Default Lines 

On the southeast corner of the Arcata Plaza, the doors of Plaza Design are locked now, and the windows are obscured by taped-up sheets of brown paper.

The place has been shut down by the Arcata Economic Development Corp., whose executive director, Ross Welch, led the team that walked in earlier this month, ushered customers out and changed the locks.

In 30 years in the banking business, Welch said later, he's never done anything like that before.

Welch is going gray, and his dark brown eyes take on a sad, puppy-dog look when he's asked about stuff that he'd really rather not dwell on. Last week, that was happening a lot.

Yes, the nonprofit economic development corporation makes occasional bad loans, because it's supposed to nurture small businesses and take the lending risks that can help grow jobs.

Yes, every now and then it repossesses a car or pushes a house toward foreclosure if the borrowers can't pay up.

But normally -- the way things are supposed to go -- most of the struggling borrowers can work out something with the development lender. If a business must be closed down, and that happens around once a year, Welch says, owners can get help even with that.

He's chatting in his office, where his wife's quilts hang on one wall, and a needlework Monopoly board, from her cross-stitch days, decorates another. He would much, much rather talk about the development lender's business success stories (they are many), about the Rotary, and about the great volunteer spirit here in Humboldt.

Welch landed in Humboldt 12 years ago, after stops in Sacramento, Crescent City and Fort Bragg. Since mid-2008 he's been running the Arcata Economic Development Corp., which makes or administers loans in six different counties, with the goal of growing the economy.

It hands out some serious money. In Humboldt County, 64 different businesses owe the development lender a combined $6.5 million. If you include other counties where AEDC is active, it is bankrolling businesses to the tune of $7.4 million.

Where does that money come from?

Some is interest on older loans -- the development lender has been around since the 1970s, and over the years it has helped fund Holly Yashi, Kokatat and even the original owner of Plaza Design, Welch says. A little comes from gifts. But lots and lots comes from the government. The federal Department of Agriculture is so fond of rural robustness that it consistently loans money at 1 percent interest to the Arcata Economic Development Corp., which then turns around and loans that money out at 8 or 9 or 10 percent interest. The development lender also draws from many other pots of local, state or federal money, created for everything from small business growth to compensating Humboldt for establishing the Headwaters Forest Reserve.

So when AEDC loses some of that money on a bad loan, well ... now you know where it came from. Pretty much from all of us.

In fairness, the development lender is supposed to take (calculated) gambles on businesses that are a little bit of a dice roll, all in the name of growing jobs. It insures many loans through a special state program that can cushion some of the blow.

And defaults happen. The development lender's bad debts have totaled about $300,000 over the past 10 years. In 2005, it wrote off $180,000. Another 80 grand went bye-bye in 2010.

Now, there's Plaza Design. It is the third largest loan in the Arcata Economic Development Corp.'s portfolio. Welch delicately refrains from spelling out just how it has gone awry. He will say only this, "There were agreements made, and agreements not kept. There were certain performance issues that were not met."

Peter Labes, who with his wife Jane owned the corporation that owns Plaza Design, says the lender had agreed to help them close the store in an orderly way, then reneged.

"I don't want to say anything mean about AEDC," he said in a phone interview last week. "We had a great working relationship with them" -- until the very last. The sudden closure, complete with locked doors and seized inventory, left him "surprised and sad."

Labes and Ross were both reluctant to talk about just how much money is at stake in the store's collapse. But because public dollars -- specifically Headwaters Fund money -- is directly involved, Dawn Elsbree, the Headwaters Fund coordinator for Humboldt County, was much more candid.

The fund often teams up with the development lender. AEDC makes and administers many Headwaters loans, but the funding is 50-50, half from the county's Headwaters pot, and half from AEDC, through its many, varied sources.

Back in late 2006, Elsbree said, the Labeses asked to borrow $500,000 toward a $775,000 project -- buying Plaza Design from its founder and then-owner, Julie Fulkerson. The Labeses appear to have put up the $275,000, Elsbree said, and Peter Labes confirmed that they invested big money, although he wouldn't say just how much. The couple successfully borrowed the rest in early 2007, with the Headwaters Fund loaning $250,000 and AEDC another $250,000, all at 9.2 percent interest.

(As collateral, the Labeses offered machinery and equipment, accounts receivable and an interest in a home in Irvine.)

Payments started out at over $5,100 a month, Elsbree said, but later were reduced.

"Unfortunately they kind of bought at the peak, and the recession hit them right after," she said.

John McClurg, co-owner of Fire and Light Originals, which sold its glassware at Plaza Design, said the wave that pulled the store down has been crashing nationwide. "We've had over 300 of the stores we do business with go out of business, all over the country," said McClurg.

At different times, its lenders lowered Plaza Design's interest rates and made other arrangements to try to help the business through, Elsbree said, but as the payments dwindled, the loan balance remained high.

On Jan. 31, Plaza Design's owners still owed the Headwaters Fund $227,862, and would have owed AEDC another $227,862, she said.

This is likely to be the Headwaters Fund's biggest loss since it was started, according to Elsbree.

Like the Arcata Economic Development Corp., the Headwaters Fund is supposed to take chances, to be "gap" funding to get slightly risky enterprises on their feet. In that context, Elsbree said, "We were really lucky for the first eight years of the fund. Since 2003 we've loaned out over $6.1 million, and up until Plaza Design we'd lost less than $50,000."

It is too early to know what the final loss figure might be for the Plaza Design loan, because the lenders still have to wring whatever value they can out of the remaining inventory. There might be a big liquidation sale, Welch said, or there might not. At least one potential buyer has expressed interest in taking everything that's left -- no doubt for one, low price.