Muniland Absurdity of the Year Award

September 22, 2011

The small town of Collingswood, New Jersey is facing some rough sledding in the next 90 days as it attempts to raise cash to pay off loan guarantees it made on behalf of a local condo and commercial development.

The private project, The Lumberyards, originated in 2006 with funding from TICIC, a consortium of New Jersey banks that provided $18,000,000 in construction loans to Lumberyard Condominiums. After completing about one third of the project the developers encountered weak demand when the housing market and economy softened following the 2008 financial crisis. The developers are now broke and have turned to the town of Collingswood, their municipal guarantor, to repay the loan to TICIC.

Moody’s downgraded the town six notches due to its weak financial position and the difficulty it will face in repaying the loan to TICIC. Moody’s picks up the tale:

The current loan amount outstanding is approximately $8.5 million with a maturity date of October 7, 2011. Lumberyard Redevelopment LLC and borough officials have asked the lender to extend the term of the loan by one year to October 7, 2012, as allowed in the most recent modified loan agreement. Collingswood officials have stated that the lender is requiring the loan to be paid down to $4 million before an extension is granted.

The developer seems to have returned a good portion of the loan monies to TICIC since most of the project was never built, leaving the loan balance at $8.5 million. But the lenders want half of the remaining loan amount paid immediately. Collingswood has very little cash so they plan on issuing $4.5 million in bond-anticipation notes to buy up vacant condos and rent them out for revenue to pay off the loan.

The reason I’ve been following this story is that last week I happened to read a report by a Gannet reporter, Jane Roh, about the financial troubles of the community. She has done an excellent job covering the story, especially considering she is not a financial reporter, but she got a key fact wrong: the Lumberyard loan guarantee is not part of the $27.8 million, but rather an addition to that municipal debt.

When I saw her report I wrote initially about Collingswood and said:

The Muniland Absurdity of the Year award goes to the small town of Collingswood, New Jersey for their guarantee of municipal bonds to fund a luxury condominium project that is incomplete and unsold. Moody’s recently gave the town a six-notch downgrade due to concern about the city’s exposure to the weak housing market.

Jane followed up with another article and asked me for some quotes about the town. My comments from the Courier Post:

“Generally a municipality would not be involved in financing a private housing project like that, especially a luxury one,” she said. “They generally put up a separate legal structure or housing authority, and 99 percent of the time they fund senior or low-income or housing for the disabled. It’s generally housing the private market doesn’t want to build.

“I’ve never seen anything like this.”

James Maley, a development consultant as well as the town’s longtime mayor, said the borough invested in the LumberYard because the private market would not. Previous projects, such as The Heights off Collings Avenue, have yielded returns for property owners, whom Maley regards as investors.

“I appreciate her views but has she ever come here? Come on over and take a look,” Maley said, referring to Long’s “award.”

Long said it wasn’t necessarily the borough’s mission to lead gentrification efforts. She also defended Moody’s, saying ratings agencies have actually allowed municipalities to have greater access to credit over the last year.

Long also said Collingswood has issued an unusually large number of bonds for a town its size.

“Every time you issue a bond, you pay a lot of fees. These are a lot of bonds with very high (banking) fees,” she said.

It’s extremely unusual for a community to involve itself so directly in a private project like Lumberyard. This perfectly illustrates the conservatives’ complaints about government overreach. Now the small town of Collingswood will be adding another $4.5 million in debt to their balance sheet in addition to a $650,000 bridge loan from 2010 (2010 annual report, page 18) and a $1,300,000 loan from the town’s capital fund (page 26) made to Lumberyard’s private developers. Mayor James Maley seems to be digging a deeper and deeper hole for the taxpayers on this money-losing project.

This small town with 11% unemployment is saddled with $6,500,000 in debt for a private condo project that has no property tax revenue — it’s currently offering 5-year tax abatements as sales incentives. For that reason and others the Lumberyard project in Collingswood deserves the Muniland Absurdity of the Year Award.

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In fact, the $650,000 is not the bridge loan but is authorized by borough ordinance 1480 (in 2010), which can seen on the town’s website. This money, purposed for completion of Buildings 3 & 4 at the Lumberyard, yet was never even washed through Lumberyard Redevelopment, LLC. The Purchase Order and Invoice for this expenditure indicate that the vendor is the Borough of Collingswood General Current Account.

The bridge loan, authorized by Resolution 2009-10, went to Lumberyard Redevelopment, LLC, which gave the money back in December of the same year so that the Borough could square its books. The invoices for these four purchase orders, totaling $1.3 million, read “Additional Funds per the Subordinate Mortgage Modification Agreement” and similar wording. There’s no evidence of materials purchased or work or services performed. The money never went back out from the borough to the project.

Another of the later bond ordinances for this project, Ordinance 1486, has invoices that detail construction loan interest and property tax payments. Definitely not the kind of stuff you want a municipality to borrow money for. That’s probably why Moody’s made such a harsh downgrade.

When the slick marketing is peeled away and the facts are evident, the borough position becomes much less tenable.

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