To a taxpayer's eye, the City of Denver's decision to lend $180,000 to Manuel Fernandez and his partners five years ago might look like a mammoth mistake.

Fernandez's Mammoth Events Center, a historic music hall located on depressed East Colfax Avenue, was renovated with money from the loan but has since struggled financially. Cash-flow problems forced Fernandez to ask for a one-year deferral of principal and interest payments last March. Not long before that, Fernandez and his partners had fallen more than $40,000 behind on payments to the Colorado Housing and Finance Authority, which itself had loaned the Mammoth almost $800,000. Until December, the Internal Revenue Service had a lien on Fernandez's home in Arvada, securing more than $37,000 in unpaid federal taxes. Another IRS lien, this one placed on the Mammoth property for delinquent unemployment insurance payments, remains in effect.

But Bill Lysaught, the city's point man on the Mammoth loan, is a born optimist. As deputy director of the Mayor's Office of Economic Development (MOED), Lysaught sees the troubled Mammoth venture as more of a success than a failure. With the city's help, Lysaught says, Fernandez has occupied the Mammoth property for eight straight years now. Simply having someone in the building, he says, has helped prevent further economic decline along East Colfax, one of the city's most blight-ridden business districts. And Mammoth's rock concerts and cultural festivals have provided jobs for low-income residents. Indeed, Lysaught says, Fernandez has done a lot better at the center than the long string of hapless entrepreneurs who owned it before he did. "People were in and out of there on a six-month basis before," he says. "It was a constant revolving door."

So goes the thinking at MOED, the controversial Denver agency that makes dozens of high-risk loans to businesses and nonprofit groups every year. Credited by some for sparking the economic renaissance of South Broadway, lower downtown and other once-moribund commercial areas, the agency is taking an increasingly high profile. It put $300,000 into the Denver Dry building on the 16th Street mall in 1993 and loaned a full $7 million to finance Elitch's move to the Central Platte Valley after the amusement park's owners had trouble raising the money on their own.

But MOED is routinely castigated for rolling the dice with tax money--and for lending to borrowers whose ability to repay is questionable at best. In 1993, for instance, a federal-government audit charged that a Denver nonprofit group that had received millions from MOED had misused a $350,000 city loan--and faulted what it termed lax oversight by Denver officials. Last February MOED made headlines when it was revealed that the agency loaned $173,000 to Denver businessman Willie Kellum shortly after a bank foreclosed on property he owned in 1988. Kellum later received a lucrative concessions contract at Denver International Airport.

Last spring the historic Rossonian Hotel in Five Points, subject of an ongoing multimillion-dollar MOED revitalization effort, was transferred into the hands of a nonprofit group after the hotel's developer, Tom Yates, was accused of misleading state regulators liquidating his defunct insurance company. In October, Joyce and Ronald Ford sued the city after their MOED-financed deli on Welton Street went belly up; the couple claimed that they were lured into the ill-fated project by the agency's false promises and rose-colored visions of prosperity. Around the same time, MOED let Johnny Copeland, the owner of a Park Hill shopping center, borrow $270,000 even though Copeland owed the Denver treasury almost $60,000 in delinquent real estate taxes.

City councilman Ted Hackworth says MOED is guilty of a long line of "stupid business decisions," including pouring more than $1 million into four separate grocery stores in the last few years. Three of those stores have gone out of business. "When you fail [so much] of the time, you wonder about the viability of the program," adds the councilman.

But within MOED, whose loan portfolio has now swelled to more than $30 million, the agency's failure rate is actually a source of pride. Lysaught claims MOED's "loan losses" average about 8 percent--not much worse than private-sector banks. The occasional high-profile disaster is inevitable, Lysaught and others note, since MOED's stated mission is to venture into poor neighborhoods that private lenders have abandoned.

"That's our mandate, to take on the tough deals," Lysaught says. Max Wiley, a former banking executive whom Mayor Wellington Webb put in charge of MOED last October, agrees, saying Lysaught has nothing to apologize for. "I think he's done some spectacular things in areas that needed assistance," Wiley says. In fact, adds MOED's new boss, "I'm amazed that the losses aren't greater than they are."

