Elk Grove City Council Enters the Business of Lending to Business

You may be confused by the title of this blog, and you should be.  William pointed out in his most recent writing that most in CA love big government; specifically, being told what to do by government.  However, what if they knew the government was guaranteeing loans to business owners who are already successful?

Enter the City of Elk Grove.  The City Fathers have decided to pick losers and winners in the local economy using your tax dollars for the wager. The remainder of this blog documents this very socialist behavior in our once very Republican community.

Old Town Elk Grove’s future barbecue restaurant and bar took a large step closer to its completion thanks to the Elk Grove City Council’s recent approval of a $500,000 loan deal.

LowBrau’s Slow and Low Smokehouse, a project of restauranteur Michael Hargis’ Slow and Low, LLC, is currently slated to open at 9700 Railroad St. in the next one and a half to two months, Hargis told the Citizen on June 29.He also owns Sacramento dining establishments such a Beast + Bounty, a Michelin-rated restaurant; and the LowBrau Bierhall.

During their June 28 regular meeting, the Elk Grove City Council unanimously approved an agreement for that loan, which is a commitment from River City Bank to Slow and Low, LLC to fund the costs of final tenant improvements, opening and initial operations of the new restaurant and bar.  The vote was unanimous.

Because the loan was contingent upon a third party agreeing to provide a repayment guarantee as security, if Slow and Low, LLC defaults on its loan, the business’s owner, Michael Hargis, asked the city if it would serve as that third party.

Yes, folks, a Michelin Star restaurant is a big deal. Think Gordon Ramsey or Wolfgang Puck… It is one of those places where frog legs cost $125 a plate, and you get 1 leg …I though frogs had 2 legs, but I digress.  Low Brau I have been to before, it’s a German sausage/food themed place where you guessed it, the beer flows freely.  It is a cool place; I do not have a gripe with either restaurant.  Where I have a gripe is why are we, the taxpayers, guaranteeing a loan to a guy who runs not 1 but 2 very successful places to eat?  Can’t someone else lend him the cash?  Specifically, the Small Business Administration (SBA) or Chamber of Commerce or maybe a bank?  I thought when you wanted a business loan that you had to have a business plan, profit/loss projections, costs, and a plan to pay it back?  Maybe times have changed?

Slow and Low, LLC is responsible for the loan that must be paid in full within five years.

As a guarantee that the bank would be reimbursed if the business defaulted on its agreement to pay off the loan, the city has pledged a collateral cash deposit in funds that were already deposited by the city at that bank.

Another element of this contract includes the use of a security agreement, in which the city will place a lien on the business’s restaurant equipment, if the loan is not paid in full prior to the deadline to do so.

In a worse-case scenario, a defaulted loan would result in the city losing some or all of its pledged deposit with River City Bank.

However, the city’s potential loss of $500,000 would be less impactful, considering that the restaurant equipment and Hargis’ 7001 Garden Highway, Sacramento property is relatively equal in value, noted Darrell Doan, the city’s economic development director.

“We have that first deed of trust in Mr. Hargis’ personal property (on the Garden Highway), and we also have the lien on the restaurant equipment (for the Railroad Street restaurant project),” he said. “We could foreclose both of those interests – in theory take title to his personal property, take title to the restaurant equipment.”

Although Doan mentioned that he does not foresee the worse-case scenario occurring, he presented that possibility for the purpose of providing full disclosure.

Doan noted that if Hargis is able to pay off the loan, the city will “experience no loss.”

“During that time, (those funds) would have earned the same interest on that deposit as we would have had we not created this security arrangement,” he said.

This Doan fella seems like a real piece of work, but his actions are on point for a government official.  Let me make a bet with taxpayer money and if it goes wrong, we will seize the man’s house and the equipment in the bar.  If it goes well, I can parade around calling myself an economic growth genius and apply for a job in a bigger City.  It’s literally heads I win, tails you lose.

