Denver Auditor Dennis Gallagher is refusing to sign a $3 million city contract with a new nonprofit, citing "the appearance of a conflict" by its executive director, Peter Chapman, who recently left the mayor's administration.

Gallagher also contends the contract with New York-based Seedco Financial Services Inc. calls for work the city already does through the Office of Economic Development - at a lower cost.

And Gallagher questions $455,000 in overhead expenses the contract calls for.

The auditor said Chapman, who resigned in May as an economic development policy adviser to Mayor John Hickenlooper to become Seedco Denver's executive director, "was primarily responsible for the creation of the program and was its most significant advocate before City Council."

"I have some serious questions and reservations about this contract," Gallagher wrote Monday in a letter to Jacky Morales-Ferrand, director of the city's Division of Housing and Neighborhood Development.

Morales-Ferrand said she was surprised by the letter, which she said doesn't tell "the full story."

"All of these concerns and questions have been vetted through a very open process that included City Council members," she said.

In February, the council awarded Seedco a community development block grant of $437,000 to create a "community development financial institution," prompted by a 2005 report that found gaps in the city's small-business lending program. The report recommended "entrepreneurial approaches to expanding capital and creating new financing products," and Seedco fills that role, Morales-Ferrand said.

The contract calls for Seedco Denver to oversee the loan program, which helps small businesses and commercial and mixed- use projects in targeted areas.

The six-month contract requires $2.7 million from the city to provide loans and to administer the program in exchange for a commitment from Seedco to come up with another $6.2 million, Morales-Ferrand said.

Seedco is leveraging the city's federal CDBG funds to provide "net new investment dollars to distressed neighborhoods," she said.

"Instead of just investing $2.7 million of CDBG funds, there's now $8.9 million of funding that can go into the community," she said.

Morales-Ferrand said she could understand why the auditor was questioning the $455,000 in overhead expenses if it just included the city's $2.7 million, but it's for an $8.9 million program.

Chapman, who obtained a waiver from the city's Board of Ethics to apply for the job, said Seedco isn't duplicating the city's efforts.

"It sounds as if, perhaps, the auditor has not read all of the background information that has been put out there over the last six months," he said.

The ethics board concluded that Chapman's applying for the job would violate the ethics code.

However, the board granted him a waiver because it would "serve the best interests of the city."

chacond@RockyMountainNews.com or 303-954-5099