Loans of last resort

11-dec-2008

BOSTON MAYOR Thomas Menino, who is usually averse to risk, is pushing a bold plan to jump-start stalled downtown building projects with $40 million in loans guaranteed by the city. This edgy strategy could work. In the event of failure, though, the city's poorest neighborhoods could lose out.

BOSTON MAYOR Thomas Menino, who is usually averse to risk, is pushing a bold plan to jump-start stalled downtown building projects with $40 million in loans guaranteed by the city. This edgy strategy could work. In the event of failure, though, the city's poorest neighborhoods could lose out.

Menino proposes to loan $40 million from the city's federal Community Development Block Grant allocation to developers who can't secure adequate financing to complete their projects. He cites the stalled redevelopment of the Filene's block in Downtown Crossing and the Kensington Place mixed-use project in Chinatown as possible beneficiaries of such a loan pool. Menino made a similar gamble with federal funds in 2003 when he provided $15 million in financing for the Westin Waterfront hotel. It paid off handsomely, giving a needed boost to the nearby convention center and earning the city $6 million in interest and fees.

Still, Menino's latest move is risky business, especially if the city gets sloppy with its underwriting standards. Equity investors have looked at some of the same projects Menino is looking at and found them wanting. The mayor is saying that he and his staff at the Department of Neighborhood Development, which manages the federal block grants, know better.

But what happens in the event of default? The feds aren't too worried because Menino will be putting up future community block grants as collateral for the loans. And that is money that is used to build housing in poor neighborhoods, spruce up neighborhood business districts, and provide services that make life more tolerable for Boston's poorer residents. If the city winds up servicing debt on bad loans to downtown developers, there could be millions of dollars less in future years for the poor.

City officials are saying the right things. They want to deal only with projects that are on the fast track with existing access to construction loans and equity financing. If so, the city might be willing to close a gap of 5 to 15 percent. Menino, at least, is standing up while most bankers are curled up in the fetal position.

Source:http://www.boston.com