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									DRAFT 02.10.10

                                        City of Buffalo
                                  Economic Development Review

Executive Summary

        A working group (the “group”) was formed in October 2009 to review the City economic
development delivery system with a specific focus on Buffalo Economic Renaissance Corporation
(BERC). Dennis Penman, acting BERC Executive Director, was group chair and invited the
following to participate: Peter Cammarata, Fred Fadel, Robert Gioia, James Militello, Nancy
Peacock, Larry Quinn, Chuck Rosenow, Larry Rubin, and David Stebbins. Larry Quinn resigned on
December 8, 2009, and James W. Pitts and Brendan Mehaffy were added on November 11, 2009
and December 9, 2009 respectively. Laura Smith from the Buffalo Niagara Partnership staffed the
effort.
        The group concluded there needs to be a fundamental change in how the City structures and
implements economic development programs. The current City economic development efforts
have suffered from a confused organizational structure, unclear policy direction and a lack of
qualified staff in key positions. The group’s primary recommendations are that the economic
development programs should be the responsibility of the Director of the Office of Strategic
Planning and removed from the Department of Economic Development, Permits and Licenses.
An integrated delivery system to carry out economic development programs should utilize all
available tools both in City Hall such as Buffalo Urban Renewal Agency (BURA), Buffalo
Economic Renaissance Corporation (BERC), and Buffalo Urban Development Corporation
(BUDC) as well as other regional economic development partners. The Executive Director of the
Office of Strategic Planning should be the chief economic development officer of the City, that the
Department of Economic Development, Permits and Licenses should be restructured to focus on
permitting, licensing and code enforcement and that the current economic development agencies
(Buffalo Economic Renaissance Corporation, Buffalo Urban Renewal Agency(BURA) and Buffalo
Urban Development Corporation(BUDC) should be retained but that administrative costs need to
be significantly reduced. The group also recommends that the boards of these entities need new
membership.

        The City economic development agencies also need to be integrated with other economic
development agencies in the region to avoid redundancy and reduce costs associated with the
regional economic development system. Neighborhood development and revitalization should be a
primary component of the City’s economic development strategy. The Community Development
Block Grant (CDBG) program should be a neighborhood-rebuilding program with its funds used
for hard housing and neighborhood improvements with administrative costs significantly reduced.
In addition, a pro-active approach and customer friendly culture within City Hall needs to be
cultivated and marketed.

         The Mayor needs to empower a core group of professionals under the leadership of the
Executive Director of OSP to work as a team to develop an economic development strategy and
short and long term goals effectively using the City’s resources, to support public and private sector
initiatives consistent with such strategy and goals and to help other City departments deliver a broad
range of City services to implement the strategy and achieve the goals. It is critical that the
perception or reality that other members of the Mayor’s executive staff have supervision over this
team and their work be dispelled.


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Specific recommendations to achieve this include:

   o Create one City economic development office - the Office of Strategic Planning (OSP) - by
     pulling the economic development functions out of the Department of Economic
     Development and Permit and Inspection Services (EDPIS) and putting them into the OSP
     department. The acting Commissioner of EDPIS should be made the Commissioner of
     Permit and Inspection Services.

   o Hire an Executive Director of the Office of Strategic Planning who will be the chief
     economic development officer in the City and have the full support of the Mayor. Once the
     new Executive Director is in place, some but not necessarily all, of the vacant upper
     management positions in the department need to be filled. The OSP Executive Director
     should be the chief executive officer of BURA, BUDC and BERC and should be
     compensated as a City officer only. Each of the development agencies also should have a
     staff operating officer to manage staff and implement programs.

   o Set neighborhood and business development as clear priorities of the City and realign
     resources by functionality rather than funding to best deliver on the priorities. The city
     should have a series of neighborhood plans for improvement that must be multi-year and
     contain a credible phasing of improvements. Resources must be concentrated pursuant to
     the plan. By definition this means that certain areas of the city will not receive resources
     until the prior phase of the plan is complete. Every neighborhood needs a credible
     partner to implement the plan. City Hall directed or city-wide organizations typically fail
     more than they succeed. They lack focus, accountability, and resources. The Push group
     on the lower west side is a model that should be considered for this type of partnership.