Just to make things clear here, I do not know this Hargis guy who owns the restaurants, nor do I know his finances, or business acumen.  But I will make an assumption, he is quite good at his craft, a Michelin Star is not given out like candy on Halloween, they are quite rare.  Keeping it is even harder.  I have never had a bad meal at Low Brau. 

But why is he privatizing the profit, while socializing the loss?

Opinion of blogger:

This deal reeks.  Sorry I’ll say it.  The idea that the City will have a lien on his house tells me he may be mortgaged to the hilt.  His agreement should be between the bank, the landlord of the building he will occupy, and himself.  Why is the City involved at all?  This smells like Darrell Doan wanted to see a BBQ joint in Elk Grove and talked this guy into starting one and guaranteed his loan. In addition, I think the bank didn’t like his business plan or profit/loss estimates moving forward so they balked at the loan. 

Also pay attention to this statement:

Hargis, who has already spent about $750,000 on this restaurant and bar project, told the Citizen that he feels confident that his barbecue business will open on Railroad Street and the loan will be paid in full.

Why is the tenant making all the improvements to the building?  Typically, the landlord does this in exchange for higher rent/increases in rent annually.  I have not seen many of these arrangements lately.  It gives me pause.  Especially since the Dust Bowl Brewery that went in directly next to this proposed site made a lot of improvements, then ripped them out and put other ones in.  (Note, the buildings are old brick train station type buildings that got a ton of updating). 

Continuing my concerns, the location is in Old Town. It’s far away from the city center and is not easy to get to.  Think of one lane in each direction street, stop lights/neighborhood homes/very scarce parking.  Simply put, not many work in the area, and most who live there work far away so locals likely will not be partaking.  The BBQ business is also very fickle, either folks like it or not, and usually the owner finds out his BBQ is not as great as he thinks it is.  I watched as “The Rib Shack” near my office bit the dust in a bout a year’s time.  The location is also very set back from the road, and visibility will be little as it will be behind the Dust Bowl Brewery and a couple of housing units being built.  I would be remiss not to add that the neighborhood directly to the east of this is known for its meth heads and crack cocaine deals.  Just ask a local, one told me any Amazon package left on the porch longer than about 30 minutes is stolen.

In closing I will say this is the new America.  It used to be you took a chance, and if you hit it, you could hit it big, or even hit it to where you made a good living working in your own business.  Now the profit is enjoyed by the owner, and the loss is shared by the citizens.  It is sad, but it’s what it has come to.  Frankly you would be foolish not to get into it if you can.  This town is playing with house money quite literally as we built a casino.  One has to wonder if it will decide to have a BBQ joint inside or nearby their casino?  The plans are to build a hotel and amphitheater.  Most in central or west Elk Grove likely have never heard of Old Town Elk Grove or really care.  Quite frankly, if you live in either area its likely quicker and easier to go downtown than to travel to East Elk Grove and deal with the aforementioned parking and logistics issues getting to the area.

We are spending 1.25 million on something that is so far from a sure thing the owner (of 2 restaurants) has to personally put up his house and kitchen equipment as collateral?  Huh?  Also, the kitchen equipment, may seem like it’s worth a lot, no one buys that stuff second hand.  It’s likely useless, and only has scrap value.  Also, they say this guy’s house is worth 500k?  How can that be possible?  They claim he lives on Garden highway, for those of you not familiar Garden Highway (essentially the levee road in most of Sacramento County) which means he has a view/close proximity to water, so his home value is bunk.  My small 1700 square foot house in aforementioned East Elk Grove in a tract home neighborhood is worth north of $650k according to Zillow.  A lot is not adding up here.  I think he does not own his house free and clear; he likely has a large note payable on it via a bank, backed by the house as collateral.  No bank is letting the City of Elk Grove foreclose on it if they are owed money.

Again, folks here we are privatizing the profit, socializing the loss.

The Chief