Two pictures of the same building hang in George Brantley's office at the nonprofit Hope Center in northeast Denver. One shows the center's facility at 3400 Elizabeth Street in its former state as an abandoned neighborhood grocery store: empty, surrounded by blacktop and covered with graffiti. The other shows the property as it is now: an educational center for low-income children that is clean, fully renovated and skirted by a playground and well-kept lawns. The contrast between the two pictures, Brantley says, speaks volumes about the value of MOED's loan program.

"That wouldn't have happened" if it hadn't been for a $350,000 MOED loan, says Brantley, the center's executive director. "We would not have been able to do this."

It's not hard to find others who will sing MOED's praises. John Hickenlooper, developer of the Wynkoop Brewing Company in lower downtown, says the Wynkoop "would not exist" if it wasn't for a 1988 low-interest loan from the city. Hickenlooper says it cost him $575,000 to refurbish the Wynkoop building and turn it into a restaurant, but he could scrape together only about $450,000 from investors and a private lender. The city stepped in to fill the gap.

Today the Wynkoop is a quintessential MOED success story. The restaurant thrived after the city's financial jump-start, MOED was repaid in full, and the popular brewpub helped speed the rebirth of LoDo, now one of Denver's real estate hotspots. "We paid the city, in sales tax last year, over $140,000," Hickenlooper adds.

MOED has been making such loans since its founding in 1985. As with similar economic-development agencies in other American cities, virtually all of its funding comes in the form of annual grants from the U.S. Department of Housing and Urban Development. MOED gets about $2.5 million a year from HUD, approximately 80 percent of which it redistributes as low-interest loans. The agency spends the remaining $500,000 on administrative costs, including salaries for Lysaught and half a dozen other employees. MOED also collects another $2 million per year in interest on its existing portfolio--money it sends back out the door in the form of new loans.

As of last September, MOED had made 385 loans totaling more than $43 million during its ten-year history. Of those, 153 have been paid off, while 197 remain outstanding. Thirty-five loans worth about $4 million have fallen into default; an additional seventeen are categorized as "liquidations," which means the agency expects them to fail in the future. But Lysaught says that through the seizure of real estate and other loan collateral, the city has lowered its actual loan losses to less than $3.4 million--even though in the process it has been forced to serve as a de facto landlord on failed properties. By comparison, he says, MOED has earned $3.9 million in loan interest over the years.

Local HUD administrator Roy Porter says Denver's loan program "is one of the best" in the federal agency's six-state Rocky Mountain region. Porter, who's seen delinquency rates climb above 50 percent in other cities, says if anything, Denver is too conservative in its approach to economic development. HUD allows cities to grant, rather than loan, federal money to projects in some circumstances--something Porter says Denver should do more often. "I've criticized them for being too strict rather than not strict enough," Porter says.

Lysaught says he has "problems" with simply giving money away. "I'm not sure you're a [viable] enterprise if you need grants," he says. And over the years, MOED has concentrated its financial firepower by focusing on a handful of troubled business districts, such as Welton Street in Five Points and West 38th Avenue on the city's north side. On Santa Fe Drive, another target zone, MOED has poured more than $1 million into various projects: $236,000 for a radio station; $499,000 for the Denver Civic Theatre; $178,000 for a Grease Monkey franchise; and almost $200,000 for three different restaurants.

Max Wiley's predecessor at the MOED helm, John Huggins, says such loan "agglomeration" gives MOED the best chance of turning a problem neighborhood around. The area around the Mayan Theatre on South Broadway is a prime example, he says: In the mid-1980s, a $120,000 MOED loan helped save the theater from destruction, and subsequent loans were instrumental in turning the surrounding blocks into a vibrant commercial and restaurant district. "It's been almost ten years since MOED made a loan there," Huggins says. "It worked."

Chris Citron, a neighborhood activist who led a fight to save the Mayan, agrees. Citron remembers when the Mayan, now the city's premier venue for art films, was a sleazy $1 movie house. The whole area, Citron says, "had become skid row. Now it's doing wonderful things."

Despite MOED's apparent successes, the agency has no shortage of the kind of loans that make taxpayers wince.

