Recently the borough of Collingswood suffered a massive credit downgrade:
Collingswood was among the 0.6 percent of public entities rated by Moody’s to receive a “large, multi-notch downgrade,” or a downgrade of two or more notches. The borough was dropped an astonishing six notches, from A1 to Ba1.
The primary source of the problem seems to be a development scheme wherein the borough underwrote considerable debt to secure the financing of high end housing:
The downgrade was a reflection of doubts over how Collingswood would fully pay off $8.5 million for the LumberYard, a luxury housing and retail complex near the PATCO Hi-Speedline. The borough will make an extended maturity deadline of Dec. 7, but not without borrowing another $4.5 million to purchase unsold condos, which it will try to lease.
This odd situation has lead Reuters columnist and municipal debt expert, Cate Long to award the Borough of Collingswood the “Muniland Absurdity of the Year Award” Long writes:
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.
What is also raising eyebrows is the involvement of Philip Norcross, brother of both powerbroker George Norcross and Senator Donald Norcross, who serves as Collingswood’s bond counsel and worked on this strange deal. Philip Norcross was recently profiled in a piece by the Philadelphia Inquirer citing his involvement in a new and very lucrative lobbying firm that leverages its connections to both Chris Christie and Steve Sweeney. This, along with the involvement of the scandal plagued Delaware River Port Authority, has many wondering if there is another shoe to drop in this boondoggle.
(more after the jump)
Long further explores the absurd arrangement:
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…
It’s extremely unusual for a community to involve itself so directly in a private project like Lumberyard…
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 and a $1,300,000 loan from the town’s capital fund 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.
TICIC is a subsidiary of the New Jersey Bankers Association. The LumberYard is mentioned in TICIC’s 2006-2007 Annual Report as one of the organizations major “downtown redevelopment” projects. The Vice-Chairman of TICIC at the time was James Meredith, who also served as Executive Vice President of the New Jersey League of Community Bankers. Ironically, or perhaps some other word would better describe it, James Meredith forcefully argued in that same year against the Credit Union Regulatory Improvement Act (CURIA):
James M. Meredith, senior vice president for one of the groups, the 80-member New Jersey League of Community Bankers, told Credit Union Times that when bills like CURIA “get introduced again and again a momentum builds” and that is troubling considering the makeup of the proposed legislation.
Meanwhile, the CEO of the New Jersey Bankers Association, John McWeeney, charged the place for CUs in the U.S. economy is to focus on the underserved and “not making business loans and financing commercial real estate.”
Meredith of NJLCB, said his group is committed to defeating CURIA as injurious to “the level playing field” and giving tax-exempt CUs major business loan advantages.
Good thing Credit Unions, which generally focus more on community needs rather than banking profits, stayed out of financing commercial real estate projects like LumberYard. They would have an “unfair loan advantage“… kind of like TICIC had when the Borough of Collingswood acted as guarantor of the loan? Woops.
Banker lobbying adventures aside, Long defends Moody’s downgrade of Collingswood saying the borough is in a “weak financial position” and “it will face [difficulty] in repaying the loan to TICIC” and therefore concludes:
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.
Congratulations Collingswood and Co.