   o Strategic investment areas in the City need more focus. City wide Capital and operational
     budgets should be reviewed to address some of the key projects and initiatives currently
     underway in the City by providing some matching capital improvement dollars for public
     infrastructure (streets, sidewalks, lighting, greenspace, utilities, etc.) to leverage and support
     these investments. The City needs to devote a full-time planner/project manager for each
     of these strategic investment areas to coordinate planning and development activities,
     serve as a liaison to city departments, assist in attracting additional investment, etc. The
     strategic investment areas are: Waterfront – inner and outer harbor; Buffalo Niagara
     Medical Campus; neighborhood development centered around magnets like, Canisius,
     UB South Campus, and D’Youville; Downtown especially Delaware Avenue and
     Genesee Village; Larkin District and, Buffalo River Brownfields.

   o Create an internal “policy cabinet” comprised of internal staff and related departments
     necessary to advise the Executive Director: a lawyer, planner, lending expert, CFO, real
     estate administrator and the neighborhood program administrator. The Mayor, with input
     from the Executive Department and Executive Director of OSP, should develop, articulate
     and implement clear economic development policies and priorities that focus on
     neighborhood and business district development and revitalization. These neighborhood
     focused policies should be considered when major projects or other economic development
     activities are before the City. Staff and the economic development entities should be aligned
     with these policies. An external group of advisors should also be established to assist and
     advise the Executive Director.


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  o The existing BERC Board should be asked to resign and repopulate it with new business,
    civic and neighborhood perspectives appropriate for the new focus. The new Executive
    Director of OSP and board should review the powers of its existing local development
    corporation which have not been utilized or underutilized. In addition, BERC should
    focus on lending and technical assistance for small businesses. This does not mean the
    expertise needs to be staffed in house but rather utilize creative partnerships with
    existing, effective entities that perform these functions already.

  o Remedy HUD concerns and address BURA “fire wall” issues related to compliance and
    program delivery. Assess staff responsibilities and reporting structure in BURA and BERC
    and realign responsibilities as necessary to eliminate self monitoring. CDBG administrative
    costs should be reduced to the HUD recommended 20% or lower. Build a better system of
    accountability and checks and balances for CDBG funds. Streamline application process for
    potential recipients and focus resources on restoration of city neighborhoods.

  o Consolidate City real estate functions. Prepare an inventory of real estate functions,
    holdings and powers by department and BUDC, BERC and BURA. Increase coordination
    of activities and develop policies to guide entities that own, manage and or dispose of
    properties. For example, Brownfield industrial land redevelopment is a major need of the
    City and is the primary focus of BUDC. BUDC should either be brought back into City Hall
    or it needs to be viewed as part of the OSP Executive Director’s team.

  o Culture – develop and support an accountable, collaborative, proactive, professional culture
    that is customer friendly and development savvy.




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                                         City of Buffalo
                                   Economic Development Review


Recommendation background
        The City of Buffalo’s (the “City”) economic development functions were under scrutiny
from the administration, Common Council, Department of Housing and Urban Development
(HUD) as well as the local press for purported fund mismanagement and lack of effective economic
development activities leading to desired outcomes. The concerns were centered on the use of
nearly $16 million dollars of Community Development Block Grant funds and lack of results. The
types of loans, process for approving loans and staff capacity were all questioned.

         Prior to the start of the group’s review, Mayor Brown addressed some of the concerns
through personnel changes. He removed the Commissioner of Economic Development and Permit
and Inspections Services from his role as Executive Director of BERC and replaced him with
Dennis Penman on an interim basis. Additional personnel changes were made to assist in improving
the process and use of funds. It is at this point that Dennis Penman brought together the group to
assist in the review and offer their experience and advice on how to best position the City’s
economic development functions to generate the greatest impact.

         Over the course of several months, the group discussed City economic development
priorities, policies, operations, culture, structure, and staff capacity. With the specific focus on
BERC, attempts were made to understand how the entity functions today and what its economic
development priorities are.

Structure:
         The group believes the structure should be informed by the functions needed to implement
the City’s economic development priorities. The existing structure with a combined economic
development and permitting department mixes development with regulatory functions
unnecessarily. The staff reporting structure needs to be addressed so the appropriate checks and
balances HUD requires are in place. The “economic development” functions of the Commissioner
of Economic Development and Permit and Inspections Services position should be removed and
the acting Commissioner of EDPIS should be elevated to Commissioner of Permit and Inspection
Services. The OSP Executive Director should be the chief economic development officer for the
city and have the authority and support of the Mayor to implement the policies and priorities and be
able to delegate to a staff with the capacity to competently deliver on the desired outcomes. The
Executive Director should be someone who has the ear of the Mayor and is the key person that
responds to the question “who in the City should I talk to about…” A simple organization chart
starting with - lending, planning, land inventory and sales, housing, project management, grants
management and legal should be created with the new Executive Director of OSP. BURA should
focus on grants management and land assembly and management, BERC should focus on lending.

