A Hummel Report Investigation
The board overseeing a taxpayer-funded loan program for Providence businesses has written off millions of dollars in bad loans - two-thirds made during the administration of former Mayor David Cicilline. Jim Hummel has obtained new documents showing Cicilline tried to bend the rules of a program that the feds later said took on too much risk. And we have details about the longest-running loan, which is being carried by a prominent elected official.
Click HERE to see the PEDP board minutes.
Click HERE to see the PEDP Write Off Loans.
Click HERE to see the PEDP Aging Report.
They hadn't written off a bad loan since 2008.
Even though the board of the Providence Economic Development Partnership had no hope of getting money back from more than two dozen businesses in Providence it had loaned money to - including one loan that had been delinquent for 13 years.
But with a new mayor chairing the board and a new executive director at the helm, the PEDP last month finally wrote off $1.5 million in delinquent loans to 29 companies - $2.2 million dollars if you add in the interest and penalties that accrued over the years. Sixty-five percent of the write-offs came from loans issued during David Cicilline's tenure as mayor.
The write-offs came at the insistence of the federal Department of Housing and Urban Development, which provided the loan money. A Hummel Report investigation last fall found that even though the loans are supposed to go to businesses that can't get financing elsewhere, the feds called the loan default rate during the Cicilline administration ``astounding.''
Officials have directed the city to begin writing off the bad loans if it hopes to get more money from the feds in the future.
The city's economic development director, Jim Bennett, last year took over control of the loan program from Thomas Deller - who admitted to us in an interview that in retrospect the city shouldn't have made some of the loans it handed out.
Deller: ``There have been some loans that you sit down now and look at them now and say `Why did anyone ever think this made sense?' because you look at some of the details of what's happened - we probably shouldn't have done this loan.''
Deller left in April to take a job in Hartford.
Bennett: ``Our client is HUD and we have to make them happy and they weren't happy for a while.
So we've done some things...''
Hummel: ``And why weren't they happy?''
Bennett: ``The processes were not in place. We had some aging loans that were not written off, which was inflating our default rate.''
The Hummel Report has learned Cicilline - who chaired the PEDP - tried to bend the rules of the program to take even riskier loans, according to minutes we obtained of a board meeting in 2009. At that meeting Cicilline said the city wasn't taking enough risk.
``Mayor Cicilline added that our default rate is 1.46% [s/b write-off rate], which is too low and indicative of not taking enough risk,''
according to minutes from the Dec. 2 2009 board meeting. Cicilline confused the 1.46 percent write off rate with the default rate (as noted by the secretary who took the minutes), when in fact the default/delinquency rate in one pool of money was more than 50 percent.
According to the those same minutes Deller tells Cicilline that because it was federal money, PEDP had to follow certain rules that limited its risk. That did not deter the mayor.
``Mayor Cicilline said to not feel limited by the rules, we can go higher up to have a regulation issued to allow this type of financing. Mayor Cicilline has a good relationship with the secretary of HUD.''
And that means the current PEDP, which has a new look under Mayor Angel Taveras, has had to mop up the mess Cicilline left when he ran for Congress in 2010. The default/delinquency rate has since decreased and the number of loans that are current increased.
Hummel: ``HUD has forced you to make changes, has it not?''
Bennett: ``They haven't forced us.''
Hummel: ``If you want more money you have to play their game.''
Bennett: ``Exactly, a lot of these recommendations are good business practices that we should...''
Hummel: ``Nothing you could have disagreed with? Anyway.''
Bennett: ``Nothing I could have disagree with.''
Bennett, who brings a private sector philosophy to the position, says the PEDP is going to stay away from the heavy emphasis on restaurant loans that marked the Cicilline era. The board last month wrote off loans to several of the businesses we highlighted last fall, including the Custom House Tavern and Stanley's Famous Hamburgers, which barely made a dent in its $100,000 loan. PEDP also wrote off a $20,000 loan to Mainelli's Restaurant made in 2009.
Bennet says the PEDP is now investing in a variety of startup companies, already loaning $50,000 to each of 16 companies, with more in the pipeline. Bennett is well aware of the publicity surrounding 38 Studios and quick to point out differences.
Bennett: ``They are start ups.''
Hummel: ``So how do you collateralize that? As we walk down this road - and 38 studios was not really on the front burner when we did this story back. How do how do we protect HUD's money? How do we protect the taxpayers' money going forward. What is the difference between these startups on a smaller level?''
Bennett: ``It's two different animals, completely different animals. We've set our investments up - and they're capped at $50,000 for the startups. And they're convertible notes, which is the big difference. In other words, and I don't want to get too technical here, but if they're successful and it will only take one company to be successful, the city of Providence or PEDP gets part ownership in that company. So it's a convertible note, we accrue interest and we are able to get a piece of the company when they do their next financing. Now of course all of them aren't going to be successful. In fact, some of them are going to go by the wayside. That's why we use the experts at Betasprings, Slater Funds and Cherrystones to weed out over 200 companies from all over the world this past session and try to get the best and the brightest.''
The Hummel Report has also found that the oldest loan on record - 24 years - was given to a business partly owned by Providence City Council President Michael Solomon, long before he became involved in politics. The Conrad on Westminster Street, received a $500,000 loan from the city in 1988 and $3.5 million in private financing to develop condos.
Hummel: ``What was the pitch in terms of an investment?''
Solomon: ``Condominium use, like any other pitch, it's a business deal. It didn't go the way we'd like it to go, but we stayed committed to it. And we're committed to seeing the project through.''
In fact, Solomon and his partners took out another $100,000 for a total of $600,000 - and still have a balance of $454,000 owed to the city. Solomon says they sold 20 units on the upper floors to pay off the $3.5 million in private financing; and last spring converted the unit they own on the ground floor into a restaurant - hoping to generate enough money to pay off the remainder of the loan over the next decade.
Solomon and his partners repeatedly went to the city asking for payment moratoriums and for the last two years have been paying interest only on the loan. This month they go back to paying down principal as well now that the restaurant is generating money.
Hummel: ``The fact is you are the council president, you have a loan with the city and this loan is going on 23 years now. And the fact is it's almost $450,000 of a $500,000 loan. So what about the person who says why isn't the city council president making good on the loan to the city?''
Solomon: ``I am making good, we're making our payments, we're making our obligation and I'm committed to seeing this thing through. We could have easily walked away from this project and we didn't we stuck with it. And I'm proud right now that we're able to keep paying on it. And we went through some tough times in the early 2000s, in the first 10 years and it's been tough. But we're committed to moving this project forward and I'm pretty happy right now that we set out to do economic development and that's what succeeded doing.''
Bennett says he is keeping a close eye on the remaining portfolio and that the PEDP will begin writing off loans it can't collect on twice yearly.
Bennet: ``After a certain period of time you're giving yourself a false sense of security if you're carrying an aged receivable over a thousand days. It's time to either deal with it write it off move on to the next one. That's the position that HUD took and we agree with it.''
In Providence, Jim Hummel for The Hummel Report.