Newark development agency review questions over $3 million in loans

By Naomi Nix | NJ Advance Media for NJ.com
Email the author | Follow on Twitter
on December 11, 2014

John Feely (L) and Greg Gilhooly(R), former co-owners of Port 44 Brew Pub in Newark pose for photos in 2010 in the brew house located on the 2nd floor of the pub. The pub was one of many businesses that have not repaid their loans from the Brick City Development Corporation, according to a forensic operational review requested by Newark Mayor Ras Baraka and the city council and obtained by NJ Advance Media.

 

NEWARK — In 2009, Chris and Ade Sedita —who served on former Newark Mayor Cory Booker’s transition team—received a $100,000 loan from the city’s chief economic development agency to bail out their failing art business.

The year before the couple was awarded the loan, financial statements indicated they only had about $1,000 in assets that were not part of their inventory, reporting that they had a negative net worth.

The loan was never paid back, and later written off in bankruptcy, according to a forensic operational review requested by Newark Mayor Ras Baraka and the city council and obtained by NJ Advance Media. The Seditas could not be reached for comment.

Funded by millions in taxpayer money Brick City Development Corporation was created under former Mayor Cory Booker's administration in 2007 to leverage city funding to spur redevelopment, produce jobs, expand existing businesses and lure new businesses to Newark.

But the highly-critical forensic review questioned the awarding of millions of dollars in loans, many of which were ultimately written off as uncollectable.

In fact, 40 percent of the loans in First Movers Fund loan program were delinquent or written off, according to the report. While 29 percent of the Urban Enterprise Fund loans were delinquent or written off by mid-August of this year. The total value of those loans is $3.4 million, according to the report.

The report also alleged that Brick City made little attempt to collect on the delinquent loans nor perform due diligence when evaluating potential borrowers—some with political ties to the Booker administration.

In a supplement to the report, the author, Keith Balla of O’Connor Davies, acknowledged that “the BCDC loans are being actively managed and, where, necessary, litigated to judgment.”

“We were informed that BCDC had been working with legal counsel to collect and recovery funds on the delinquent loans and continues to do so,” the supplement said.

Balla said while BCDC did make some efforts to collect on the loans in many cases the agency was not successful.

“The main thrust is the poor administration of loans,” he said. “That’s probably the biggest part of the overall criticism was…the administration of loans.”

Lyneir Richardson, the development agency’s former chief executive officer, challenged the report, calling it biased and factually flawed. Richardson said all BCDC’s loans were approved by a board of directors, and the agency used outside counsel to collect on non-performing loans.

“The City of Newark will unquestionably get a return on its investment from BCDC over time,” Richardson said in a statement.

“The over $2 billion of projects completed or underway will yield the City many millions of dollars in property taxes, payroll taxes, parking revenue every year for many years to come.”



A spokeswoman for Booker echoed similar sentiments. "All BCDC loans went through an underwriting process and were reviewed and approved by the BCDC Board of Trustees -- a high integrity, independent board consisting predominantly of representatives from the private sector who made lending decisions based on their assessment of the merits of each transaction," said Silvia Alvarez.

Otis Rolley, the new interim CEO of BCDC said the agency was taking lessons from the report to improve the corporation’s operations.

“The biggest take away is to make sure as the organization is moving forward that we have checks and balances,” he said.

The report arrives as the corporation is experiencing a major reorganization after the election of Newark Mayor Ras Baraka earlier this year.

Soon after The Star-Ledger reported in August that Baraka had appointed Rolley to be interim CEO, BCDC replaced its website with a simple message: “Brick City Development Corporation is undergoing a major reorganization. We will reemerge as one of the most effective economic development agencies in America.”

That organization will be renamed the Newark Economic Community Development Corporation, according to city officials.

Former BCDC board members have since left the board and the city council approved new board members in August and October, who will act as a transitional board to set up the structure for the new permanent board, Rolley said.

Baraka declined to say whether the loans given out were improper but said the report’s findings will be used to improve on Brick City’s operations.

“I just know we want to go in a different direction,” Baraka said.

