In recent days, there have been a number of news articles about “large” publicly-traded businesses receiving Paycheck Protection Program (PPP) loans of substantial amounts – $10 million here, $20 million there. Loans that had been designed for “small” businesses. Loans that are from the American taxpayers. Loans that can be forgiven as tax-free income.
Because of the publicity regarding these large loans, several of the businesses have returned the funds to the federal government.
But these large loan amounts were a superficial aspect of a much deeper concern.
This news column focuses on how two Indiana-based businesses used the program in ways that are likely of great interest to American taxpayers. Research showed that the relationship between these two entities is more extensive than simply one PPP loan of funds from American taxpayers.
Emmis Communications Corp. is headquartered in Indianapolis, while STAR Financial Bank is headquartered in Fort Wayne.
According to the Form 8-K filed with the United States Securities and Exchange Commission (SEC) on April 17 by Emmis Communications Corp., a PPP loan in the amount of $4,753,000 was granted to Emmis Operating Company, a wholly-owned subsidiary of Emmis Communications Corp. by STAR Financial Bank.
That loan of funds from the American taxpayers is one of the largest granted by a lender through the PPP.
Both STAR Financial Bank and Emmis Communications Corp. were asked specific questions about this PPP loan as well as the business relationship between the two businesses.
The entire response from STAR Financial Bank:
“Thank you for your inquiry. The PPP process directed applicants to work with its banking partner, which we did. Emmis has been negatively affected by the pandemic like every other broadcaster and nearly every business. Emmis is known for its people-first culture and we are proud to say we have avoided furloughs for our employees despite the sharp declines in our businesses. The proceeds from the PPP loan enable us to continue to provide stability for our employees while we weather this storm together.”
Previous news articles, news releases, and documents filed with the SEC provide a more in-depth view of the relationship between these two Indiana-based businesses.
These documents indicate that STAR Financial Bank holds the mortgage on the headquarters of Emmis Communications Corp. and that “Emmis Operating Company [a wholly-owned subsidiary of Emmis Communications Corporation] and STAR Financial [Bank] entered into an amendment to the Mortgage, whereby Emmis placed $8 million into a restricted cash account with STAR [Financial Bank] to serve as additional collateral for the Mortgage.”
In addition, news articles in several Indiana publications as well as in news statements — with quotes from both businesses — indicate that STAR Financial Bank is a tenant in real estate owned by Emmis Communications Corp.
A news statement from STAR Financial Bank dated May 8, 2019, noted that STAR Financial Bank was planning to open a new office at 40 Monument Circle in downtown Indianapolis. That address is the address of the headquarters of Emmis Communications Corp. The size of the office was detailed to be 12,500 square feet.
In a webpage dated Jan. 29 on the website of the Indy Chamber, this local chamber of commerce included text that noted that STAR Financial Bank was inviting Indy Chamber members to visit the new office of STAR Financial Bank on Monument Circle. This webpage includes two photographs of the new office.
Additional information about the financial relationship between Emmis Communications Corp. and STAR Financial Bank is detailed in several filings with the SEC.
As noted above, the PPP Loan from STAR Financial Bank is detailed in the Form 8-K issued by Emmis Communications Corp. to the SEC on April 17:
On April 13, 2020, Emmis Operating Company (the “Borrower”), a wholly owned subsidiary of Emmis Communications Corporation (the “Company”), was granted a loan (the “Loan”) from STAR Financial Bank in the aggregate amount of $4.753 million, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020.
The Loan, which was in the form of a Promissory Note dated April 13, 2020 issued by the Borrower, matures on April 13, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 13, 2020. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use as much of the Loan amount as possible for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. A copy of the Promissory Note is attached hereto as Exhibit 10.1 and incorporated herein by reference [sic].
The guidelines outlined by the Small Business Administration (SBA) indicate that a lender processing a loan in an amount greater than $2 million, the lender would be entitled to be paid 1% of the loan amount. Thus, using those SBA guidelines, STAR Financial Bank would have been paid $47,530 in a processing fee. Whether that amount actually has been paid is unknown.
Whether STAR Financial Bank retained all of that processing fee or shared it with an agent or agents is also unknown; if shared with an agent, using the guidelines of the SBA, STAR Financial Bank would have retained at least $35,647.50. (As noted above, an agent cannot receive more than one-quarter of one percent for loans of at least $2 million, according to SBA guidelines. It is not certain if more than one agent can be involved in the same loan and if additional agents for the same loan are paid from the same one-quarter of a percent or if additional amounts must be shared in some other manner.)
This PPP Loan, though, is not the only financial relationship between the two Indiana-based businesses.