Policy/Priorities:
        Clear economic development priorities and policies need to be defined, communicated
internally and externally, and sufficient resources deployed to act on them. The group recommends
the City priorities and policies focus resources on neighborhood and business development and
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revitalization. This includes addressing neighborhood business development and lending, housing,
streetscape, and infrastructure. The tools available to the City to implement the policies and
priorities need to be realigned to have a greater impact on neighborhood and business districts. In
addition, neighborhood and Business District “teams’ can be formed utilizing existing staff in key
department areas to more effectively address neighborhood /business district concerns.

        These policy recommendations should be set by the OSP Executive Director with the advice
of a Policy Cabinet made up of key OSP staff and leadership of other development related city
departments. The committee recommends the cabinet contain a lawyer, planner, financial expert
(lending and deal making), CFO (risk manager), real estate administrator and the neighborhood
program director. The policy recommendations from this cabinet would be communicated to the
Mayor/Executive Department by the OSP Executive Director. In addition, an advisory group of
external individuals should also be established to advise the Executive Director.

Staffing:
Staffing should be the means to carry out the delivery system. Once the Executive Director of
OSP is hired and a clear organizational chart developed, persons with appropriate skill levels and
expertise should be hired including having existing staff apply for the positions. Whether they
are called “planners” or “community developers” or “economic developers” the City needs
enough staff to address some of the key projects and initiatives currently underway in the City:
Private and institutional entities are making major investments in strategic areas in the City.
These investments are totaling into the billions (UB2020 will invest several Billion at their South
and Downtown Campuses; waterfront investment will total over $500 million; First Niagara,
City Center etc. are investing hundreds of millions; the Medical Campus has already seen close
to $1 billion in investment with much more to come; downtown has been an award winning plan
with many individual investors). There is virtually no City representative at the table for any of
these strategic investment areas. The City needs to provide at least some matching capital
improvement dollars for public infrastructure (streets, sidewalks, lighting, greenspace, utilities,
etc.) to leverage and support these investments, devote a full-time planner/project manager for
each of these strategic investment areas to coordinate planning and development activities, serve
as a liaison to City Departments, and assist in attracting additional investment.

Filling these positions should not come at the expense of program dollars. The group recommends
reducing administrative costs associated with CDBG funds, which is approximately 30 percent, to a
HUD recommended 20 percent or less. The CDBG is not a program for funding city hall civil
service jobs, random non-profits, political patronage, the Department of Human Resources or any
other replacement for normal city services. It is not a temporary jobs program.
Tools:
        The economic development tools (BERC, BURA and BUDC) should be aligned to best
deliver on these priorities. The Executive Director of OSP should be on each of the boards (as
chairman) and a staff director should be in place to oversee staff and implement programs that align
with the City’s economic development policies. BERC should be overhauled and rebranded to
assist with banking/lending activities that service neighborhood and small business lending. The
group recommends the Mayor request the BERC Board to resign and repopulate it with business,
civic and neighborhood members able to affect the new focus.

        BURA staff responsibilities should be examined to mitigate the HUD concerns of a lack of a
“fire wall’ between compliance and program delivery.

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    The real estate functions need to be more effective and proactive in anticipating the market and
determining city needs. For example, tracking City vacancy rates, leases, etc. and developing a plan
and providing insight for policy and program development. There also needs to be coordination
among the entities that own, manage and/or dispose of properties. The group recommends an
inventory of real property, powers and effectiveness of each of the entities that has some real estate
functions be completed. BERC has actively utilized its power to acquire, rehabilitate and improve
real estate and has transferred property at negotiated prices in support of community development
projects. Additionally, it appears that the City and BERC have not exercised their ability to
collaborate to provide for the transfer of City owned realty to BERC for use in economic
development projects without public bidding and without the constraint of fair market value pricing

Entity Background
        BERC is a local development corporation that was incorporated in 1978 under the original
name of “The Local Development Corporation for the City of Buffalo, Erie County, New York.” It
was essentially formed by City officials; its initial board of directors was dominated by the City; it
was primarily funded by the City; its meetings were traditionally held in public buildings, and its
purpose was clearly to assist the City in carrying out its economic development function. BERC was
originally created to administer loan programs and encourage through loan incentives the
development of local, growth-oriented manufacturing companies and other small businesses.

