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– In the heart of this historic Eastern Shore city, the effect of a state program that lends money to small businesses in struggling neighborhoods is easy to see.

There's Jimmy & Sook's restaurant with its award-winning crab cakes; My Favorite Things, where you can taste fine wines before you buy them, and a thriving reincarnation of the old Craig's Drugstore that still makes home deliveries to ailing customers. By financing these and other businesses, the program is helping to turn a depressed downtown district into a lively place.

"It's happening here. It's growing," said Carol Levy Ruark, who opened My Favorite Things a decade ago with the help of an early version of the Neighborhood Business Works program. "The tanking of the economy is over."

Out on U.S. 50, however, is an example of why the program is at the center of a dispute over where its loans should be directed. It's a gleaming new Popeye's restaurant on the fast-food row that lines the highway as it passes through town on the way to Ocean City. It, too, received a loan from the Department of Housing and Community Development under the program.

When the Popeye's loan came before the Board of Public Works in February, Comptroller Peter Franchot opposed it but lost on a 2-1 vote. Now Franchot is planning to vote against a proposal to extend a loan under the same program to help expand the Greene Turtle in Towson, which he describes as a "sports bar in an affluent college town."

State Treasurer Nancy K. Kopp also expressed misgivings when the Greene Turtle loan came before the board last month, so the opponents could prevail. Kopp asked for more time to consider the proposal, which could come back to the board Aug. 21.

The Greene Turtle loan helped shine a spotlight on Neighborhood Business Works, which can lend up to $500,000 to businesses that can't fully finance their openings, renovations or expansions from private sources. It made more than $3 million in such loans last year.

The program has had notable successes since its origins in the 1990s under Gov. Parris N. Glendening's "smart growth" policy, including Hampden's well-known Cafe Hon. But there have also been conspicuous failures, such as its investment in Baltimore's Senator Theater under its previous management.

In an interview, Franchot said he likes the state loan program but opposes what he calls "mission creep" under the administration of Gov. Martin O'Malley, the third member of the public works board. Franchot argues that the Greene Turtle and Popeye's loans — like another to a Hampton Inn near the Beltway in Prince George's County — go beyond the program's original intent.

"It's designed for older neighborhoods that are in need of revitalization and have a lot of 'For Lease' and 'For Sale' signs on Main Street," said Franchot, a Democrat like Kopp and O'Malley.

Carol Gilbert, the housing department's assistant secretary for neighborhood revitalization, said the program provides gap financing for businesses that locate or expand in areas targeted for development by the counties or Baltimore city — a designation left up to local authorities. In all three cases where Franchot has opposed the loans, local officials supported the deals.

The comptroller said the state should reserve its lending capacity for investments in distressed urban neighborhoods. Franchot noted that the same day he voted against the $250,000 loan to refurbish a vacant building for the Popeye's franchise, he voted in favor of a $500,000 deal to help renovate a building on Race Street in downtown Cambridge for a project including an upscale butcher shop and bakery. That development is now under way.

Others go beyond Franchot's wariness about mission creep and oppose the program entirely. State Del. Kathy Szeliga, a Harford County Republican, said the state has no business picking "winners and losers."

"If the risk is so great that the private industry is not making the loan, then why is the government doing this?" said Szeliga, minority whip in the House of Delegates.

Others contend the government needs to step up because banks are reluctant to lend to businesses in older cities — especially since the recession.

"The Neighborhood Business Works program is especially important to rural communities like Cambridge in this economy because financing is so difficult to find," said Natalie Chabot, Cambridge's economic development director.

Local business owners say the five current businesses financed by the program in downtown Cambridge have played a critical role in attracting other businesses that haven't needed such loans.

Brett Summers, a Cambridge resident and Washington-based developer whose High Spot restaurant was partly financed through Neighborhood Business Works, said the state sets strict standards.

"They are underwriting pretty much like a bank nowadays," said Summers, who also is developing the butcher-bakery project on Race Street. "It's not just a boondoggle giveaway."

Gilbert said borrowers must show they first tried to secure private financing and could not. The state can contribute no more than half the money for the project, she said, and borrowers must put up collateral and at least 5 percent of the money out of their pockets.

The program has had hits and misses, but Gilbert said only 6.45 percent of its loans have gone into default. She acknowledged that in some cases, the state has eased the terms or let borrowers extend their loans.

Franchot said he has no quarrel with such loans as the ones to My Favorite Things and Jimmy & Sook's. He said he could even consider supporting a loan to a Greene Turtle franchise if it were in a place like Cambridge.

"I'm not opposed to franchises, I'm not opposed to restaurants, I'm not opposed to bars," he said. What he's against, he said, are loans to businesses along strip highways or in communities that are already thriving.

"There are a lot of great things you can say about Towson, but 'in need of revitalization' is not one of them," he said.

Donald I. Mohler III, spokesman for Baltimore County Executive Kevin Kamenetz, said Franchot's comments show "the comptroller is just not very familiar with Towson."

Mohler said that while there have been big investments in big projects on the fringe of the business district, downtown businesses such as the Greene Turtle are struggling to keep up.

"The county executive doesn't believe that you cut and run on the older businesses trying to survive on the York Road corridor," he said.

michael.dresser@baltsun.com

Copyright © 2014, The Baltimore Sun
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