Loading...
HomeMy WebLinkAboutMINUTES - 07082003 - C113 ',, ,� ir/1 •l Contra y C�; Costa TO: BOARD OF SUPERVISORS County �'Sra FROM: Dennis M. Barry, AICP Community Development Director DATE: Judy 8, 2003 SUBJECT: PROPOSED SETTLEMENT OF LOAN MADE THROUGH THE COU'NTY's COMMUNITY DEVELOPMENT BLOCK GRANT SMALL BUSINESS AND MICROEN'TE'RPRISE LOAN PROGRAM SPECIFIC REQUEST(S) OR RECOMMENDATIONS(S) & BACKGROUND AND JUSTIFICATION RECOMMENDATION APPROVE and AUTHORIZE the Deputy Director-Redevelopment or his designee to accept a promissory note as payment in full for the obligation to the County's Community Development BlockGrant (CDBG) Small Business and Mircoenterprise Loan program owed by LGF, Inc. FISCAL IMPACT No General Fund impact. The proposed settlement will result in the County having less CDBG money to loan due to reduced repayment. t CONTINUED ON ATTACHMENT: _XYES SIGNATURE: ,,-RECOMMENDATION OF COUNTY ADMINISTRATOR RECOIIiI' DATION OF B ARD COMMITTEE -APPROVE OTHER SIGNATURE(S): 1 ACTION OF BOA N July 8, 2003 APPROVED AS RECOMMENDED x OTHER t VOTE OF SUPERVISORS HEREBY CERTIFY THAT THIS IS A UNANIMOUS(ABSENT IV ) TRUE AND CORRECT COPY OF AN AYES: NOES: ACTION TAKEN AND ENTERED ON THE ABSENT:' ABSTAIN: MINUTES OF THE BOARD OF *District III'Seat VACANT* SUPERVISORS ON THE DATE SHOWN. Source: Bob Calkins, CDBG Program Manager (925) 335-1260 ATTESTED July 8, 2003 Orig. Dept. Community Development JOHN SWEETEN, CLERK OF cc: County Administrator County Counsel Auditor-Controller THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR n BY ''"° EPUT'�( BACKGROUND /REASONS FOR RECOMMENDATIONS CDBG Small Business and Microonterprise Loan Program: Funded through the CDBG program, the County has operated a small business and microenterprise loan program since 1982. The goals of the County's program are to provide gap financing to small businesses, and to create job opportunities for low- and moderate-income persons. All loans are subject to review for eligibility and national objective requirements under the CDBG program. Consequently, initial loan eligibility is based on the business satisfying the CDBG program's national objective of principally benefiting low- and moderate-income persons through job creation/retention. Loan applications are reviewed by the County's consultant based on established underwriting criteria. Funding recommendations are forwarded to the CDBG Loan Committee composed of a County staff person, a representative of the Small Business Administration, and a local Chamber of Commerce representative. LGF, Inc. Loan: Four years ago, Rapallos, a well-established deli specializing in ethnic Italian products and a manufacturer of quality ravioli in Pleasant Hill was sold to Joseph Frumenti, a long time resident of Contra Costa County, who at the time owned two restaurants in the County. With the help of Bank of Walnut Creek, Mr. Frumenti, formed LGF, Inc., and received a loan from the Small Business Administration (SBA)to purchase the ravioli business. By early 2002, LGF's annualized ravioli sales were increasing to significant levels with placement in Safeway Stores and some specialty grocers. Even though sales were expanding the operation was suffering from aging and inefficient production equipment, lack of adequate refrigeration and the manufacturing facility was poorly laid out. In June, 2002 LGF, Inc. applied for financial assistance under the CDBG Small Business and Microenterprise Loan program to help address their business needs. The LGF, Inc. loan package consisted of a $75,000 loan for a period of five (5) years at 4.75% interest. The proceeds were to fund continuous production and refrigeration equipment, tenant improvements and a marketing commitment. The public benefit of the CDBG loan included a total of eight jobs created or retained. The Loan Committee approved the request, and loan documentation was completed and fully executed on July 25, 2002. The loan was secured by a Loan and Security Agreements, Promissory Note, UCC-1 filing and the personal guaranty of Joseph Frumenti. Loan History: In the Fall of 2002, LGF, Inc. began to exhibit financial difficulties due to a general decline in the economy and its effect on both wholesale and retail operations, and costs associated with an unforeseen high level of product return. By April 2003, LGF, Inc. was on the brink of involuntary bankruptcy. The CDBG staff engaged the loan program consultant to work with the owner and his attorney with the goal of maximizing the CDBG program's recapture of the outstanding capital involved in the loan. The owner's business assets are being liquidated to satisfy the various lienholders. Present liens on these assets, in addition to the CDBG loan and various supplier debts, include the following: Bank of Walnut Creek (SBA Loan), US Bank (SBA Loan), Employment Development Department, broker, real estate taxes, Mello's Restaurant, rent, and escrow Proposed Settlement: The several properties which represent Mr. Frumenti's holdings are cross-collateralized and held as security by a broad range of senior and junior creditors (tax-liens, banks, landlords, suppliers, etc.). Rather than place the assets in a bankruptcy action, where all parties would suffer from substantially reduced values on the assets, the LGF, Inc. attorney has developed a settlement which is based on structuring a sale of all the assets, followed by a negotiated settlement with each creditor. On June 13, 2003 the County received a letter from the LGF, Inc. attorney, detailing the status of negotiations at that time, and asking that the County CDBG Program accept a promissory note ($25,000 @ 6% due in one year), as payment for its outstanding "secured junior lien". This represents a very substantial discount from the outstanding balance ($75,000+), however, the complexity of the situation added to the significant losses by the senior secured creditors(tax liens/banks) suggest that the County accept the proposed financial settlement, rather than risk losing its entire investment if the assets are thrown into bankruptcy court.