By Evan Halper, Times Staff Writer For the owner of a freeway-hugging carwash, Ed Komski was living a charmed life. His chic, feng shui-inspired Mission Viejo Autohandwash beat mega projects all over the West to win the prestigious Gold Nugget award from the Western Building Show in San Francisco in 1997. Judges praised the design as an inspired model of "high architectural style." Newspapers and magazines splashed photos of him and the building--designed by Bundy/Finkel Architects of Santa Ana--across their pages. The phone began ringing with corporate consultants wanting advice. A few months later, El Nino struck. Business came to a near halt. The rainstorms were followed by competitors opening carwashes nearby, increasing the pressure on the bottom line. Komski says things were finally starting to look up when the fatal blow came: The Small Business Administration had sold to a private financial group the $750,000 loan on which he had fallen behind in payments. The SBA staff was out of the picture and foreclosure loomed. In a few months, a Krispy Kreme Doughnuts franchise will open where the carwash is now being torn down. All that will be left of the Autohandwash is the imitation gold nugget and plaque awarded Komski, and a lot of legal bills. Already bankrupt and unemployed, Komski said his troubles keep compounding. He's now being sued for $1.1 million--the remaining amount of the 20-year SBA loan, with interest--by the out-of-state financial consortium CFSC, which bought the loan. The loan was sold as part of a much-heralded federal program in which SBA auctions off its assets to private financial groups, sometimes without warning borrowers. The sales of loans, some in default and others not, have raised billions to jump-start new small businesses, but they also send fledgling entrepreneurs into the hands of bottom-line-driven lenders. The SBA had offered counseling, marketing help and loan restructuring to Komski, who was more than a year behind in his payments. CFSC demanded immediate payment. "The loan sale program is a double-edged sword," said Raphael Bostic, an associate professor of real estate at USC and an expert in small-business loans. "SBA is handing over loans to companies that don't have the same mission it does, which is to have businesses survive." CFSC took over Komski's loan, along with more than 4,000 others as part of the government's first loan sale in 1999. The package was worth $332 million plus tens of millions more in interest. A third of the borrowers, like Komski, were already in default, so the company was able to get the entire group of loans for $195 million. Financing Attempt Doesn't Work Out Soon afterward, Komski lined up a private investor willing to take over his loan for a price close to what CFSC paid, but the consortium demanded the entire $1.1 million. "Without my knowledge, the SBA just sold my loan to a private consortium I never would have been able to get money from in the first place," Komski said. SBA officials said their loan contract did not require them to consult Komski about the sale. An attorney for CFSC said Komski merely gambled with taxpayers' money and lost and now must be held accountable. "The business was well on its way to failure by the time CFSC got the loan," said the attorney, Edward Treder. "All reasonable efforts to get him back on track had already been exhausted by the SBA..... There is a point at which government agencies have to mitigate their loss and protect the interests of the taxpayers." Komski looked on recently as the wrecking crew crushed pipes, hacked away at the walls and began to pull the foundation out of the ground. "People need to realize that their relationship with the government may have a time bomb attached to it," he said. His resume is up on the Internet and he has been hunting for a banking job while he fights his creditors in court. There has been no large-scale revolt against the loan sales. Small-business lobbying groups largely embraced them because they have created billions in seed money for entrepreneurs. About 110,000 loans have been turned over to private bidders, bringing $2.7 billion to the U.S. Treasury. But some business owners have taken to calling the transferred loans "vulture funds," charging that financial groups buy in at a discount so they can seize assets from troubled firms. The risk CFSC took in taking over Komski's loan was high, but so were the potential rewards. The site, after all, can be seen from Interstate 5. The consortium was required to abide by the same loan contract as the SBA. But while the government worked with Komski when he couldn't make the $7,000 monthly payments, the new company was less forgiving. CFSC's move to foreclose triggered the same move from Community Bank, which was the primary lender to the business and had given Komski a separate $1.38-million loan. Komski had managed to keep the $13,000 monthly payment on that loan current. Property Is Sold and Owner Is Sued for Note The lenders raced to the courthouse and CFSC lost; Community Bank got possession of the property and sold it. So CFSC is suing Komski and a family member who guaranteed his loan for the $1.1 million. Government officials say the program has safeguards to ensure that the companies that take over the loans don't merely foreclose and liquidate assets. But if the borrower falls behind in payments, the companies have a right to move in--even when the SBA probably would not. "Given the massive number of loans we have sold, we have had very few complaints about these being 'vulture funds,'" said Richard Blewett, director of the SBA Asset Sale Program. "These are large institutions buying these loans for cash-flow reasons. They are not fly-by-night operations." Blewett said the SBA is scheduling two or three more loan sales a year for at least the next few years. He said part of SBA's mission is to collect on loans so there is more money for new loans. That includes selling loans to companies to get the cash. "We do as much as we can, but at some point these loans must be repaid," he said. "We have a responsibility to the taxpayers."
April 21, 2002