DATE: August 15, 2023
TO: Mayor and City Council
FROM: Assistant City Manager
SUBJECT: Adopt a Resolution Authorizing the Transfer and Appropriation of $100,000 from the General Fund to the Community Development Block Grant Fund (Fund 225) for Repayment of the Russell City Distillery Loan to the Department of Housing and Urban Development
RECOMMENDATION
That Council adopts a resolution (Attachment II) authorizing the transfer and appropriation of $100,000 from the General Fund to the Community Development Block Grant (CDBG) Fund (Fund 225) for repayment of the Russell City Distillery Loan to the Department of Housing and Urban Development (HUD).
SUMMARY
In 2014, the City issued a $100,000 CDBG small business loan to Mr. Geoff Harries, owner of the Russell City Distillery (RCD) located at 22549 Foothill Boulevard. To comply with CDBG requirements for economic development activities, the loan terms included a requirement that at least 51% of the staff hired and/or retained by the borrower be low- to moderate-income individuals. The loan terms also required that the borrower report demographic information, including race, ethnicity, and income level, to City staff. The borrower never opened the business and never provided any of the required information, preventing the City from completing the activity in line with HUD’s requirements. The loan terms also include a lien on the property to ensure the City is reimbursed should the borrower default on the loan. The City issued a notice of default in October 2022.
HUD recently issued updated guidance for closing out activities that were initiated before 2015 and has prompted the City to close the RCD loan activity. Since the business never opened, the City cannot close the activity and must return the funds to HUD because the activity failed to meet a HUD national objective. Following discussion with the City’s HUD representative, staff recommends that Council authorize the transfer and appropriation of $100,000 from the General Fund to the CDBG Fund (Fund 225) to repay HUD for the incomplete RCD loan activity. The General Fund will be replenished if and when the City recovers the original loan funds from the borrower.
BACKGROUND AND DISCUSSION
As a CDBG entitlement jurisdiction, the City of Hayward receives approximately $1.5 million from HUD each year for eligible CDBG activities. In 2014, Council adopted Resolution 12-051, which included authorization of small business loans through an economic development revolving loan fund. Through that activity, the Economic Development Division issued a $100,000 loan to Geoff Harries, owner of the Russell City Distillery (RCD) located at 22549 Foothill Boulevard, for economic development activities eligible under the CDBG regulations.
The terms of the loan include a requirement that the borrower commit to hiring and/or retaining low- to moderate-income employees, so that 51% of those hired and/or retained are individuals making no more than 80% of the area median income (AMI). The borrower was also required to provide demographic information, including race, ethnicity, and income level of full- and part-time employees hired and retained to work at RCD.
Additionally, the loan terms include a lien on the property, ensuring that the City will be reimbursed the loan amount should the property be sold. As of this report writing, the business never opened for its intended use and the borrower never provided any of the required data to staff. The borrower has listed the property for sale. The City issued a notice of default on the loan to the borrower in October 2022 and did not receive a response.
In December 2022, HUD released updated guidance for closing out activities initiated before 2015 and prompted the City to close out the RCD activity from 2014. As the business never opened and the CDBG requirement to hire low- to moderate-income individuals was not met, the activity failed to meet a CDBG national objective, and the City cannot close out the activity. Staff met with the City’s HUD representative and determined that, since the activity cannot be completed, the City must return the funds to HUD. The City may not use program income from other loan repayments or any other CDBG funding to repay the loan.
The City’s HUD representative advised that HUD will likely issue a monitoring finding, which can be resolved by repaying HUD for the incomplete activity. Staff recommends Council authorize a loan of $100,000 from the General Fund to the CDBG Fund (Fund 225). As the City has a lien on the RCD property, the General Fund will be replenished if and when the property is sold.
STRATEGIC ROADMAP
This item is an operational item and does not relate to any of the priorities outlined in Council’s Strategic Roadmap.
FISCAL IMPACT
This loan will have an initial negative impact on the General Fund of $100,000. However, the General Fund will be replenished when the current owner of RCD sells the property, and the City recovers the original loan funds. When that repayment occurs, the funds will be deposited into the General Fund.
PUBLIC CONTACT
No public contact was required by HUD as part of this item.
NEXT STEPS
Should Council approve this action, staff will work closely with the City’s HUD representative to return the funds to the City’s CDBG line of credit and will replenish the General Fund when the original loan funds are recovered from the borrower.
Prepared by: Amy Cole-Bloom, Acting Community Services Division Manager Recommended by: Regina Youngblood, Assistant City Manager Approved by:
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Kelly McAdoo, City Manager
HUD uses the term “Activity” to refer to individual programs funded through CDBG. Each activity must meet CDBG eligibility requirements and corresponds to specific reporting requirements that the City must meet each year.
Activity “close out” refers to the process the City must complete to document that an activity met the eligibility and reporting requirements. The close out process must be done in a timely manner and HUD requires all activities that were created before 2015 to be closed.
According to HUD, “a finding is a deficiency in program performance based on material noncompliance with a statutory, regulatory, or program requirement for which sanctions or corrective actions can be posed” (HUD Exchange, October 2012).