     BERC is one component of the City and region’s greater economic development operation and
is situated under OSP. BERC’s function focuses solely on commercial (as opposed to residential)
development in neighborhoods by providing various financial incentives as well as office and
business incubator space. It currently primarily focuses on small businesses, early stage businesses
and businesses in need of gap financing. There are additional powers available to BERC through its
LDC status that are currently not utilized or are underutilized:
     1. Construct, acquire, rehabilitate and improve for use by others industrial or manufacturing
         plants in the City of Buffalo;
     2. Assist financially in such construction, acquisition, rehabilitation and improvement;
     3. Maintain such plants for others in the City of Buffalo;
     4. Disseminate information and furnish advice, technical assistance drop this and liaison with
         federal, state and local authorities with respect thereto;
     5. Acquire by purchase, lease, gift, bequest, devise or otherwise real or personal property or
         interests therein;
     6. Borrow money and issue negotiable bonds, notes and other obligations;
     7. Without leave of the court, sell, lease, mortgage or otherwise dispose of or encumber any
         such plants or any of its real or personal property or any interest therein upon such terms as
         it may determine;
     8. In connection with loans from the New York job development authority, to enter into
         covenants and agreements and to comply with all the terms, conditions and provisions
         thereof; and
     9. Otherwise to carry out its corporate purposes and to foster and encourage the location or
         expansion of industrial or manufacturing plants in the City of Buffalo.

        The power to purchase or lease real property owned by the City can be an important asset in
a City of Buffalo economic development project because it can alleviate some of the constraints on

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alienating City owned real property. Regardless of any local law(s) to the contrary, such sale or lease
may be made without appraisal or public bidding for a price and terms agreed upon between the
municipality and the LDC. However, before such sale or lease is authorized, a public hearing must
be held by the local legislative body, to consider the proposed sale or lease.

         The income and operations of BERC are exempt from New York State taxation.
Additionally, the IRS has determined that BERC is exempt from federal income tax. Further, the
NYS Commissioner of the Tax Department has indicated in several advisory opinions that the
involvement of an LDC in the construction and/or finance aspects of a qualifying project may allow
for an exemption from NYS sales and use taxes and/or mortgage recording taxes. The mortgage
recording tax exemption and sales and use tax exemptions are tools that an LDC can use to provide
significant savings/financial assistance to economic development projects. Unlike IDAs, LDCs are
not specifically exempt from real property taxes and therefore cannot provide real property transfer
tax exemptions or PILOT arrangements.

   1. NYS Mortgage Recording Tax Exemption - The NY Commissioner of Taxation and
      Finance has held that since the income and operations of LDC’s are tax exempt, mortgages
      given to or by LDCs are tax exempt as well. Therefore, if BERC participates in an economic
      development project as a mortgagor, it is possible to save the cost of mortgage recording tax

   2. NYS Sales and Use Tax Exemptions – The NYS Department of Taxation and Finance
      issued an Exempt Organization Certificate to BERC which permits the organization to be
      exempt from payment of NYS and local sales and use taxes. This tax savings can be applied
      to economic development projects by the following means:

           a. Agency Contract Exemption – Under certain circumstances, BERC may contract
              with an agent wherein the agent purchases goods on behalf of BERC and the
              purchase is then tax exempt. Among other procedural requirements, the purchases
              must be billed directly to BERC (or to the agent on behalf of BERC), and payment
              must be made directly by BERC (or by the agent from a special fund created by
              BERC for this specific purpose).

           b. Capital Improvement Exemption – Purchases of materials that are incorporated into
              BERC-owned realty as capital improvements are exempt from sales and use tax
              (provided BERC owns the property before the improvements are made). The
              exemption extends to purchases by contractors, subcontractors and repairmen for
              incorporation into BERC-owned real property. Therefore, if BERC holds fee title to
              real property in an economic development project, a sales tax exemption can be
              realized for purchases concerning capital improvements to that property. The
              exemption does not apply to equipment rentals or materials that do not become part
              of the structure.

       BERC has not aggressively utilized its mortgage recording tax exemption as a tool to
provide financial assistance to economic development projects. In connection with mortgage

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secured loans, BERC saves the borrower the tax associated with recording the mortgage.
Outside of a mortgage loan scenario, this tool is not utilized. Likewise, BERC has not
aggressively utilized its sales and use tax exemption as a tool to provide financial assistance to
economic development projects. In connection with the former CARE grant program, BERC
would hire the contractor to make improvements to various businesses and the contractor would
not have to pay sales tax because its purchases were made on behalf of BERC. Outside of the
CARE grant scenario, this tool is not utilized.

