backing it financially, as long as each offering did not exceed $5,000,000.00. This was primarily established for the bond market however the way it is written should apply to any form of security. This limitation applies only to a 3A exemption. Other exemptions may be chosen and used depending upon the size and nature of the offering, and to whom the offering is being marketed.
The real stumbling block with this approach is the will of the community to have real economic change. Many speak it, few practice it.
If structured correctly this type of offering would entice any industry to pick up and move into your community without hesitation. Tax abatements will not be able to compete with this approach. Warning ! Do not attempt this approach without competent advice, and I am not talking about attorneys. Attorneys are excellent at telling you what you can and can't do with the width and breadth of their knowledge. No one ever said attorneys must possess a degree in business. Don't ever rely on them for the structuring of the project. Use a professional.
Raising capital is a major industry in this country today. Just because you have never raised investment capital before does not mean it can't be done. The key to the success of this, and any other type of syndication, is to know the difference between a good deal and a bad one. This approach will work for your community if you want it to.
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