Council faces lodge loan woes

The Lone Star Lodge #18 at 208 N. First St on Sunday evening. The Lone Star Lodge is one of a few minority businesses located on North First Street. Ed Thomson

The Lone Star Lodge #18 at 208 N. First St on Sunday evening. The Lone Star Lodge is one of a few minority businesses located on North First Street. Ed Thomson

By Jonathan Mendes

Editor’s Note: This article is the result of a month of research on North First Street. It concludes a series of three parts. The interviews were conducted in November and December of 2004.

When the Lone Star Lodge #18 applied for a city of Champaign grant to construct a new building, the city and the lodge’s members thought the project could spur further development of the North First Street area and benefit the black community.

The lodge, 208 N. First St., was a black fraternal organization with ties to First Street for about 50 years. The city sought to restore the area as a black commercial corridor.

“It was their business center years ago and the idea was to bring the area back to its vitality,” said Dennis McConaha, a consultant whom the city hired to help with the redevelopment project. “The lodge was part of the fabric of the community.”

The project called for razing the lodge’s weathered, narrow building and replacing it with a grand, 6,000-square-foot building that would house a bar and a banquet hall. The Lone Star Lodge had promise to be a shining beacon for North First Street’s future.

Five years after the project was started, the promise has faded. The lodge defaulted on a loan, and the city has started the process to foreclose on the property and could lose about $300,000. The fiasco serves as a cautionary tale of how the city and others must be vigilant when exploring ways to revitalize an area and evaluating a business’s chances of success, some say.

“There’s a good lesson to be found,” said James “Casey” Rooney, economic development manager at the Champaign County Regional Planning Commission. The commission administered a Community Development Corporation (CDC) loan to the lodge. “We all need to do a better job in evaluating the chance of success for the business,” Rooney said. “We all learn from mistakes.”

Struggling business

Much of the lodge’s current problems stem from slow business and its failure to repay equipment and construction loans, according to city documents.

The lodge has had monthly shortfalls in both sales and profits in 2004 and has been operating at a loss, according to a financial report submitted in May to the city by the lodge’s accountant, Daniel E. Setters.

The lodge also failed to make loan repayments on time and, in April, defaulted on a $125,000 loan owed to the CDC, which held the first mortgage on the lodge’s property, according to a city report.

“Becoming current (on the CDC loan) will be a challenge considering (the lodge’s) current cash crunch,” Setters had written.

The city bought out the CDC’s position on that loan because of a previous agreement between the two, said Veronica Gonzalez, the city’s implementation planner. The city declared the entire loan immediately due.

The city staff recommended that the Champaign City Council declare the loan in default because the lodge’s financial report showed it didn’t have a sufficient revenue stream to pay off its debt.

At its July 13 meeting, the council voted to declare the lodge in default of the loan and directed city staff to foreclose on the mortgage. The lodge was given a 90-day period to pay $9,962.44 in order to reinstate the mortgage and prevent foreclosure.

“It’s like an alcoholic brother-in-law,” said Tom Bruno, a city councilman. “You feel compassionate at first, but you can’t go helping them. You have to cut your losses.”

David Johnson, the president of the lodge’s High Twelve social club, said that the reason the lodge struggled from the start was because the lodge’s original contractor went bankrupt.

“He went belly-up and had told us he purchased equipment and materials, but he didn’t,” Johnson said. “We had to take out loans twice.”

Other lodge officials did not return several phone calls.

Business decisions

“The deadliest business to be in, in America, is small business,” said John Lee Johnson, whom the city hired to work with North First Street businesses, including the lodge, looking to redevelop their properties. “But (the lodge’s) product hasn’t become obsolete and their clientele hasn’t shifted. They’ve made unbelievable decisions that put them in a hole.”

John Lee Johnson said members of the Danville Business School helped write a business plan for the lodge that detailed how the business could sustain itself; the business plan was required in order to get the city grant. The lodge’s business plan, John Lee Johnson said, should have prevented the lodge from falling behind on loan payments.

David Johnson, the lodge official, said the lodge’s problems haven’t resulted from mismanagement.

“For the small budget (the lodge managers) had to work with, they did good,” David Johnson said. “Whatever money we had, we used to open the place. But we had no operating capital. That prevented us from having supplies on hand and doing advertising. We weren’t able to tell public that we exist.”

But Rooney, whose office administered the CDC loan, said the lodge had the additional problem of being a fraternal organization.

“When you’re talking about a fraternal organization, who is accountable?” Rooney said. “In that situation, there is no such person as there would be in a for-profit organization who is responsible for paying the bills, for marketing, etc. The board is constantly changing.

“What’s important to the bank is that you have a good businesses model and a good business structure that’s sustainable over time, that won’t deviate from year to year,” Rooney said. “That doesn’t appear to be the case in terms of the lodge.”

The lodge also rebuffed the city’s inquiries about the health of the lodge’s business, said Gonzalez, the city’s implementation planner.

“Time and time again, we asked for information about the status of the business,” Gonzalez said. “But with the lodge, it’s always been a mystery. Every time we met with them another issue would surface … They would come to council and would tell us it wasn’t our business. But it is because we lent them money.”

Lending lessons

In 1999, the city loaned the lodge a total of $296,000 to help finance construction of the building – $150,000 of which the city would forgive if the rest were paid back on time.

The city loaned an additional $150,000 in 2002 to fund the completion of the lodge’s building. At the time, the lodge had fallen behind on its loan from the CDC because the construction of the building had been stalled. When the city made the 2002 loan, it also agreed to buy out the loan from the CDC if the lodge were to default on the CDC loan. The CDC, in return, agreed not to hold the lodge in default of its loan at that time.

Champaign Mayor Jerry Schweighart said the city could have offered more business help, rather than loaning money.

“It’s the old saying: Give them a hand instead of a handout,” Schweighart said. “In the case of the lodge, I think we gave them too much of a handout.”

By the time the lodge defaulted on the CDC loan in 2004 and the city took over the loan, the lodge’s debt had ballooned to $703,000, according to a report to the city council. The city also appraised the building, which it valued at $360,000.

“Their business projections were supposed to work,” Gonzalez said of why the city continued to loan money to the lodge. “Their business plan was sound. We knew it would be risky – what business isn’t? But it was the execution of the business plan that’s the issue.”

Future development

Meanwhile, the 90 days the lodge had to pay the city to reinstate the mortgage expired on Nov. 17, according to a city document. The city is waiting for a judge’s decision, though the lodge is trying to come up with the money to pay off the loans.

“We’re going to lose money, there’s no doubt about that,” Gonzalez said. “Besides money, we lose credibility from both the business community that thinks we’ve done too much (for the lodge) and the black community who will want to know why it didn’t succeed. If they aren’t informed correctly of what happened, it could hurt future development.”

Bruce Knight, the city’s planning director, said there were circumstances surrounding the lodge that wouldn’t be met again. Nevertheless, the city should be more careful in the future when determining the financial capability of a business, he said.

“Each one of these cases are unique, and we have to handle them uniquely,” Knight said.

Rooney thinks putting a more thorough focus on future lending would help businesses avoid the lodge’s predicament.

“I hate to think there won’t be any more investment on First,” he said. “It’s all going to boil down to their business plan and financial projections. People will be a little more cautious. But we’ll still be here.”