PROGRAM HIGHLIGHTS

NA = Not Applicable.

SUMMARY OF BUDGET ESTIMATES

1. SUMMARY OF BUDGET REQUEST

The fiscal year 2001 Budget proposes to increase funding and ensure authorization of a New Markets program first proposed in the fiscal year 2000 Budget--America's Private Investment Companies (APIC)--to provide for the significant expansion of private equity capital for the creation or expansion of large-scale businesses in economically distressed central cities and rural areas. The APIC initiative is a key component of the President's New Markets Initiative and complements the Small Business Administration's (SBA's) equity investment programs, particularly the New Markets Tax Credits and venture capital firms, encouraging substantial business expansion into inner cities and rural areas.

Despite the greatest economic expansion in the history of the United States, there are many low-income areas that have not benefited from this phenomenal growth. Too many impoverished urban and rural areas still exist where poverty rates remain unacceptably high. Private capital and economic development continues to bypass such areas, despite the existence of large untapped markets. In addition, the difficulty in obtaining equity financing, which is harder to come by than debt financing, worsens the overall shortage of investment capital in distressed inner city and rural areas.

The private sector is beginning to realize that there are significant untapped markets in low-income communities. There are a number of new business opportunities available that range from new business ventures, corporate divestitures, roll-ups, and focused market expansions (for example, companies formed to address major opportunities in the minority marketplace) that could be located in lower-income geographical areas. Significant, quality employment opportunities can be created in inner-city and rural areas by creating vital pools of equity capital, supporting market-rate profitability, and enabling investments of $50 to $100 million in a single transaction. For this reason, the APIC program is aimed to be an important element in the Department's addressing Strategic Goal #4, "Improve Community Quality of Life and Economic Vitality." APIC's outcome indicator 4.1.d, will show growth in business formation, job creation, and secondary economic activity for predominately low- and-moderate income areas. APIC also supports indicators, 4.1.1, 4.1.2, 4.1.3 and 4.1.4, city versus suburban comparisons in the following: job growth, unemployment rates, household income and poverty rates, respectively. APIC also supports the Strategic Goal #3, "Promote Self-Sufficiency and Asset Development of Families and Individuals," by providing a vehicle under which the economic and social returns on financial investments will be available to both APIC investors and the residents of the low-income communities in which an APIC invests. By creating and expanding businesses in low-income areas, APIC will not only create jobs but will improve the economic base of such areas. As a result, APIC will contribute to reducing poverty and improving the overall standards of living in such areas. This Budget proposes $36 million in credit subsidy, which is expected to leverage $1 billion in loan commitments, and an additional $500 million in private equity capital. This means that the program will have a total impact of $1.5 billion per year, or approximately $7.5 billion over the next 5 years, and will support the creation of thousands of jobs through direct job stimulus and spillovers. In addition, selected APICs will be eligible to receive tax credits within the proposed New Markets Tax Credit.

HUD will administer the APIC program, with consultation with SBA, combining the Department's expertise in large scale urban revitalization with SBA's expertise at raising private equity capital for business development. APIC has been modeled after the SBA's Small Business Investment Company (SBIC) program, which has been effective in making equity available, and can be targeted to distressed areas, but is limited in the size of projects that it can serve and does not enable the real estate investments vital in so many revitalizing areas. SBIC cannot serve the type of large-scale projects, such as shopping centers or manufacturing facilities, that can have a major impact on distressed areas. Further, regulations governing SBIC can be hard to overcome, and can thus discourage investment. APIC will provide a financing mechanism for equity capital funds that could be invested in larger businesses which are created or expanded in distressed areas. In general, an APIC equity capital fund will issue zero-coupon debentures and take equity positions in businesses with large scale equity capital needs, for example $10 million or more.

APIC will complement a number of existing HUD and SBA programs, including the Section 108 Loan Guarantee program, Empowerment Zones and Enterprise Communities, the Community Development Block Grant and others. APIC funds will not be channeled through local governments but rather will challenge and energize the private sector at both the finance and development levels to invest in lower income areas. It is expected that there will be a strong public/private collaboration between APIC and local governments that will be central to the success of projects in local communities.

2. CHANGES FROM 1999 ESTIMATES INCLUDED IN 2000 BUDGET

The APIC program was not funded in 1999.

3. CHANGES FROM ORIGINAL 2000 BUDGET ESTIMATES

The current 2000 estimates reflect that Congress appropriated $20 million rather than the requested $37 million and a loan guarantee limit of $541 million rather than the requested level of $1 billion. Outlays are also reduced to reflect this reduced appropriated level.

EXPLANATION OF INCREASES AND DECREASES

This Budget requests an additional $459 million in loan guarantee commitments, as compared to the 2000 enacted level, which would bring the total request to $1 billion. This level of funding would leverage a total of $1.5 billion in loan commitments and private equity capital. Outlays would increase accordingly.

PROGRAM DESCRIPTION AND ACTIVITY

1. Legislative Authority. Authorizing legislation was submitted to the Congress in 1999, and has been introduced in both the House of Representatives and the Senate.

2. Program Area Organization.

• APIC Fund Structure and Selection. HUD, in cooperation with SBA, will call for proposals to create investment partnerships to be funded under the APIC program. HUD, with SBA's support, will collaboratively review the proposals for sponsorship, financial credibility and potential for advancing APIC public policy goals. It is expected that five potential organizations would be selected with this level of funding, each with a minimum of $100 million in private capital (though depending upon the applications submitted and initial interest, adjustments could be made reflecting the statutory minimum equity investment of $25 million), and eligible for twice that amount of Federal Government debt guarantees. The Government leverage could be provided by using a debenture security similar to the SBIC debentures and funded through the same or similar process.
• APIC Fund Oversight. HUD will enter into a negotiated financing and license agreement with each APIC selected. The license will require, among other things, prior due diligence and certification of all investments for their conformance with the program's public policy objectives and Federal requirements, but not for the investment merits.
• Program Purpose. The purpose of APIC is to stimulate private investment and economic development in low-income areas by creating equity capital funds that target investment to low-income, economically distressed urban and rural areas of the country. Thus, APIC will provide a vehicle under which the economic and social returns on financial investments will be available to both the investors in the APIC and to the residents of the low-income communities in which an APIC invests. By creating and expanding businesses and jobs in low-income areas, APIC will improve the economic bases of such areas, thus reducing poverty and improving the overall standards of living in such areas. Because APICs must invest in active businesses substantially located in low and moderate income areas, the program structure will encourage joint ventures and partnerships with community development corporations and businesses already located in low and moderate income areas where appropriate.
• Eligible Applicants. Eligible applicants are for-profit business entities that will apply and compete for an APIC license under a competition. HUD will award a license to such for-profit equity capital funds that are competitive on the basis of the quality of their plans to make economically and socially responsible investments in low-income neighborhoods that maximize the number of living wage jobs for the current residents of those neighborhoods.
• Eligible Activities. Eligible qualified activities are private investments by a licensed APIC in business ventures that are located or will locate in low-income rural and urban areas and in those businesses which hire residents of those low- income areas consistent with the terms of the APIC license granted by HUD. An APIC's source of funds are a combination of Federal government guaranteed debentures and equity capital pledged to and invested in the APIC.

STATUS OF FUNDS

Balances Available

a. Unobligated Balances. The following table compares the program obligations with funds available by year.

b. Obligated Balances. The status of obligated balances is as follows: