March 25, 2012 Category: Commercial Real Estate
During times of economic troubles, individuals and businesses often struggle to make ends meet. Often, developers with optimistic intentions of improving impoverished areas of the community are faced with challenges when the economy heads to troubled waters.
Many area developers who were the recipients of a federal loan program to redevelop parts of downtown and Midtown Detroit are finding that paying back the funds they received for property developments is going to be more of a challenge than they anticipated.
Two of the Detroit businesses reported to be having a hard time with loan repayment is Westin Book Cadillac and the DoubleTree Fort Shelby. The lack of payments from these businesses has resulted in lost revenue for the City of Detroit.
According to information from city officials, the City of Detroit gets money in a block grant from the U.S. Department of Housing and Urban Development. Then the city turns around and issues loan funds to developers; these loans are known as HUD 108 loans.
According to the U.S. Department of Housing and Urban Development, Section 108 loans are specifically provided to for-profit companies focused on investing in community development. The areas benefiting from this type of investment must be comprised of at least 51 percent low to moderate income level residents
Since the mid-1990s, 14 out of 17 loans issued by the City of Detroit are in arrears for approximately $18 million. For its part, the Westin Book Cadillac project is arrears for $2 million for an $18-million loan.
According to the news report, the developers who received these funds negate having ignored their repayment obligation to Detroit’s government. In fact, the developers feel that the positive results stemming from their projects have contributed to the increased infrastructure in Midtown and more urban living in downtown areas.
According to the media report, one developer stated, “If we’re looking at these projects and what they meant and what has been accomplished, I don’t for a second doubt the value to the city.”
The trouble in this financial tangle lies in the fact that while the businesses may not readily have the funds to pay backs the loans; the arrears have to be paid from somewhere still. What that means is that the city will have to redirect other community development funds slotted for other projects to repay the federal government. For example, Detroit is anticipating $33 million to use for Community Development Block Grant projects, but $8 million is going to have to be used to repay the HUD loans.
Source: Freep.com, ” City of Detroit to step up collection efforts as most developers fail to repay HUD loans ,” John Gallagher, March 16, 2012