Free Market

Provo Restaurant Received Federal Funding, Closed Doors After Three Months

Nilsen Septon had a dream of owning his own restaurant—considering himself, in his own words, “crazy enough” to do so. Thus began an arduous path towards his restaurant, Nellie’s Diner, opening for business in the first floor of the Zion’s Bank Financial Center.

Delays plagued the process; Septon initially hoped to be open “by Thanksgiving of 2010, then by early March, then by April 21 (BYU Graduation), then May, then by July 4, then August, September…” One of his greatest challenges was raising the funds needed to build and operate the business. On January 31, 2012, Septon wrote:

The fact is, I’m not sure how to get funding because I’m still working on it…unfortunately.  See, I had the project planned out and funding arranged until part of it didn’t come through.  So for the past several months, I’ve been working on getting the funding that I need in order to open…

At the time of that post, the buildout was almost complete. Other sources of revenue had been raised to get Nellie’s Diner down the path, but Septon needed help making it to the finish line. In an interview with Libertas Institute, he called the economic climate “extremely tough,” noting that “lenders were more apt to fund a tech startup and less likely to fund a restaurant.”

Septon, a resident of Orem, came across a loan opportunity made available through the Provo Redevelopment Agency. Using funds from the U.S. Department of Housing and Urban Development through its Community Development Block Grant program, this agency extended a loan to Nellie’s Diner on May 16, 2012. A GRAMA request made by Libertas Institute shows that $35,000 was loaned to Septon using federal dollars, and $28,489.48 in additional expenses was funded by the federal government for “program delivery costs”—Provo’s staff and overhead expenses relative to the actual loan.

Though Septon says this loan was only a “small minority” of the total revenue he raised, he says it “definitely helped.” With this infusion of cash, Nellie’s Diner wrapped up its loose ends and opened its doors to the public, finally, in May.

Three months later, the doors closed “due to lack of working capital.” Septon told his former patrons: “In the end, the costs simply outweighed the sales to the point where it just did not make sense to be a viable entity.”

After its short existence, Nellie’s Diner is now working through bankruptcy proceedings. Investors, including the government, will likely receive pennies on the dollar once the business’ assets are liquidated.

This small-town example is reminiscent of the Solyndra scandal, where that company received a $535 million loan guarantee from the federal government, as part of the “stimulus,” prior to going bankrupt. In that case, the government is expected to receive 19% of the money in return. Solyndra could not adapt to market forces and thus found itself going through bankruptcy, much like Nellie’s Diner.

While Septon was frustrated that banks looked more favorably on tech companies than food establishments, this circumstance is evidence of market priorities. Difficulty in raising funds for an establishment likely means, in most cases, that insufficient market demand exists for the proposed goods or services.

Further, bad decisions made by a business owner should not be subsidized by taxpayers at large. One reviewer noted that because of its location, Nellie’s Diner likely had expensive overhead costs. The Zion’s Bank Financial Center was, in this person’s view, “probably the absolute most expensive place to operate a business.” Septon entertained the same thoughts himself: “I find myself wondering at times if I should have looked for an existing location.  It may have made my life a bit easier (maybe) and it certainly would have been a little better on my pocketbook.” The costly buildout of a new, large establishment, along with a presumably costly lease, are choices that taxpayers should not be required to help fund.

Government at any level, be it federal, state, or local, should not be socializing the negative consequences of people’s decisions. Too often this occurs under the guise of “economic development,” as is the case with Provo’s Redevelopment Agency. While in some cases a taxpayer subsidy or loan may bring a good return on investment, in other cases, such as Nellie’s Diner, the opposite is true. This risk is a necessary and core function of the market, but only private actors should play the game—government employees should only protect liberty, not engage in economic development using taxpayer dollars.