Last month, the Middlesex County Improvement Authority failed to pay $1 million in principal and interest on a $20 million loan it received from the Casino Reinvestment Development Authority.
The Improvement Authority had already been in arrears for five years, racking up nearly $7 million in missed payments.
The loan, made in 2005, bankrolled construction of The Heldrich, a New Brunswick hotel and conference center developed by a nonprofit called the New Brunswick Development Corp.
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The corporation has been touted by state Senate President Stephen Sweeney as a paragon of what can be done when public dollars are funneled through private firms to execute large-scale construction. The New Brunswick outfit is also the model for the Atlantic City Development Corp., a sister firm that expects to oversee more than $200 million in public and private financing — including $19.5 million in new CRDA money — to develop the Gateway project in the city’s Chelsea section.
Both corporations are headed by attorney Christopher Paladino, who arranged the $20 million Heldrich loan.
“CRDA will be paid, but it’s just going to take a couple more years,” he said this week.
The 235-room Heldrich, which opened in 2007 as the economic downturn set in, has struggled to attract guests. Last year, its occupancy rate was 63.5 percent, and its largest account was Johnson & Johnson, whose executives sit on the New Brunswick Development Corp.’s board of directors.
The hotel is so cash-strapped that the corporation had to tap about $776,000 of its own money to fund basic capital expenses, such as mattress and carpet replacement, according to Paladino.
“We continue to be engaged in the project, and we want to make it healthy,” he said.
The $20 million CRDA loan was part of about $107 million in financing stitched together by the corporation to build The Heldrich. The package included $70 million in municipal bonds issued by the Middlesex County Improvement Authority. Those bonds are supposed to be repaid with revenue from the hotel.
But the hotel, which the Improvement Authority owns, has performed anemically.
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Holders of $30 million in senior bonds have been repaid, with about 5 percent interest, according to schedule. Subordinate bondholders haven’t seen a payment in years.
Meanwhile, the Atlantic County Improvement Authority is preparing to issue $120 million in bonds in May for the Gateway project. The bonds will be used to build a Stockton University satellite campus and are to be repaid through dorm-room revenue and the sale of tax credits.
John Cantalupo, bond counsel for the Atlantic County Improvement Authority, said he’s reviewed the Heldrich financing and is confident the Gateway bonds won’t experience the same shortfalls.
“This project and the hotel project is apples and oranges,” he said.
In December, Gov. Chris Christie signed a law barring state agencies from giving loans, grants and other subsidies to businesses, including nonprofits, that have defaulted on state-issued loans and bonds.
While the New Brunswick Development Corp. arranged financing for The Heldrich, the Middlesex County Improvement Authority was, formally, the borrower of the $20 million.
Improvement Authority spokeswoman Maria Prato said in a statement that “the CRDA loan documents provide that the loan is secured and to be paid only from available project revenues after payment of senior lien public bond holders.”
“We are optimistic that as the economics of the project continue to improve on a concurrent path with the overall economy, that the project will satisfy its outstanding obligations,” she said.
CRDA Executive Director John Palmieri acknowledged this week that repayment of the $20 million loan has not happened as planned but said the agency made the loan knowing it would be a deeply subordinated lender on the project and would be among the last to be repaid.
“We make risky loans,” he said. “We try to underwrite them carefully, but we take risks to make it possible for other, senior lenders to participate. To reduce the risk for them is what helps to make these projects feasible.”
And in the case of The Heldrich, he said, “there are tangible economic impacts that are measurable.”
According to Paladino, those impacts include The Heldrich’s employment of 235 unionized workers, the $1.2 million in real estate taxes it generates annually and the 100,000 people who visited the property in 2015.
“We took a really crappy block and turned it into something special,” Paladino said. “Will I be happier with the project once it pays all its debt? Yes.”