After Losing $85,000 Loan to Restaurateur with Bad Credit, No Collateral, Berkeley Revamps Program

By Doug  Oakley

Staff Writer

Bay Area News Group

doakley@bayareanewsgroup.com

Berkeley has revamped its small business lending rules following the default of an $85,000 loan given to a failed pizza parlor owner who, in retrospect, had little chance to make any dough.

The city also is redoubling its efforts to find assets held by the owner of Spud's Pizza who defaulted on the loan from the city and closed the business in August of 2009. City  staff went ahead with the loan even though Andrew Beretvas had bad credit and no collateral, according to a city report.

Beretvas filed bankruptcy the same month and a bankruptcy judge in Oakland ruled he had no assets to repay the city, said a report to the City Council by Michael Caplan, the city's manager of economic development.

"It's not unusual for one of these loans to go belly up in a tough economy," said Caplan.

"One of the criteria for receiving these loans is to be turned down by a conventional lender. They fill a slot in the credit market to provide financing or small loans for people who otherwise can't get capital. There is risk, but there's a question of how much risk there is to take."

Caplan recommended the City Council write off the loan at Tuesday night's City Council meeting but Councilmember Darryl Moore removed it from the agenda until September so city staff can look for more assets to recover.

"That's a lot of money to be taking out of that loan fund," Moore said.

Caplan, who was not the director of economic development when the loan was made in 2004, defended the city's track record on small business loans. Out of 34 loans made from the South Berkeley Revolving Loan Fund since 1984, just eight have been written off, Caplan said.

And since the fund was started with a $500,000 grant from the federal Economic Development Administration, the balance has grown to $672,000 despite the city writing off $350,000 in bad loans.

Still, Spuds Pizza had more than it's share of problems.

In addition to having bad credit and little prospects for success, according to the report, during the course of its five years in business, Spuds had three Alcoholic Beverage Control violations, Beretvas was in danger of losing his liquor license and he was reluctant to make any changes in his business strategy.

Beretvas was not available for comment. A phone number listed in his name was disconnected.

Wary of losing the loan, the city went out of its way to help him. In the spring of 2009 the city paid a consultant, Dorothee Mitrani-Bell, owner of La Note restaurant, about $2,000 to study Beretvas' business plan and give advice to get him out of the red.

The report cited the alcohol penalties with the possibility of having his liquor license revoked, poor cash flow and no personal funding available by the owner, an unclear menu and layout, and a confusing restaurant concept as challenges.

"We tried so hard to help him," Caplan said. "But he was a stubborn, independent entrepreneurial guy and he wasn't willing to adapt or rethink his concept and that really hurt him."

Elizabeth Delgado, community development project coordinator in the office of economic development, said partly as a result of the Spuds Pizza problem, the office has not made any more loans since 2008.

Caplan's report and Delgado noted that the city's Loan Administration Board, which gives direction to the economic development office, voted to give Beretvas the loan despite warnings from their office.

"There was no motivation to make stupid loans," Delgado said of the board. "This one fell through. The current loan board realized we need to put in new policies to safeguard the program." Caplan added that in the past, the staff of the economic development office "overwhelmingly" yields to recommendations of the board, even though the board sits in a purely advisory capacity.

Delgado said the program now has a loan cap of $35,000 and an application fee of $200. In addition, borrowers must have "some skin in the game" as Delgado put it, with a personal guarantee of 20 percent of their own equity when opening a new business.

And the program has been expanded to the entire city from just south Berkeley, Caplan said.

"It's a shame to have to write off anything," Caplan said. "We hope this is a learning experience and hopefully we'll move forward from here."

City Council member Max Anderson, whose district includes the corner at Adeline and Ashby streets where Spuds was located, said the city really wanted to make business come alive in that area.

"In hindsight, the city manager is probably saying they shouldn't have made the loan," Anderson said. "At the time we were trying to make sure the businesses on the corridor were viable, but it was an investment that didn't pan out."

Doug Oakley covers Berkeley. Contact him at 510-843-1408. Follow him at Twitter.com/douglasoakley.