        With respect to BERC’s staffing, the organization currently has 21 full time employees that
carry out the daily operations of BERC. Additionally, in November 2008, in order to ensure the
seamless continuation of operations of the Broadway Market in the wake of the untimely departure
of the Market’s former management company, BERC hired the existing Broadway Market
porters/maintenance staff. As a result, BERC currently has 2 full time employees who carry out
daily operations of the Broadway Market. The remaining BERC employees are City grant funded
employees who carry out daily operations of the City and/or part time employees. By November
2009, BERC’s total personnel cost as a percentage of revenue was approximately 30%. The group
did not review BERC staff but like the board, the positions need to be redefined and the staff
should reapply for the jobs.

         BERC’s active CDBG allocation is approximately $4.8 million dollars. It is important to
note that in years prior (primarily during the 1990s) BERC issued millions of dollars in HUD 108
loans (the “108s”). The108s were funded with HUD dollars and guaranteed by the City’s CDBG
allocation. Many of the 108s are now in default and the City is responsible for repayment to HUD
under the guarantee. As a result, approximately $2,915,000 of the active allocation to BERC was
required to be turned over to HUD for repayment of the 108s. That leaves approximately 40% of
the entire allocation available to fund current programs and operations, and results in scarcer
resources to support current loan and grant activity. The net allocation of CDBG funds available
for programming has declined from approximately $5 million to $2 million over the past five years.

       BERC has three business segments; Commercial Lending, Community/Neighborhood
Development (Grants, Technical Assistance, Empire Zone and Renewal Community Incentives)
and Real Estate (Owns and manages various properties, some of which are business incubators).

        The real estate component was established primarily to serve as a revenue producing vehicle
to support the lending and neighborhood development programs. The Community/Neighborhood
Development division provides grants and technical assistance to BERC customers. Additionally, it
administers the Empire Zone and Renewal Community programs on behalf of the City. Internal
personnel have reviewed the primary grant program (Commercial Area Revitalization Effort
“CARE”) as well as the primary technical assistance program (Entrepreneurial Assistance Program
“EAP”), deemed them ineffective, and will be discontinuing them. The lending component, which
offers term loans and a line of credit facility, is largely focused on microenterprise development.
These loan products generally support development of business opportunities for underserved
entrepreneurs and other businesses that have capital needs that a traditional lender will not meet.
Additionally, in larger projects there is often a financing gap that the primary lender will not cover.

    BERC’s technical assistance delivery is unstructured and informal. EAP was its former technical
assistance program however it was discontinued due to poor results. BERC’s clientele consists
primarily of new and early stage microbusinesses. As such, it is imperative that these businesses
receive technical assistance along with financial assistance in order to enhance their opportunity to

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DRAFT 02.10.10
succeed and provide for maximum job creation/retention. Technical assistance can be provided in
the form of acting as a liaison and linking BERC clientele to services successfully administered by
other community providers. While BERC provides this type of technical assistance in connection
with its lending and real estate operations, the delivery is ad hoc, informal and results are
unmeasured.


(BURA info to come).

         The BUDC is housed at the Erie County Industrial Development Agency (ECIDA) as the
result of the 2003 Memorandum of Understanding (MOU) between the City, BERC, ECIDA,
BUDC, and the Buffalo Niagara Enterprise (BNE) setting forth the roles and responsibilities of the
parties in an effort to coordinate and streamline economic development activities within Erie
County. The focus of BUDC has been on public industrial land development and management.
The Mayor is the Chair of the BUDC Board and the Executive Director of OSP is a board member.
Currently the City has no personnel costs for the staff at BUDC which is supported by revenue
generated by land sales. ECIDA does provide general overhead support: office space, phones,
office equipment, etc.

         These recommendations represent the opinions of the group members. The group will
remain available to work with the new Executive Director of OSP to further refine the structure,
staffing, program delivery, and operations to implement a solid economic development delivery
system. Input should also be gathered from parties interested and impacted by the City’s economic
development process and policies. In addition, the coordination between the City’s economic
development functions and other regional economic development organizations such as the Buffalo
Municipal Housing Authority, Buffalo Niagara Enterprise, Buffalo Niagara Partnership, Empire
State Development Corporation, Erie County and the Erie County Industrial Development Agency
should be examined to establish a more impactful regional economic development delivery system.




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