Understanding Government continues its work with reporters around the country, here featuring Jane Johnston of the Newburgh Advocate.

When Banks Say No, City Says Yes

Newburgh, N.Y., October 16, 2008 — With the downturn in the economy, LeylandAlliance, Newburgh’s waterfront developer, has had a hard time getting the loan they wanted from banks for their East Parmenter Street Project.  LeylandAlliance is looking to build 24 homes downtown, including eight homes to be built together with Habitat for Humanity.  So the developer came before the Newburgh City Council to request a project construction loan from the city’s Kingston-Newburgh Enterprise Corporation (KNEC) funds.

"With what’s going on with the credit market now, the banks do not want to lend against speculative building,” said Lou Marquet, executive vice president of LeylandAlliance, to the City Council of Newburgh, NY at their meeting September 8.  “All we’re asking you to do is to help underwrite the financing of the infrastructure of this project.”

The council voted 3-2 to grant the $300,000 loan.

Some on the council were asking whether the city should be in the role of lending money to a developer when banks are reluctant.

Councilwoman Mary Ann Dickinson, who cast a dissenting vote, said she believed “we should be as fiscally responsible as we can, which means holding onto our money right now and not lending it out. The people that are asking us for money are people that are supposed to be having money, and so why are they coming to the city?”

Councilwoman Dickinson had made a motion to table the loan resolution, which would have allowed more time to review financial statements from the developer.  Her motion was voted down, 3-2.

Mayor Nick Valentine, who voted in the majority to fund the loan, said “on this one it’s not really a risk.  I sat on the KNEC board from its inception. We were the last resort for some businesses at the time, when banks maybe said no, we were the ones that were supposed to say yes.  And part of [Congressman] Maurice Hinchey’s philosophy was, help out some smaller businesses, they’re going to hire locally.”  Mayor Valentine noted that many businesses in Newburgh and Kingston have benefited from KNEC funding.

“I think it’s a good use of it, it’s used wisely, and certainly between Leyland and Habitat, I think the risk is very low,” the mayor said.  I think it’s something that will not only come to fruition, but will be a useful mechanism for our city to use in jumpstarting some projects.”

The LeylandAlliance is Newburgh’s chosen waterfront developer.  They are redeveloping approximately 30 acres of land along the Hudson River that was leveled by urban renewal efforts in the 1970s.

In addition to the waterfront project, Leyland is collaborating with Newburgh’s Habitat for Humanity on the East Parmenter Street development.  Of a total of 24 buildings, 8 will be Habitat homes and 16 will be workforce homes – homes available to anyone but designed with the goal of providing reasonably priced in-town housing for workers like policemen, firemen, teachers, and nurses. The $300,000 loan will go toward demolition and infrastructure costs for this project, at a 5% interest rate.

History of high-risk loans

These days, $300,000 is real money.  So where’s it coming from?  The Kingston-Newburgh Enterprise Community, the brainchild of Congressman Hinchey, who arranged for the designation in 1994.  Money came from Washington – the Department of Housing and Urban Development (HUD) – and from New York State, which targeted for $3 million for economic and community development projects in specific census tracts with high poverty rates.  Kingston gave tax breaks to the Head Trauma Center and built the Edward Hodge Community Center.  Newburgh built the Washington Heights Community Center.

Dan Marsh of the National Development Council helped write the initial application to HUD in 1994.  “Kingston and Newburgh got together because both of them independently probably wouldn’t have qualified.  It was successful.  It was designed to provide benefit [for] public service, social service, economic and community development.” 

“The loan funds were designed as very high-risk loan funds,” Dan Marsh notes.  He called KNEC an attempt at “bold action to try to jumpstart some needed projects in the areas.  Quite honestly, I don’t know what ever happened to most of the loans.”

Department of Labor audit put funds on hold

But KNEC funds have a troubled history, and the corporation has been audited by the federal government.

KNEC received $1.9M in funding from the Department of Labor from 2001-2004 for job training programs.  In an audit from 2006, the Labor Department’s Office of the Inspector General found problems with ineligible program participants, or programs without participants at all, concluding with a request that $1.2 million be repaid to the Department of Labor.

“The problem was mostly factors of recordkeeping – programs of training for homeless people without addresses, or welfare recipients without sufficient credentials,” said Robert McKenna, Newburgh’s Economic Development Director.  McKenna stated that they have been negotiating with the Labor Department and that “all the questionable costs have been resolved.”

A spokesperson for the Department of Labor declined to comment, stating that the matter is under appeal by the auditee.

December of 2004 marked the end of the Enterprise Community designation, although KNEC had been disbanded two years earlier, when most of its funding had run out.  The remaining funds and loan portfolios, totaling about $500,000, were disbursed to the cities of Newburgh and Kingston to administer.

Newburgh hadn’t spent this money because of the ongoing Department of Labor audit, in the event that they would have to give some money back.

Leyland fits the criteria

Newburgh development director McKenna said that KNEC projects must meet the original criteria for the funds use: economic or community development within census tracts 4 and 5.  As a housing project, Leyland’s East Parmenter Street project appears to make the cut.

Asked to comment, LeylandAlliance’s executive vice president Lou Marquet said “The City of Newburgh is committed to the revitalization of neighborhoods and encouraging housing to meet the needs of people who live and work in the city. By providing funding to demolish existing residences that are beyond repair and install infrastructure and utilities for the new residences to be built, the City is demonstrating a vote of confidence for the East Parmenter Street project. The loan will be repaid as each homeowner takes ownership of their new home.”

According to McKenna, the loan will be paid back proportionally when Leyland sells each house.  Construction will be done in small groups of three to four homes, so they won’t go on the market all at once.  Construction is expected to start in spring of 2009.

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