PEDP to renew lending

When city officials explain why they didn’t terminate the Providence Economic Development Partnership’s troubled loan program this year following a damning federal report, they point to businesses such as Providence Specialty Products, owner of Narragansett Creamery, that it’s helping grow.
The recipient of a $250,000 loan in May after being turned down for financing by banks, Providence Specialty Products has 30 employees and expects to add between 10 and 15 more over the next three years as it expands.
“It made capital available to us for growth in a very difficult economic time when … access to capital is limited,” said Providence Specialty Products owner Mark Federico. “It’s helping us expand a new yogurt line, add new equipment and give us working capital.”
Although there’s no guarantee Narragansett Creamery will grow as it expects, the business’ size and existing sales make it a contrast to many PEDP loans made since 2003 to small operators with thin track records, minimal assets and poor prospects for generating significant employment.
In a report issued in July, the U.S. Department of Housing and Urban Development, which funds the loan program, cited PEDP for poor underwriting standards, inadequate monitoring and misusing administrative resources.
So to save the program, Providence Mayor Angel Taveras vowed to transform it.
He started by requiring approval from the PEDP board of directors, which he chairs, for all loans, stripping PEDP staff of the authority to make loans up to $75,000 and dissolving a committee that had approved lending between that level and $150,000.
Then the city wrote off $1.5 million worth of bad loans it had kept on the PEDP books for years despite long-term delinquency and little prospect of repayment.
HUD strengthened its hand as well, requiring PEDP to seek its approval for all loans and hiring a consultant to work inside PEDP to clean up administration and oversight.
After being frozen in the wake of the HUD findings, the loan program is slated to relaunch this winter with both better financial controls and a smarter lending strategy, said James Bennett, now the partnership’s executive director as well as the city’s economic-development director.
“We have addressed a number of the issues HUD has had with the bad loans, written off loans and made the process more transparent,” Bennett said. “We are strengthening the internal procedures with financial people experienced in underwriting loans, and we are still funding the creative economy. By the end of this year, we will restart the loan program and feel comfortable where it is.” As an example of where the loan program is headed going forward, Bennett cited the Providence Innovation Investment Program, launched last year through PEDP, which offers technology startups that agree to stay in the city for at least one year $50,000 convertible loans.
The Providence IIP, which piggybacks on bets made by the Betaspring business accelerator, Slater Technology Fund and Cherrystone Angel Group, has already invested in 24 local startups, with another 13 from the latest Betaspring class ready to go.
Previously, restaurants and bars had made up a large part of the PEDP portfolio, but Bennett said there is now a conscious effort to diversify and finance companies with good growth potential.
“We don’t want to concentrate our program in one area like in the past, where there was a heavy concentration in restaurants,” Bennett said. “We are still a lender of last resort and we will still finance restaurants, but we want to make sure they are successes.”
Bennett, who has a lengthy business background and was president of an electronics distributor before joining city government, replaced Thomas Deller, the longtime city planning director, as PEDP executive director. Deller has since moved on to become director development services in Hartford, Conn.
Bennett said he welcomes having PEDP loans vetted and approved by HUD and said direct involvement by the federal agency in the city program will continue indefinitely after it is relaunched.
The city has also hired a retired banker, Thomas Hoagland, to help out with PEDP on an hourly basis, Bennett said.
The PEDP was formed in 2003 as a nonprofit arm of city government dedicated to business growth and through which Providence’s share of federal Community Development Block Grants could be dispersed. Providence received $5.1 million in direct CBDG funding in fiscal 2011.
As of November, the PEDP was managing $15.7 million in loans and has up to $6.8 million to draw against to make new loans during the fiscal year ending June 30.
Like most public financing programs, PEDP is a lender of last resort – businesses are only eligible for loans if they have been rejected by two banks – so their loans are inherently riskier than private financing. But according to the HUD findings, the PEDP default rate between 2003 and 2011 soared to an unmanageable 60 percent, and the city has never attempted to seize property connected with a PEDP loan to recoup losses.
In addition, HUD determined that some loan recipients had been ineligible for the program and some of the administrative expenses charged by PEDP staff, of which there was inadequate record keeping, may have been excessive or ineligible.
This past summer, HUD found up to $1.5 million in potentially ineligible spending that it said the city could be liable to repay.
In its response to the HUD report and corrective-action plan, the city produced documents it said supported the eligibility of $947,000 of the questioned expenditures, reducing the potential liability to $552,673.
HUD has not said how much, if any, of the city’s potential repayment liabilities the new documentation relieves.
Rhonda Siciliano, spokeswoman in HUD’s Boston office, said the agency was in negotiations with the city over repayment and expects to “come to a final number very soon.”
HUD is paying ICF International of Virginia $375,000 to provide technical assistance to Providence for administration of its CDBG grants, although Siciliano said the help extends beyond the loan program. She said there was no time frame for how long the firm would be in place in Providence.
On whether HUD considered killing the PEDP loan program, Siciliano said that’s something the agency has done in other places in the past, but opted against it in Providence because the city’s response seemed promising.
Asked what kind of default rate should be expected at a financing program such as PEDP, Bennett said he wasn’t sure and expected every loan in the partnership’s portfolio to be repaid, even though that’s not realistic.
“By diversifying you limit the downside,” Bennett said.
With the economy slowly improving, Bennett said he see banks becoming more aggressive with their commercial lending, and he wants PEDP to be a part of an environment with much better access to capital.
“We are close to being back in business and want entrepreneurs to come see us,” Bennett said. “We not only lend, but we are a networking organization. We have $6.8 million in liquidity to get out on the street.” •

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