The Rushford Council approved three recommendations by the Economic Development Authority at the Monday, September 25 council meeting. Affecting all current and future EDA loans are changes to the loan Modification/Forbearance Policy. The policy amendments aimed at reducing considerable time and effort by city staff in ensuring loan reporting requirements are met, to authorize rapid action after failure to comply with requirements, and to require more detailed financial analysis in order to apply for debt restructure.
It was noted by staff that the purpose of the policy remains to accommodate businesses with legitimate hardships. “Continuing to make payments on a loan is a priority with Rushford EDA and the loan modification is the first tool to consider when a business demonstrates a hardship. It can include, but is not limited to, temporarily reducing payments and/or interest rates.”
“Forbearance also allows the EDA to modify a loan to accommodate a hardship. It can include but is not limited to temporarily postponing payments on loans. However, interest continues to accrue, and when the loan modification or forbearance expires, the unpaid interest is added to the principal balance of the loan,” states the policy. Forbearance periods are allowed for up to 12 months, but must be filed in writing 60 days prior and are subject to quarterly financial reviews and Small Business Development Center Financial Analysis.
“They’ve enhanced and cleaned up the documents. There’s a number of aspects that’ll make it easier to track and follow,” said City Administrator Tony Chladek. The recommendation was approved unanimously.
Related to the same topic, the council once again took a look at issues with the EDA loan and forbearance to Hypersonix, formerly Rushford Hypersonic, LLC. In December 2007, the EDA first approved allowing then Rushford Hypersonic to apply to utilize Category 2 funding for businesses not directly affected by the flood. The non-forgivable loan was contingent on matching funding from a private source and meeting all state criteria for the loan category. At the time, company founder Dan Fox and then City Administrator Block noted the purpose of the loan category as boosting local economy and job availability.
By the following January, the council debated the company’s $500,000 loan request. The amount was the maximum that could be awarded to one company. City Attorney Terry Chiglo argued the business was in in operation at the time of the flood and suggested the city consider this business under former EDA rules. A vote on the application was postponed.
The funding was finally approved in 2009. Additional funding was provided to the company from a Southern Minnesota Initiative Fund (SMIF) loan and from a private investor. The company sought another loan in the amount of $70,000 in September 2010 that was eventually denied.
Then, in August 2013, the EDA recommended the city approve a $145,000 subsidy loan to Rushford Hypersonic for the financing the low-scale production of products for distribution. Previous funding had been utilized, according to the company, for research, design, development, and fine tuning for testing. The new amount was requested to fund a carousel component to begin production of coated drill bits for industrial use. The loan was controversial and debated by the EDA, council, and the community.
The company indicated it had $2 million invested in research and development and that the additional funding would simply start the revenue stream. Company President Jay Skranka stated the company anticipated cranking out bits in 60 days, with an additional 30 days to fine tune the process, with a goal is to create 10,000 coated drill bits per eight-hour shift, equating to a $40,000 a month profit to the company. City Attorney Terry Chiglo directed that it be certified that the city would be first in collateral in case of liquidation and that the company comply with the EDA loan policy.
In December 2014, the company requested and was approved for a 12-month loan forbearance until January 2016. A year later it requested an additional 12 months, and after review, was granted six months. It was noted at the time that the company’s move out of Rushford and into Winona was a violation of the agreement, but the agreement was amended due to size constraints of the former Rushford facility, as well as cost savings to the new space.
The forbearance period expired July 1 and it was noted by the city that no paperwork or requests had been received from the company. A letter was sent to the company giving notice to cure the default by September 21 or the loan would be referred to the city council for action. To date, the company owes the city $645,000, plus accrued interest for two loans. In total, with loans to RINTEK and SMIF, they owe $1,221,738. As of the council meeting, no payment or paperwork had yet been received. “I met with them and they had nothing to show us,” stated Administrator Chladek. “They have nothing to cure the default and no recommendations to us. They’re not in any position to provide financials and are fully engrossed in their product. They’re starting to make some breakthroughs, but there’s no product to market or sell.”
Councilor Terri Benson, who also sits on the EDA, noted that at this time there is no real recourse for the city other than to let the company put its energy in trying to create a useable product and thereby generate revenue in which to repay the city. “I struggle with the amount of money, but nothing’s going to change, at least for now. According to City Clerk Kathy Zacher, items that were listed as collateral for collections are no longer worth the value.
“The more we push them, the more they spin doing things we want. We’re spending so much time asking them for things they can’t give us,” added Benson. “Maybe the dust will settle and we will get something. We’ll focus on something productive.”
“Maybe they feel like they’re off the hook,” said Zacher. “It’s not fair to the other loan holders.”
Administrator Chladek offered several options including a motion to lay the question on the table; sending the matter to collections, which could result in a ruling, but no way for the company to repay; sending the matter back to the EDA, which could result in the EDA spending additional time and money; amending reporting requirements to be less burdensome, but still accountable; and writing off the amount as uncollectable. The last option appeared to be off the table for the council.
According to a letter from the EDA to the council, the EDA believes that tabling the item the best measure. By sending to collections, the city would spend additional money on legal action and “end up with nothing but creating a reputation for making bad loans and compounding it by creating a legal adversary or bankrupting the business venture.” It was also noted that by continuing to collections the it would “likely scare away Hypersonix’s current and future possible investors.” SMIF has loaned $200,000 to Hypersonix and has taken a similar ‘sit back and wait’ approach.
“They have literally thumbed their nose at us,” said Councilor Mark Honsey.
“We’re laying it on the table. Let’s wait and see,” suggested Councilor Jim O’Donnell. “We’ll keep an eye on them to be sure they don’t close up shop and walk away.”
The preliminary, maximum levy for 2017 has been set at $867,000. The amount, which cannot be raised, but can be reduced, will be finalized and certified to Fillmore County December 26.
In other news, the council considered the contribution of $5,000 in EDA funds for the purpose of upgrading the Public Access Channel. The Rushford Peterson Valley Chamber of Commerce is in the process of securing funding for the purchase of a $13,750 system, to be owned and operated by the city and housed at the new R-P School facility. The system will allow audio to be added to current programming, as well as the ability to add scheduled programming and additional feed capabilities.
According to Chamber Director Jennifer Hengel, the system will allow for recorded and edited informational and educational development, including coverage of news, sports and community events, public health information and videos from the state. Partnership with the school and the possible development of a technology team, overseen by R-P Technology Director Corey Mattson, is anticipated. The R-P Booster Club is contributing $5,000 to the upgrade and additional sources are expected to cover the cost.
“It’s a win-win. It’s a no brainer for me,” said Councilor Benson.
“You make it available and people will watch it,” added Mayor Chris Hallum.
“We’ve fallen short on this for a long time,” added Councilor O’Donnell. The council voted unanimously to approve the monetary contribution.
The next regularly scheduled council meeting is Tuesday, October 11, at 6:30 p.m., at city hall. Please note the day change to accommodate the Monday holiday. The public is encouraged to attend.
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