Some South Carolina banks have had a tough go over the past few years. Hit hard by the ongoing economic downturn, no fewer than seven state financial institutions have been closed by regulators since 2009, while several others have been placed under regulatory-enforcement actions of one sort or another.
In addition, Palmetto State-based banks have lost tens of millions of dollars since the beginning of the downturn.
But at least one state agency has recently muscled its way into the lending business, without being subject to the many rules and regulations by which financial institutions must abide.
The S.C. Research Authority approved nearly $1 million in loans to five separate entities – including a consortium created by some of the biggest entities in the state and an alternative-fuel vehicle manufacturer eligible for tens of millions of dollars in state incentives – during fiscal year 2011 alone,The Nerve has learned.
Proterra Inc., an electric- and hybrid-powered bus manufacturer which recently set up an assembly plant in Greenville; and Trulite, a portable power-generating company, were the big winners.
Proterra received a $250,000 bridge loan and a $5,912 equipment loan from SCRA, while Trulite received a $150,000 bridge loan and a $146,779 equipment loan.
Other companies benefitting from SCRA lending activities were Alexium LLC, which received an equipment loan for $169,084; IT-oLogy, a consortium set up by BlueCross BlueShield of SC, IBM and the University of South Carolina to grow information technology talent and nurture IT management expertise, which received a $150,000 bridge loan; and genetic testing firm Iverson Genetic Diagnostics LLC, which received a $78,180 equipment loan.
A bridge loan is interim financing that usually helps a company cover its bills until the next stage of its financing kicks in. An equipment loan generally is used to acquire assets, such as equipment needed to operate a business.
During SCRA’s April 21 board meeting, Chief Executive Bill Mahoney said Proterra’s bridge loan would be for 45 days at 15 percent interest, while IT-oLogy’s loan would be for 90 days at 13 percent interest. Details of Trulite’s loan were not revealed.
Information about equipment loans to Proterra, Alexium, Trulite and Iverson Genetic Diagnostics LLC, along with loans made in fiscal years 2010 and 2009, was discovered through an S.C. Freedom of Information Act request filed by The Nerve.
Over the past three years, the Research Authority has loaned a total of $1,765,928, including more than $1 million to Trulite, records show.
SCRA did not disclose what the terms of the additional loans were, and the agency did not respond to inquiries from The Nerve seeking additional information.
Having a state agency lend money to private businesses raises questions, says College of Charleston economist Pete Calcagno. These include:
- What criteria exist for companies to apply for loans from SCRA?;
- Is any firm eligible to apply, or is lending limited to selected firms and industries?;
- Are the loans guaranteed by the state?; and
- If a company that receives a loan from SCRA fails is it still obligated to pay the money back, or is the loan forgiven?
“The point is that if any of the criteria, rates or payment schedule are different from what we would see in an ordinary financial market then we have a quasi-public agency picking winners and potentially creating distortions in the market,” Calcagno said.
“Why is it that we need the SCRA to finance these ventures as opposed to traditional financial markets?” Calcagno added. “Is there something unique about these firms? If not, then it is simply another way to offer financial incentives that may not be a good return on investment.”
Lawful lending?
It’s also unclear whether SCRA has the authority to make such loans.
The agency’s consolidated financial statement for fiscal years 2010 and 2011, released in October, includes phrasing from auditing firm BDO USA Inc. that would indicate SCRA is prohibited from investing in private businesses:
“SCRA is subject to State of South Carolina legislation that places restrictions on the types of investments it may hold,” BDO writes on page 26 of its independent auditor’s report. “SCRA may only invest in obligations issued by the federal government or agencies of the federal government, general obligations of the state of South Carolina and certificates of deposit issued by financial institutions that are authorized to do business with the State of South Carolina.”
SCRA, a state-created and state-controlled technology and real estate entity, is a key player in South Carolina’s state-driven “knowledge economy” development plan, laid out in a July 2008 press conference that featured S.C. House Speaker Bobby Harrell, R-Charleston, other legislative leaders and business executives.
However, the Research Authority, which posted revenues of $195 million in 2011, has come under increased scrutiny over the past couple of years for an alleged lack of openness and accountability.
Former Chairman Bill Masters detailed many of the issues – including that the agency is “run mostly for the benefit of its top management for monetary benefits and for exerting control and power”; is “exceptional at manipulating government contracts and data to pass audits”; and management “does not fully comply with the constitution of South Carolina in arm’s-length handling of monies of affiliate SC Launch” – in his resignation letter to Gov. Nikki Haley.
SCRA was begun in 1983, when it was chartered through legislation. It does not receive direct state appropriations, but it has received government largesse over the years. Upon its creation, the General Assembly gave the agency approximately 1,400 acres of undeveloped land, estimated at that time to be worth $10.7 million, and $500,000.
Since then SCRA has received other land grants, as well. And while SCRA doesn’t receive direct appropriations from the state, SC Launch gets $6 million annually in tax-deductible contributions through the Industry Partners Fund.
The Research Authority makes most of its money from contract management fees. Its work centers on commercializing high-tech research, such as the development of new composite materials used in the construction of Navy submarine hulls.
Other SCRA loans
The Freedom of Information Act request response that provided details of the SCRA lending activities during fiscal year 2011 also revealed several other loans the agency made in prior years.
Trulite was the recipient of a $500,000 bridge loan in fiscal year 2010, a $200,000 bridge loan in 2009 and a $28,030 equipment loan in fiscal year 2010.
Also, Alexium received an equipment loan of $37,943 in fiscal year 2010 and a company called HunterStone Inc. received a $50,000 bridge loan in 2010. A spreadsheet SCRA provided stated that HunterStone had repaid the loan in full, but gave no other details.
The Nerve’s FOIA request sought information on funds disbursed to SC Launch through the legislatively created Industry Partners Fund for fiscal years 2009, 2010 and 2011.
It’s unclear if SCRA made loans to private companies prior to fiscal year 2009.
The loans to Proterra come on top of a lucrative incentives package that could see the company receive as much as $40 million in corporate income tax credits, job development credits, grants, low-interest bonds and forgivable loans within 10 years.
In addition, there are millions of dollars’ worth of expected county property tax breaks to be had, according to information obtained under the S.C. Freedom of Information Act.
IT-oLogy, located in state-of-the art environs in the Wilbur Smith Building across from the State House in Columbia, occupies parts of two floors and its space includes computer labs for hands-on and distance learning, integrated audiovisual equipment, a 200-seat theater, space for software development and open-source development labs.
Since its inception in late 2008, a number of other companies and universities have joined the consortium.
Alexium Inc., a subsidiary of Alexium International Group Ltd., an Australian company, announced plans last year to build a technical fabric manufacturing and development plant in Greer.
Stefan Susta, a director of Alexium, said the company would be receiving a package of financial incentives from state and local officials, as well as SCRA, according to a press release issued by the S.C. Department of Commerce.
Attempts by The Nerve to learn details of what incentives Alexium would be receiving proved fruitless.
Karen Manning, Commerce’s chief attorney, said the state Coordinating Council for Economic Development, made up of the heads of Commerce and other state agencies involved with economic development, has “not approved Alexium for any discretionary incentives.”
“Accordingly, the Department of Commerce has no public records in its possession that are responsive to your request,” she wrote in an email to The Nerve.
Reach Dietrich at (803) 779-5022 ext. 110, or kevin@thenerve.org.