Take the City Spirit Cafe. Denver businessman Morton Zeppelin got a $50,000 loan to open the restaurant at 14th and Blake in 1986. Since then, however, Zeppelin has run into significant trouble with the Internal Revenue Service. Until last October the IRS had an $18,500 lien on the cafe for delinquent unemployment-insurance payments. Another IRS lien--this one for more than $100,000--still encumbers the property, records show, though Zeppelin says that lien is "not at all" related to the City Spirit venture. "Everybody goes through some bad times," he says. Zeppelin insists his MOED loan has never been at risk of default. "The loan is being paid off," he says.

Numerous other MOED beneficiaries have had tax difficulties as well. KJME, a Spanish-language radio station that received $236,000 from MOED in 1990, was slapped with an $18,000 lien by the federal government three years later, IRS records show. The lien has since been released. KDKO, a radio station on Welton Street, fell more than $15,000 behind in its taxes before paying the government back in 1993. In June the same year, MOED allowed J Beatty's to modify the terms of a $66,400 city loan--five months after the IRS put a $10,700 lien on the East Colfax Avenue restaurant.

Some of MOED's largest and most problematic loans went to the nonprofit Denver Community Development Corporation (DCDC) and its subsidiary, El Dorado Denver Industries. DCDC has borrowed more than $2 million from the city over the years for a string of redevelopment projects, including the Pecos Square and Prospect Plaza shopping centers on West 38th Avenue. But a 1993 HUD audit found that DCDC had misspent city money at the centers, including $77,000 it paid itself in rent at vastly inflated prices. Last year DCDC defaulted on a separate $400,000 MOED loan for a commercial development at Federal and Speer boulevards.

DCDC executive director Cyndi Kerins insists that the organization's efforts on West 38th have been "very successful" despite its myriad problems. "It was a very blighted area," Kerins says. "It's now vital and much improved."

Lysaught also defends DCDC, saying the agency used city money to develop a highly successful industrial park on West Bayaud Avenue. The group didn't run into real problems, Lysaught says, until it stuck its neck out too far on the Federal-Speer project. DCDC hoped to put a Walgreens drugstore and Taco Bell at the site, Lysaught says, but community opposition eventually scuttled those plans. Even so, Lysaught says, the city has repossessed the still-vacant Federal-Speer lot and expects to get all its money back by selling the property to another investor. "I'm very confident that we're looking at a full recovery," Lysaught says. "We have not lost a penny."

MOED also occasionally raises eyebrows by loaning money to businesses and organizations with close ties to City Hall. The wife and son of politically connected contractor King Harris received--and defaulted on--a $30,000 MOED loan in the 1980s, according to the Rocky Mountain News. (Harris later repaid the note, the paper said.) A corporate affiliate of the nonprofit group NEWSED, one of Mayor Webb's staunchest supporters in the Hispanic community, currently enjoys a deferment of all payments on a 0 percent, $390,000 loan--even though a recent city audit found the group had fallen more than $2,000 behind on a city property assessment. RMES Communications, a Denver electrical supply company, asked for and won a six-month deferment of payments on a $191,000 MOED loan in October, citing a drastic reduction in cash flow. The company's president, Herman Malone, has been a generous contributor to Mayor Webb--in fact, he made a $250 contribution four months before asking the city for relief on his loan payments.

"You wonder why you'd be able to make a political contribution and not pay your debts," Ted Hackworth says. "It sure leads you to believe there's some political connection to this whole thing." (Webb spokesman Briggs Gamblin says politics never influence MOED decisions. "Just being a friend [of the mayor's] is not a good enough reason" for a person to receive city loan assistance, he says.)

Wiley says it's important to keep in mind federal-government guidelines when evaluating the prudence of individual loans. HUD requires that the city use grant money to improve "blighted" commercial neighborhoods and to support businesses that will provide jobs for the poor. The city can't be as tightfisted as a bank, Wiley says; if it were, MOED wouldn't make loans at all.

At the same time, says HUD's Roy Porter, MOED is supposed to make loans only to those who have a reasonable chance of paying the money back. "The business [receiving MOED money] should be financially feasible," Porter says. "We don't want them going in knowing that the project's going to fail."

Wiley says MOED rarely provides 100 percent of the funding for any project. With the exception of businesses developing a small number of "anchor" projects financed by MOED's special Skyline fund, all borrowers have to come up with at least half the money they need from other sources: banks, alternative lenders or their own savings accounts. "Every one of these loans has a private-sector participant," Wiley says. "We're not making these decisions on our own. We're doing them in partnership with other lenders."

