Minutes of the Regular Meeting of NMSBIC, January 21, 2013

A regular meeting of the New Mexico Small Business Investment Corporation was called to order on this date at 12:25 p.m. in the conference room of the WESST Enterprise Center, 609 Broadway Blvd., N.E., Albuquerque, New Mexico.

A quorum was present:

Members Present:

Mr. Joseph H. Badal, Chair
Mr. Sam Cobb
Mr. Alan Fowler, Secretary/Treasurer
Mr. Lupe Garcia
Ms. Roxanna Meyers, Vice Chair
The Honorable James Lewis, State Treasurer
Mr. Clarence L. Smith [designee of Hon. James Lewis, State Treasurer]
Ms. Launa Waller

Members Excused: None.

Financial Adviser to Board: Mr. Russell Cummins

Legal Counsel to Board: Mr. Randall McDonald

Guests Present: None.

REVIEW AND ACCEPTANCE OF AGENDA

Mr. Smith moved approval of the Agenda, as published. Ms. Waller seconded the motion, which passed unanimously by voice vote.

REVIEW AND ACCEPTANCE OF BOARD MINUTES: December 10, 2012

Ms. Waller moved approval of the December 10 Minutes, as submitted. Mr. Fowler seconded the motion, which passed unanimously by voice vote.

NOVEMBER & DECEMBER 2012 FINANCIAL REPORTS

Mr. Cummins explained that there were errors in reporting from The Loan Fund that resulted in an incorrect capital call. He said there were also errors in their delinquency reporting.

Chairman Badal said he had shared his concerns about these errors with Mr. Cummins, Ms. Meyers and Mr. Fowler and had suggested that the NMSBIC not advance any more funding requests with The Loan Fund until everyone was confident their financial statements were correct. He added that he has not yet signed off on the corrected capital call.

Mr. Cummins stated that he and Ms. Brescia have reviewed the financial report, and while they are comfortable that the loan balances and the amount being requested are correct, he would meet with Leroy Pacheco to discuss the Board’s concerns and to learn what steps are being taken to resolve the reporting issues going forward.

Mr. Cobb moved to accept the November and December financials, as presented. Ms. Meyers seconded the motion, which passed unanimously by voice vote.

EXECUTIVE DIRECTOR/INVESTMENT ADVISOR REPORT

• Loan Reports
• Accion Loan Review
• Take Away Report
• Equity Partner Detail

Accion loan review

Mr. Cummins reported that he did a follow-up loan review with Accion on January 3 and was very pleased with the improvements made to the process since the previous review on (date). He noted that the underwriter was present and available for questions, and Accion had printed hard copies of all of their loan files, which were well organized, well documented, and fully answered all questions. He selected seven loans to review, all over $20,000, originated in September through November 2012.

Mr. Cummins said he noted during the review that Accion discounts collateral values anywhere from 20% to 75% before calculating the loan-to-value. As a result, an LTV stated in Accion’s reports is often higher than it would be were it based on actual collateral value. When reviewing the collateral value used for a $240,000 loan, which was previously reviewed by him and Ms. Meyers, he learned that the equipment was discounted to 70% of the value. He had not been aware of this during the previous review.

Mr. Cummins said it would therefore appear that the larger loans being originated by Accion have less risk than was previously understood and reported to the Board.

Mr. Cummins also noted that, for fiscal year 2011, charge-offs dropped from the previous year’s $222,000 to $105,000. During the first five months of this fiscal year, recoveries have exceeded charge-offs, with a net recovery of $700 during that period. While the NMSBIC continues to have credit risk on its participation interest in Accion’s loans and will likely continue to experience credit losses under the participation agreement, the trend of declining losses over the past two and a half years appears to be positive.

Proposed changes to Accion agreement

Mr. Cummins reported that he met with CEO/President Anne Haines Yatskowitz and CFO Greg Henderson on January 3, and discussed terminating the existing participation agreement, and entering into a revolving line of credit similar to that of The Loan Fund. He said Ms. Yatskowitz and Mr. Henderson are instead asking the NMSBIC to consider making an equity investment in Accion.

Mr. Cummins noted that Accion currently has equity investments investors totaling $1.7 million. Each equity investment is made under a subsidiary LLC that has voting interest and non-voting interest, with Accion controlling 51% of the voting interest. The majority of investor cash is invested in non-voting interest, resulting in aggregate capital ownership for Accion and the investor of 0.40% and 99.60% respectively. Cash is loaned from the LLC to Accion and interest is paid to the LLC. He said each LLC has a 10-year life.

Mr. Cummins stated that the individual LLC investments provide a minimal return to the current bank investors, whose main motivation for making these investments is to meet Community Reinvestment Act requirements. He said he indicated to Accion that the NMSBIC would require a reasonable return, adding that the LLC could be structured such that interest would be paid to the LLC from Accion, but none of the loan losses would be passed through the LLC.

