An Innovator in Economic Development

During periods of economic expansion, Arizona is among the fastest growing economies in the nation. Job availability is usually the driving force, attracting people to the area. The private builders become active in single family and multifamily construction, as well as financing those activities. In a down cycle, the boom usually turns into a bust, creating an overreaction among lenders who become more restrictive about lending.

Capital Access Program
 1993-1999. A good example of the Authority's flexibility is its Capital Access Program ("CAP"). The program was developed in 1993, when commercial lenders in Maricopa County had become risk-averse in reaction to the economic downturn of the late 1980s and early 1990s. The Authority worked with existing commercial lenders to create lending incentives, using their own staff and expertise. The program was designed to avoid both a subsidy program that might help commercial lenders more than borrowers and a subsidy program for borrowers who were not ready for the responsibilities of debt financing.

The Authority worked with two commercial lenders (Andrew Gordon of Arizona MultiBank and Michael Shields) to develop the CAP. The program targeted borrowers that were close to being credit worthy, but lacked either adequate collateral, a track record or regular cash flow. In order to avoid duplication and ensure a rapid turnaround time, the Authority agreed it would not do its own credit review.

In return, the commercial lender agreed that all losses would be shared equally, unlike most credit enhancement programs that require the credit enhancer to pay the first losses incurred. Therefore, the commercial lender did not have an incentive to make poor loans because the commercial lender shared directly in the financial risk.
 
The Authority charged the lender a higher annual fee, so when the loan no longer needed credit enhancement, the commercial lender would have an incentive not to renew the CAP. In addition, each commercial lender's CAP had a built-in termination provision. In practice, the CAP worked very effectively because:
  • The Authority did not have to build a staff,
  • The commercial lenders made incremental loans,
  • Fees the Authority received from the program offset the borrowers' losses on the program, and
  • The program's use was substantially reduced by commercial lenders as the economy improved.

As the economy improved and other funding sources began to develop similar projects, the Authority was able to phase this program out.

Throughout the years, the Authority has focused more on economic development during the down cycles and has terminated or downsized programs during the economy's boom phases. The Authority is able to achieve that flexibility because the majority of its own staffing is outsourced, and because it works through the private sector rather than creating any duplication of functions.