The following text was included in a section of the Form 10-Q issued by Emmis Communications Corp. to the SEC on July 11, 2019:
$23 million mortgage by and between Emmis Operating Company and Emmis Indiana Broadcasting, L.P., as borrowers, and Star Financial Bank, as lender (the “Mortgage”).
A copy of that mortgage loan agreement — dated April 12, 2019 — was included as an attachment to this 10-Q document.
That mortgage was referenced in another SEC filing by Emmis Communications Corporation. From a section of the Form 10-Q issued to the SEC on Jan. 9:
On April 12, 2019, we entered into a $23 million mortgage between Emmis Operating Company and Emmis Indiana Broadcasting, L.P., as borrowers, and Star Financial as lender (the “Mortgage”). The Mortgage expires April 12, 2029, and was originally secured by a perfected first priority security interest in the Company’s headquarters building in Indianapolis, Indiana, and approximately 70 acres of land owned by the Company in Whitestown, Indiana, which currently is used as a tower site for one of the Company’s radio stations. The Mortgage requires monthly principal and interest payments using a 25 year amortization period, with a balloon payment due at expiration and the original annual interest rate was 5.48%.
Pursuant to the terms of the Mortgage, $10 million of combined proceeds from the Austin Partnership Transaction and the MediaCo Transaction were required to be used to repay Mortgage indebtedness. Accordingly, $6.5 million of the proceeds from the Austin Partnership Transaction were used to make a payment on October 4, 2019 and $3.5 million of the proceeds from the MediaCo Transaction were used to make a payment on November 29, 2019. As a result of these repayments, a loss on extinguishment of debt of $0.1 million was recognized in the quarter ended November 30, 2019, and the security interest in the 70 acres of land in Whitestown, Indiana was released by Star Financial.
The Mortgage is carried net of an unamortized original issue discount of $0.1 million as of November 30, 2019. The original issue discount is being amortized as additional interest expense over the life of the Mortgage using the effective interest method.
See Note 13 for discussion of the January 8, 2020 amendment to the Mortgage.
In another section of the same Form 10-Q issued by Emmis Communications Corporation to the SEC on Jan. 9:
On January 8, 2020, Emmis Operating Company and Star Financial entered into an amendment to the Mortgage, whereby Emmis placed $8 million into a restricted cash account with Star to serve as additional collateral for the Mortgage, and Star agreed to remove certain operating covenants included in the Mortgage, including no longer requiring that the Company maintain a fixed charge coverage ratio of at least 1.10:1.00. Additionally, Emmis Indiana Broadcasting, L.P. was removed as a borrower under the Mortgage.
While both businesses declined to provide any detailed answers about this specific PPP loan and the financial relationship between the two businesses — and are under no obligation or requirement to answer questions from a civic journalist — questions still remain. A few include:
Will Emmis Communications Corporation utilize a portion of the PPP loan – as specifically allowed to do so under SBA guidelines — to make mortgage interest payments to STAR Financial Bank?
Up to 25% of loan proceeds through the PPP can be used to pay for such specific business expenses as mortgage interest payments. Twenty-five percent of this specific loan of $4,753,000 would be $1,188,250.
The specific monthly mortgage payments due to STAR Financial Bank from Emmis Operating Company are not known. The amount of interest paid within the individual monthly mortgage payments is also not known.
While the mortgage is listed in an SEC filing as a 10 year mortgage of $23,000,000, portions of that mortgage were paid off according to another SEC filing. Also, while a schedule of specific mortgage payments was not disclosed in the SEC filings, one SEC filing indicated that “the mortgage requires monthly principal and interest payments using a 25 year amortization period, with a balloon payment due at expiration and the original annual interest rate was 5.48%.”
Will American taxpayers pay the mortgage interest owed by this PPP borrower to this PPP lender?
Why did the federal government authorize a financial system to be implemented where a lender of funds provided by American taxpayers is allowed to be: (1) a current lender to the borrower; (2) a current tenant of the borrower; (3) potentially, be paid substantial funds from the proceeds provided by the American taxpayers as mortgage interest payments; and (4) serve in the role to verify that the loaned funds were spent properly — to the lender as mortgage holder — and, thus, can be transferred into tax-free income for the borrower?
In a land where the Declaration of Independence is considered one of our nation’s founding documents, where is the independent relationship between a lender and a borrower using funds from the American taxpayers in the Paycheck Protection Program of the United States?
Note: The freelance writer of this news column has personally applied for the Paycheck Protection Program (PPP). As of the date of this news column, that application has not yet been processed. Funds allocated in the initial PPP were already allocated to other small businesses and independent contractors. If the PPP application does get approved in the future, funds loaned to the writer of this news column could not exceed $8,000.
Contact Richard McDonough at email@example.com.