Mr. Cummins said Accion would be able to segregate an NMSBIC investment from other funds to ensure that the capital is only for New Mexico small businesses.

Mr. Cummins noted that, under the revolving line of credit, NMSBIC would have the full equity position of Accion behind the deal, and would have loans as collateral. Under the equity agreement, there would be no collateral. Given that an equity investment would carry more risk, he feels it would be appropriate for the net interest earned by the LLC to be higher than the 2% to 2.5% currently earned on the NMSBIC’s secured revolving line of credit.

Chairman Badal commented that Accion would use any equity investment from the NMSBIC as leverage to borrow more funds against the equity, which increases the risk for NMSBIC. He said he personally feels the revolving line of credit arrangement proposed by Mr. Cummins is much better than either the current participation agreement or the equity investment alternative.

Mr. Cummins said another idea is to leave the current participation agreement in place, but add a provision (as with The Loan Fund) where loans are bought out when they reach 90 days’ delinquency. He suggested keeping an interest rate of 3% under the current participation model, but lowering it to 2% to 2.75% under a revolving line of credit with over-collateralization model.

Ms. Meyers made a motion authorizing Mr. Cummins to continue discussions with Accion focusing on revisions to the current credit participation agreement rather than the equity investment alternative. Mr. Fowler seconded the motion, which passed unanimously by voice vote.

Mr. Cummins reviewed highlights from his advisor’s report to the Board:

Verge funds

• 100% of the committed capital has now been called for Verge 1 and Verge 1.5. Management fees going forward have to be paid out of existing cash or future profits of the funds.

Mesa Capital Partners

• In response to a query by Ms. Meyers, Mesa Capital Partners has reported that they use Quickbrooks Pro as their accounting software.

Cottonwood Technology Fund II

Mr. Cummins said he communicated the Board’s decision to not invest in Cottonwood Technology Fund II at a December meeting with the managing partners, David Blivin and Ray Quintana. He said they would like the Board to reconsider its decision and have made the following comments:

• They do not believe an investment of $1-$2 million would materially change the NMSBIC’s concentration of equity investments, but would be willing to accept a $500,000 investment.
• They understand the concern about paying management fees on investments outside of New Mexico but point out that their management fees are much less than the management fees of other funds.
• They feel the fact that they are looking at deal flow throughout the Southwest means they have more stringent investment criteria than companies looking only at New Mexico investments, so they have a higher standard.
• Because investors have the opportunity to review each portfolio company investment, this could create a problem for the NMSBIC given the Open Meetings Act requirement. To address this issue, Cottonwood would provide a side letter that would allow NMSBIC funds to be automatically invested in New Mexico opportunities.

The Board discussed the desire to reduce the concentration in equity investments, and the request from Messrs Blivin and Quintana for the Board to reconsider its previous decision. Chairman Badal asked Mr. McDonald if the Board is required to vote on the matter again, and Mr. McDonald responded it would not be necessary. No action was taken, and the decision not to invest in this fund was left unchanged.

Takeaway report

At Chairman Badal’s request, Mr. Cummins said he has prepared a takeaway report, providing a listing and status of follow-up items from Board meetings.

POSSIBLE PROVISION OF LINE OF CREDIT FACILITY TO NEW MEXICO MORTGAGE FINANCE AUTHORITY: JOSEPH MONTOYA, MFA DEPUTY DIRECTOR OF PROGRAMS

Mr. Cummins referred to his January 21 memorandum to the Board, which included answers from MFA in response to questions from the Board following its tabling of a $1.5 million loan to MFA.

Joseph Montoya, MFA Deputy Director of Programs, introduced himself to the Board and made a presentation.

Mr. Montoya said the MFA’s mandate is to provide affordable housing opportunities for low- to moderate-income people. Through the Affordable Housing Act, the definition of affordable housing is left up to local municipalities, but it is capped at 120% of median income. While some of MFA’s mortgage products go up to that rate, most are at 115% of median income. In New Mexico, median income for a family of four is $48,000.

Mr. Montoya said MFA’s underwriting systems vary. For a rental, a person cannot pay more than 30% of their income for a rental product, not including utilities.

Mr. Montoya discussed the Low Income Housing Tax Credit Program and New Mexico Housing Trust Fund and their economic impact in New Mexico. MFA estimates that a $2 million investment from NMSBIC, when leveraged with other sources, could produce 120 units of housing, generate $12 million in local business income and wages and $1.5 million in local government revenues, and support 182 jobs.

Mr. Montoya reviewed MFA’s proposal for the NMSBIC’s investment in the MFA’s Primero Loan Fund.

• NMSBIC’s investment into this fund would be structured as a loan to MFA repayable at 2% interest over a 10-year term. MFA is rated AA- by Standard & Poor’s.
• MFA will use the funds to make loans to organizations that engage in the business of providing affordable housing. Loans may be secured or unsecured as determined by MFA.
• All funding requests are reviewed by MFA staff to evaluate the financial and organizational capacity of the applicant and feasibility of the planned affordable housing project.
• MFA has already committed over $6 million to the program. Wells Fargo has invested $1.5 million in the Primero program.
• MFA has funded over $10 million in loans under the Primero program and has experienced only two write-offs, totaling $662,777, or 4% of the loans funded.