Critics, though, say MOED is often too softhearted and not hardheaded enough when making loan decisions. Denver City Councilman Ed Thomas says that anyone who fails to pay his or her taxes doesn't deserve a government loan with a bargain interest rate--since the loan money, after all, comes from people who do manage to pay their taxes. "There's got to be some kind of financial responsibility there," Thomas says. "The line should be drawn at sound financial management. If it's not there, goodbye."

HUD's Porter says it's always a concern when loan recipients fall behind on their tax obligations. But he says agencies like MOED shouldn't automatically exclude people with tax debts and other financial problems from receiving assistance. Sometimes a businessman's troubles arise, Porter says, because of "circumstances beyond his control."

"You have to take a look at the individual situation and see how they got in that position," Porter says.

In 1987, for instance, MOED loaned Norman Harris Sr. $215,000 at 3 percent interest to open a liquor store at 2445 Welton Street. The city required him to make monthly principal and interest payments of about $1,500.

Since then, however, Harris and the business have floundered financially. In 1991 Harris asked the city to allow him to stop paying interest on the loan; he now makes monthly, principal-only payments of just $320. Two years ago Harris was sued by a travel agency for allegedly writing a bad check worth $8,200. According to court records, Harris promised to pay the travel agency damages of $12,000 in four installments, but a judge ordered a bench warrant for his arrest after he neglected to make the first payment.

But Harris says that's not the whole story. He used to be happily ensconced in a different building up the street, he says--but the city asked him to move so it could pursue other development plans for that site. After MOED sweetened the deal by offering him a loan, he says, he agreed. A key inducement, though, was that MOED was helping another entrepreneur open a supermarket a few doors down from his new space, Harris says. When that market went out of business, Harris was stranded with a high loan payment and not enough traffic flow. Without the reduction in his loan payment, Harris says, he might have gone under. "The rent is still a little high," Harris says, "but I think I can survive."

Manuel Fernandez, owner of the Mammoth Events Center, did not return repeated phone calls, so it's not clear whether the center's cash flow problems are serious enough to endanger its $180,000 MOED loan.

But MOED seems as aggressive as ever as it tries to revitalize East Colfax. MOED loaned concert promoter Doug Kauffman $200,000 so he could buy and refurbish the Ogden Theatre, which, since it opened in September 1993, has become a successful concert venue. "Their [MOED's] help was invaluable to me," Kauffman says. "Not just the money--their advice and everything. It would have been really hard to do it without them."

Just last year, the Bluebird Theater opened its doors at 3317 East Colfax as a combination concert hall and movie house, thanks in part to a $220,000 renovation loan from MOED. Theater co-owner Evan Dechtman says MOED was anything but lax about making the loan, thoroughly scrutinizing the viability of the project before handing over the money. "They put us through the wringer," Dechtman says. "They're not just out there to give taxpayer money away."

And even if the Mammoth should fold in the future, critics shouldn't be "too quick to say that's a boondoggle," says Dave Walstrom, executive director of the Colfax on the Hill neighborhood association. Without the city's assistance, he says, the Mammoth might well have been vacant for the past several years. An empty building "breeds crime, it breeds drug dealing, it breeds prostitution," Walstrom says. Having the Mammoth open for business has been "worth a lot to the neighborhood," he says.

Walstrom's support for MOED isn't surprising; after all, Colfax on the Hill is itself a beneficiary of the agency's largess. A few years ago the group borrowed almost $350,000 from the city to buy and demolish the old Clarko Hotel, a longtime eyesore adjacent to the Mammoth. The neighborhood group services that loan by leasing the now-vacant lot to the events center as a sort of entrance plaza, Walstrom says.

Walstrom acknowledges that the neighborhood group's MOED loan may be somewhat precarious: Paying it back depends on a steady stream of rent from the Mammoth. If the Mammoth ever failed, the nonprofit's own income from the property would immediately dry up--and the city might stop receiving payments on its loan as well. But that, says Walstrom, is a risk worth taking. "These are fragile inner-city tundras," he says. "They need some help.

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Arthur Hodges