The forensic operational review was ordered up by Brick City Development Corporation at the direction of Baraka and the city council after Baraka was sworn in as mayor in July.

According to the report, the review was prepared by evaluating election records, BCDC board minutes, all invoices and payroll records, 990 tax forms filed by Brick City, loan documents and other documents, and interviewing former chief financial officer Victor Emenuga.

BCDC paid O’Connor Davies, a CPA firm with offices across the metro region, about $30,000. The 52-page report also contains nearly 1,000 of pages of supplemental documents.

Since first completing the report in September, Balla has issued two supplements with revisions primarily about some of the BCDC vendors. Balla said his initial report outlined remaining questions and he revised the report after receiving additional information from the contractors and Richardson’s lawyers.

“The main thrust of our report relates to the loan programs and that really hasn’t changed,” he said. “One of my recommendations is they should look to operate the loan program like a community bank. That’s still my recommendation."

The report detailed a litany of delinquent loans and failed businesses:

· Brick City Bar & Grill received a $600,000 loan in 2009. Owner Izzy Sema only paid off $150,000 before the loan was written off due to bankruptcy, according to the report.

· Port 44 Brew Pub on Commerce Street received a $300,000 loan in July of 2009. But no tax returns of owners were evaluated during application process and the business went bankrupt, according to the forensic review. The brew pub’s property and all assets were already used as collateral with TD bank for the purchase of the property, and the business had no other security on the loan other than a personal guarantee. The loan has since been written off.

One of the former owners of the pub said BCDC carefully evaluated their application, but ultimately the business did not succeed and could not repay the loan because of a poor market and a delay in receiving certain business licenses. “We tried to make it work,” John Feeley said. “We invested a lot of our own money.”

· Chris and Ade Sedita received a $100,000 loan in 2009 to refinance business debt on personal credit cards totaling $67,000 and balances of business credit cards in connection with Newark Art Supply. The loan has been written off due to the bankruptcy of the borrowers. Richard Roper, a former board member, said the Seditas were referred to BCDC by another former board member. “That did not come to us from political connections.”

Lincoln Park Coast Cultural, a non-profit neighborhood development group, is 700 and 800 days respectively behind on payments for a $250,000 loan and an $87,453 loan from BCDC according to the report. The former executive director of the non-profit, Baye Adofo-Wilson, was appointed by Baraka to be the director of economic development.

In addition to the Seditas, representatives with Lincoln Park and the Brick City Bar & Grill could not be reached for comment.

According to the report, 40 percent of the loans given out under the BCDC’S First Movers Loan Fund, designed to help new Newark businesses, were written off or delinquent as of Aug, 15, 2014 .

“Loans were given out to applicants in distressed financial situation as bridge loans in anticipation of additional funding from government contracts or sales,” the review found.
“BCDC accepted second/third lien on personal properties of owners as collateral. These liens were later discharged when borrowers filed for bankruptcy.”


Likewise a third of the loans dished out to business owners under the Urban Enterprise Loan Fund were also written off or delinquent by mid-August, the report said.

Richardson said Brick City was willing to lend to small business during the recession, when banks wouldn’t, to spark development in the city. 



“Newark Arts Supply on Halsey and Brick City Bar and Grill are examples of other pioneers that stimulated corridor development on Edison Place and Halsey Street but did not survive,” Richardson said.

“We made judgment calls and were patient with borrowers to allow projects like the Marriott and Indigo Hotels to get to completion.”

BCDC’S FUTURE


Changes in the operation of the development agency are already being made, according to its new director.

The corporation plans to hire two loan officers to more effectively evaluate and keep track of the loans the agency gives out, Rolley said. And BCDC’s board will vote on new operating procedures for the agency, he added.

He also believes about half the loans that are currently delinquent or written off could be recovered.

“We are not going to be as big as we once were, but I would argue we’re going to be better,” he said.

Until then BCDC remains in limbo, or as its website currently puts it: “Newark’s New Economic Development Agency Coming Soon.”

Do you like this post?

Be the first to comment