Council to Consider Suit Against Clarke School Developers

In a memo delivered to Newport City Council members Friday afternoon, City Manager Jane Howington recommended the council grant permission to file suit against the developers of the Clarke School apartment complex. The developers owe the city $1.8 million, according to the city’s finance office.

History

In 1994, the city gave the developers a $1.35 million loan to purchase and develop the school into a subsidized senior apartments complex. The loan was originally due on Dec. 12, 2012, but council approved a one-year extension last year. The extension ends this week, Dec. 12, 2013.

On Sept. 13 of this year, Howington sent a memo to city council members that the loan could not be repaid.

She recommended council grant a second extension on the same terms as the original loan. Her memo was withdrawn from the Sept. 25 city council docket at her request. 

Councilor Justin McLaughlin said despite a likely default, he is confident the city will be able to recoup the money.

“If the partnership defaults on Dec.  12, which seems likely, it does not place at risk the city's investment, it simply makes the process of getting what is due to the city harder than it should have been,” said McLaughlin. 

Councilor Marco Camacho said he was so confident the city would be able to get back the money, he would bet his council seat on the issue.

“If the city loses the money on this, I will resign,” he pledged. 

“Given the value of the property and recourse in the courts available to the city, there is no doubt that the city will eventually receive what it is due,” added McLaughlin.

Camacho said the issue has been blown out of proportion by Councilor Michael Farley. “It’s not as big of a deal as he wants to make it out to be,” said Camacho. He cited Farley’s many emails and docket items on the Clarke School loan.

“He’s on his soap box again,” added the councilor. The last major issue Farley took up — the lease on the Newport Yacht Club — was not well received by his fellow councilors.   

A resolution submitted by Farley requesting a report on the debt failed to receive a second at the Oct. 23 council meeting.  

Farley tried to include a communication on the loan to a special session held on Dec. 4, but it was removed from the agenda after Camacho withdrew his support.

“I thought it was an executive session,” he explained.

An executive session is not open to the public. “We are in open negotiations, it shouldn't be public….maybe Farley has never negotiated before,” said Camacho.  

Farley, an attorney, said he has “litigated, negotiated and tried plenty of cases in federal court and state court.”

Farley has proposed a resolution that would direct the city to file suit.

The city manager’s recommendation and Farley's resolution are both on the docket for the Newport City Council meeting scheduled for Wednesday, Dec. 11.

The loan details

On Dec. 12, 1994, the city’s Community Development Block Grant Fund loaned the developers $1.35 million as a second mortgage to purchase and develop the Clarke School into a senior housing project.

The Clarke School partnership holds a first mortgage through the Rhode Island Housing Agency at 9.5 percent, which is set to mature in 2025.

Councilor Kathryn Leonard said she would like to see that rate reduced.

“I believe that Rhode Island Housing should do what the lenders have been made to do by the federal government,” she said. “The usury rate of over nine percent on the loan to the developers is unheard of today."

The loan from the city was set at a fixed, 2.27 percent simple interest rate.  Payments were to be made annually when there was available net cash flow (after operating costs and expenses).

Going Forward    

Farley said Rhode Island Housing should not be criticized for “looking out for their best interests.” He said instead, the city should secure a judgment, which will convert the interest rate from 2.27 percent simple interest to 12 percent interest on $1.8 million.

“Under the city manager’s recommendation, the city earns only $30,645.  Under my proposal, the city would earn over $225,000 per year on the same debt,” said Farley.

McLaughlin said he would like to keep his options open on the issue.

“I'll let the city manager and the council talk about this on Wednesday before deciding what is the best approach. “ 

Camacho agreed.  “I’d like to keep an open mind,” he said.