City Restructures Small Business Loan Program

The City of Los Angeles and the Valley Economic Development Center have severed ties on a small business loan program that after two years has given out only $533,000 of the millions made available from the federal government. The city’s Community Development Department will take over the underwriting functions of the loans, a role the VEDC had handled. Whether that will result in more companies receiving loans remains to be seen. From the outset, the city and the VEDC did not see eye to eye on how the loan program should be administered. The city said it was following parameters set out by the U.S. Department of Housing and Urban Development, the agency providing the $15 million for the loans. The VEDC thought the city’s lending guidelines were too stringent, disqualifying companies that could have used the funds. A revamped program should be in place by mid-November, said Robert Sainz, assistant general manager for the Community Development Department. The city is underwriting the loans with the input from a credit committee, and is aiming to dispense $5 million in loans within six months, Sainz said. It hopes to lend the entire $15 million out by the end of 2012. “We do want to see the capital out there,” Sainz said. “We had to do it a better way.” Program: ‘Not reaching outcomes’ VEDC President Roberto Barragan said changes to the loan program were necessary. Without changes to make the money more accessible, the organization was not interested in staying in the contract, Barragan said. The restrictions on the types of businesses receiving loans and the use of the money were too strict, said Warren Cooley, vice president of operations for the VEDC. “We could never make it work from the standpoint of finding businesses to meet the criteria,” Cooley said. The city contracted the VEDC in late 2008 to provide the loans to businesses over a 20 year period. The money became available later in 2009, when city officials announced the loan program with great fanfare. In the 18 months that followed, only two companies received loans totaling $533,000. Powerline Control Systems in Northridge received the most money with a $450,000 loan. “It was not reaching the outcomes that either side wanted to see,” Sainz said. A Sept. 2 staff report from the Community Development Department to the city council’s Jobs and Business Development Committee detailed the causes for not meeting the program’s goals. These included not making the program citywide; other lending sources available to small businesses; and a lack of confidence in making investments in employees and equipment. In March, the VEDC had suggested changes to the program that included the organization putting up $1 million of its own money to cover any losses from the loans. The center also offered revisions to allow for a wider use of proceeds, more eligibility more types of businesses, and more equitable collateral requirements. “This, along with VEDC assuming the risks of losses, would have allowed $10 million in small business lending to occur over the past two years,” Barragan said. The VEDC never heard back from the city about those revisions, he said. City ends VEDC contract The CDD staff report outlined how restructuring the loan disbursements would work. The program will limit loan amounts to $50,000 and $450,000 to companies with gross revenue not exceeding $10 million. The CDD will screen the applicants and the Housing and Urban Development Department will give final approval for all loans. Collateral requirements, a point of disagreement between the city and the VEDC, have not changed but have been made more clear for the applicants, Sainz said. The committee approved terminating the VEDC contract on Sept. 6. Only Councilmen Richard Alarcon and Bernard Parks were present for the meeting. Alarcon’s district includes the northeast San Fernando Valley. Powerline CEO Marshall Lester attended the meeting and told Alarcon and Parks about the frustrating experience he had with the VEDC over certain terms in the lending agreement. With relations between Lester and the VEDC on the rocks, the city’s economic development division stepped in with a direct loan for Powerline, a manufacturer of energy-efficient lighting control systems. “We supported (terminating the contract),” Lester said. “The VEDC should not be allowed to do anything with anybody’s money.” The full city council backed terminating the contract on Sept. 16, and Mayor Antonio Villaraigosa signed the measure 10 days later. Restructured loan program Alarcon said the program’s performance was disappointing, but the restructuring should help it move forward with improved applications. “We are talking about jobs,” Alarcon said. “I believe that we can do better with the $15 million and that was part of our goal as we centralized (the program) within the CDD.” While no longer screening applications and underwriting the loans, the VEDC will stay involved with the loan program by referring applications to the city as part of the Business Source Center system. As part of that system, the VEDC will provide consulting services and workshops targeting existing businesses that have a potential to add employees or retain them, Cooley said. “It is all about job creation,” he said. Another change to the program is the creation of a five-member Credit Committee to review the initial underwriting of the loans, Sainz said. The committee members will be familiar with the underwriting aspects of business loans. “The committee will validate the underwriting we are doing at the staff level,” Sainz said. Barragan, however, was not convinced that having loans submitted through the six Business Source Centers would result in any improvement. “It is a mismatch of inexperienced loan originators and simply a badly designed program,” Barragan said. But Alarcon supported having multiple sources for loan applications as a way to improve the quality and consistency. “They are more competitive so they will make sure to meet the HUD standards,” Alarcon said.