Thirty percent of the loans held by Buffalo's main development agency are delinquent, according to a new report that Common Council members start reviewing today.
The Buffalo Economic Renaissance Corp., stung by the recent closing of the Breckenridge Brew Pub and its default on $600,000 in loans, released the cumulative lending data for the first time today.
The data shows a 30.3 percent delinquency rate on loans that typically charge below-market interest rates. More than two thirds of the past-due loans are late by at least three months. Some of the loans date back to 1983 and many of them were closed in the late 1980s and early 90s.
But BERC President Alan H. DeLisle said most of the loans that are in arrears are smaller loans that amount to $1.8 million -- less than 5 percent of the agency's current $40 million portfolio of loans.
Nevertheless, some business experts said the agency's delinquency rate would raise eyebrows in the financial arena.
"A 30 percent delinquency rate would be way out of line for a commercial bank, where typically you might see 1 or 2 percent of all loans go bad," said Philip R. Perry, associate professor of finance and managerial economics at the University at Buffalo School of Management.
DeLisle conceded that there is a need to improve lending policies and revamp the mix of loans in the agency's portfolio. But he said it's unfair to compare BERC's 30 percent delinquency rate with banks.
"Everyone has to realize that we are a higher-risk lending agency. By our very definition, we're always going to have a higher delinquency rate than banks," he said.
Established in 1978 as the Buffalo Economic Development Corp., the quasi-governmental agency has lent $193 million since then through 11 separate programs. More than 80 percent of the funding has come from federal sources.
DeLisle, who took over as president in January, said the board passed comprehensive lending reforms three months ago that focus more attention on five growth industries, deemphasizing restaurants, retail and real estate development.
"I looked at the loan portfolio very carefully when I came in and there's certainly room for improvement when it comes to the type of loans we've been giving and our general lending policies," he said.
DeLisle underscored the necessity of targeting companies in sectors such as medical products, high technology, manufacturing, trade and tourism.
He cited the agency's plan to help Biosight Inc. of Orchard Park and five affiliated medical-product companies build a complex at Main and Virginia streets in the city's so-called medical corridor as an example of the agency's refocused lending priorities. BERC will lend the companies $300,000 to build a $4 million structure at the former Pollack Building site.
"This doesn't mean we aren't going to be giving any loans to restaurants. But the numbers indicate that we have to be more careful in the future," he said.
Delaware District Council member Alfred T. Coppola said he would be interested in seeing a list of the businesses that are behind in making payments. But attorneys for BERC refused to release the list, claiming the agency could face legal consequences.
"I am totally opposed to seeing the city lend any money to the restaurant industry," said Coppola. "It's not fair to the people who have been in business for years. The (BERC) should get out of the restaurant business," he said.
About 10 percent of all delinquent loans involve eating establishments. DeLisle said 39 percent of the past-due loans involve commercial real estate ventures and 23 percent involve residential housing projects launched by private developers.
Shortly after the Breckenridge Brew Pub closed in the city-owned Market Arcade, the Common Council called on BERC to disclose how many of its loans were delinquent.
University Council member Kevin J. Helfer said that while he understands the long-term economic benefits of providing city subsidies to some companies, he stressed the importance of making sure that the agency has effective collection procedures.
"The Breckenridge Brewery's default will mean that there are fewer funds available for future entrepreneurs," Helfer said.
The BERC has a five-step process for handling delinquent loans:
A loan officer calls each borrower who is late in making a payment, usually within one week of the payment deadline.
If the loan payment is still not made within 30 to 60 days, a meeting is scheduled to discuss the delinquency.
A default letter is sent within 60 to 90 days. The borrower is given 10 calendar days to cure the default.
If the loan is not brought current within the allotted 10 days, a demand letter is mailed.
If no response is received within five calendar days of the demand letter, the loan is referred to a collection attorney for court action.
Does DeLisle think the agency has been too lax with delinquent accounts?
"Our first goal is to work out an agreement. It's in everyone's interest to set up a repayment plan. But if our efforts are ignored, we move into the collection mode," DeLisle said.