Mr. Cummins stated that, while MFA’s mission is to provide affordable housing in New Mexico, the NMSBIC’s mission is job creation and economic development. He commented that there are certain areas of the state experiencing tremendous economic growth, and one of the big obstacles to job growth is lack of housing. He said there could potentially be a partnership between the NMSBIC and MFA in addressing these needs.

Mr. Montoya said Hobbs and the southeastern portion of New Mexico are facing these issues. He said restaurants and businesses such as Wal-Mart cannot find staff because the people who would normally work there can’t find housing, and MFA is also seeing investors and businesses hesitating to locate in certain areas because of this.

Mr. Montoya also noted that Santa Fe and other areas with high land prices are facing the problem of residents who are low wage earners being forced to leave town because they cannot afford to live there.

Mr. Montoya described the two write-offs that MFA took in the Primero program, one involving a non-profit organization in 2000, and the other involving a land development project in Hobbs, where the soft costs were written off but the property is being held in the MFA land bank for future use.

Responding to Chairman Badal, Mr. Montoya said MFA makes unsecured loans to smaller organizations (profit or nonprofit) that do not have ready access to capital but are considered creditworthy.

Chairman Badal asked Mr. Montoya why MFA is suggesting a 10-year facility in its proposal to the NMSBIC.

Mr. Montoya responded that MFA would like to leverage the NMSBIC’s funds in the predevelopment “triage” stage in order to determine whether it can proceed with a project, a process that can take up to two years. He also said MFA would like to do more construction lending because there is faster turnaround and MFA is providing the takeout, so there is more security. Depending on the size of a development (single or multifamily), and depending on whether MFA triages it or not, that process can take up to two and a half years.

Chairman Badal asked at what point the NMSBIC’s funds would be deployed, and Mr. Montoya responded that they would be deployed right away in predevelopment costs, if appropriate. He said the NMSBIC’s funds would be leveraged, however, to bring in significantly more funding. In the Housing Trust Fund, for example, the ratio is generally 12% to 15%.

Mr. Montoya noted that the rental market is extremely strong and MFA does not have enough money for rental product. They have niche markets where they continue to do single family lending, primarily in the Santa Fe area; however, MFA does not expect a big resurgence in single family development in the Albuquerque metro area for at least another 12-18 months, and right now much of the single family housing is being rented.

Responding to Ms. Meyers, Mr. Montoya said MFA allows up to a 12% return on soft costs on federally funded projects. He said the highest percentage of soft costs occurs with low income housing tax credits, with most of those expenses going to bond counsel, financiers and others necessary to the process.

The Board discussed the option of having NMSBIC act as participating lender on a project-by-project basis.

Responding to Ms. Meyers, Mr. Montoya said MFA is paying an interest rate of 4% to Wells Fargo.

Mr. Montoya said he would place the MFA’s proposal for a line of credit facility on their next agenda for MFA Board review with the understanding that the NMSBIC Board will not have made any decision on the proposal at that point.

[Mr. Montoya left the proceedings.]

Chairman Badal stated that, should the NMSBIC move forward with this proposal, he would want the NMSBIC represented on the Primero investment committee.

Chairman Badal asked Mr. Cummins to look further into risk associated with soft costs.

PROPOSED LOAN TO NEW MEXICO COMMUNITY CAPITAL ROYALTY FUND

[Deferred to February 18 meeting.]

PROPOSED CHANGE TO NMSBIC LEGISLATION & FUNDING

Mr. Cummins stated that there is proposed legislation by Senator Muñoz to increase the NMSBIC’s participation rate in the Severance Tax Permanent Fund from 1% to 1.5%. Wade Jackson, General Counsel for the NM Economic Development Department, is asking the NMSBIC for feedback before this legislation moves forward.

Mr. Cummins said he would report to Mr. Jackson that the NMSBIC Board has reviewed the bill and has no suggested changes.

Chairman Badal said he and Mr. Cummins would meet with SIC representatives to discuss this further.

Responding to questions from the Board as to what extent the NMSBIC is subject to the NM Open Meetings Act, Mr. McDonald said the statute says the NMSBIC “is not a state agency for any purpose,” yet is also subject to other inconsistent statutory language that treats the NMSBIC like a state agency. He said the NMSBIC is operating based on an opinion by the Attorney General that it is subject to the Open Meetings Act. He said the Open Meetings Act has certain specific exceptions allowing for discussions in an executive session, but none would apply to allow the NMSBIC to discuss possible debt or equity investments in a closed, executive session.

CHAIRMAN’S COMMENTS

None.

ADJOURNMENT

Its business completed, the NMSBIC Board adjourned the meeting at 2:45 p.m.