Providence Stiffed for Millions in Loan Money
Monday, October 24, 2011
Twenty-five percent of the small business loans given by Providence’s economic development program are at least 90 days past-due, leaving the city on the hook for more than $3.3 million, GoLocalProv has learned.
The Providence Economic Development Partnership (PEDP), an initiative that includes 16 small business owners or politicians and is chaired by Mayor Angel Taveras, is currently stuck with a tab of $3,358,637.67 in delinquent loans, according to Joshua Teverow, the lawyer who represents the PEDP.
Teverow said that doesn’t necessarily mean the city has written off the delinquent loans and because they are personally backed by the business owner, the only way to get out of repaying the loan is to file for bankruptcy. He attributed the large number of past-due loans to the state’s weak economy, noting that in his 20 years representing the group, the default rate is “as high as it’s ever been.”
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But despite his insistence that the city will do whatever it takes to collect on the defaulted loans, it hasn’t always had success in doing so. According to a list Teverow provided to GoLocalProv, the PEDP is currently actively pursuing collections from 11 business owners that received loans, including a Ward 9 City Council candidate, the owner of what used to be Fatty McGee’s restaurant downtown and the owner of Stanley’s Famous Hamburgers.
The Council candidate is Onassis Martinez, the son of longtime Dominican leader Victor Martinez. Teverow said Martinez and a partner took out a $70,000 on a business called KO Shoe Company, which was located in the Geller’s Shoes store on Washington Street. The business went belly up and Martinez’s partner filed for bankruptcy, leaving Martinez stuck with the tab. Teverow said the PEDP is currently in the process of obtaining a judgment against Martinez.
When reached Sunday, Martinez said the loan was from his past company, which he says he got out of “in like 2005 or ‘04.” He referred GoLocalProv to his lawyer, whom he claimed was House Speaker Gordon Fox.
Fox said he is not representing Martinez on this matter.
Delinquency Rate Is High
The nature of the loans given by the PEDP tends to make them a risky endeavor for the city. Business owners must be turned away by two banks in order to qualify, Teverow said. The funds for the program are awarded to the city through the Community Development Block Grant (CDBG) issued by the U.S. Department of Housing and Urban Development.
The Board of Directors, which is appointed by the Mayor, votes on which loans to approve and which ones to turn away after each application is vetted by the PEDP staff. According to PEDP Executive Director Thomas Deller, the program is often a loan of last resort.
“Therefore everyone who gets a loan from us has either been rejected by two banks or has been offered a loan that is not sufficient to do the project,” Deller said. “As a result our loans are very risky. Second, given this risk and the present economic climate, we have greater potential for delinquency. With that said, 25% delinquency is high. However, it is not our goal to put people out of business, but to give them every chance to succeed. We are concerned, we will work with our clients to give them every opportunity to succeed and we will continue to evaluate new loans to ensure that we aren't taking too much risk.”
Do They Create Jobs?
City Council President Michael Solomon, who sits on the Board of Directors, said he hopes Jim Bennett, the city’s new Economic Development Director, will help revive the city’s business development efforts and address the PEDP.
"With high unemployment and vacant space throughout our city, economic development needs to be a top priority for the City of Providence,” Solomon said. “Fortunately, the Taveras administration recognized this and appointed Jim Bennett to a cabinet level post to oversee economic development. It is my understanding that Director Bennett is in the process of assessing Providence's economic development menu, which includes the PEDP loan program. I look forward to hearing his recommendation when the assessment is complete.”
Solomon said he understands the risk associated with the PEDP loans and his hope is that they are creating jobs for city residents.
“While the 25% default rate is cause for concern, the reality is that there is certain amount of incumbent risk with any economic development project,” Solomon said. “This is especially true with regards to PEDP loans where the applicants have already been rejected by private lenders, which is a prerequisite for qualification. However, the bottom line is jobs and when Director Bennett completes his assessment the crucial question will be "do these loans help businesses create jobs for Providence residents?”
Loans Could Be A Win-Win
The combined PEDP portfolio (including the delinquent loans) is about $13,339,133.18 in principal according to Teverow, who said the program has helped create and maintain “hundreds if not thousands” of jobs in the city.
Councilman David Salvatore, a member of the City Council’s Finance Committee, said he understands the need to give out loans.
“As local leaders, we recognize the calculated risk that the city runs by offering PEDP loans, however; that does not outweigh the risk of doing nothing at all,” Salvatore said. “Conversely, while there are some financial institutions that might not have the borrower's best interest at heart, the majority of which, however, are often hampered by excessive regulatory policies.”
Still, Salvatore said more needs to be done when screening loan applicants.
“I think a structural analysis is appropriate when screening applications for PEDP loans,” he said. “Additionally, a personal endorsement, such as making loans more secure by assessing assets, shows commitment and passion from the borrower. Let's provide business with the tools to grow, while we invest in our own community. These loans, if structured and sustained properly could be a win-win.”
No Guts No Glory
But Teverow defended the PEDP’s practices, noting that many businesses would not have been created without help from the city. He acknowledged that the default rates are higher than ever before, but said he believes the economy is the reason, not a failure to correctly assess applicants by the PEDP.
“It’s no guts, no glory,” he said. “The nature of economic development is that you’re supposed to take a chance.”
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