These Long Island businesses got COVID-19 grants to survive. Now New York wants the money back.

Energy Fitness survived the COVID-19 pandemic thanks to millions of dollars in federal loans and a $50,000 state grant — all of which were used to offset more than $4 million in losses.

Now, as the St. James-based operator of gyms hopes to return to profitability for the first time in seven years, it faces an unexpected challenge: The state wants the grant money back, plus interest.

Energy Fitness is among 101 beneficiaries of the COVID-19 Pandemic Small Business Recovery Grant Program that were found ineligible for the relief. Seventeen are from Long Island.

Michael Tucci, who co-founded Energy Fitness nearly 25 years ago, said his company "deserved the money" because it continued to pay employees at its four gyms and virtual training operation even as most of New York State's economy was shut down in 2020 for six months to slow the coronavirus spread. 

“It’s an incredibly unfair position that the state is taking against businesses like ours that were the most negatively impacted by COVID-19,” he said.

The state’s yearlong effort to recover the grant money reveals how it came to be misappropriated in the first place: Speedy delivery of aid to struggling companies during an emergency was prioritized over verifying information in the grant applications.

Three years after winning grants of between $5,000 and $50,000, businesses are being told that they didn’t qualify for the help because they had previously received federal forgivable loans, federal restaurant grants or both, based on the findings of a 2025 state audit.

The ineligible grantees must repay a total of $4.1 million, including $697,000 from those on Long Island.

As of April 30, $521,536 had been repaid, including $50,000 from one firm in Nassau County, state officials said.

Still, auditors from the office of state Comptroller Thomas DiNapoli found no evidence of criminality. The ineligible grantees were legitimate businesses with genuine payroll records and tax returns. They just didn’t meet the grant program’s requirements.

“You’re not talking about somebody that had no business and was just trying to get the money,” said Tina Kim, deputy comptroller for state government accountability. “These were small business owners trying to survive in a very difficult environment.”

Federal loans, grants disqualified them

The $800 million grant program was included in the 2021-22 state budget in response to complaints from entrepreneurs that federal relief initiatives had provided insufficient support.

The state aid was to be used to reimburse costs incurred when the coronavirus was at its worst in 2020 and 2021. The costs could include employee wages, rent and mortgage payments, utility bills and personal protective equipment, such as masks, partitions and ventilators, according to the program guidelines.

Grant applicants had to be small businesses that received no federal help or federal Paycheck Protection Program loans totaling $250,000 or less, and could not have gotten a federal Restaurant Revitalization Fund grant of any amount.

Applicants also were eligible if they were “unable to obtain sufficient business assistance from such federal programs” as the PPP, the guidelines state.

Among the Long Island grantees that were later disqualified, five won PPP loans exceeding the limit while a dozen won RRF grants, based on public records requested by Newsday from the U.S. Small Business Administration, which oversaw the two programs.

All of the grantees attested twice in writing that they qualified.

In interviews, some said they won the state grant before securing a second PPP loan or an RRF grant. Others, such as Energy Fitness, said they were eligible because federal relief programs in no way covered their pandemic losses.

State, contractor failed to verify application info

Empire State Development oversaw the grant program as the state’s primary business-aid agency. ESD in turn hired Lendistry, a small-business lender, to run the program for $35 million.

Both the state agency and the lender failed in many cases to verify information in the grant applications. For example, they didn’t use federal databases of PPP and RRF recipients that were available around the time the state program opened in June 2021, according to the audit.

Instead, ESD and Los Angeles-based Lendistry relied on applicants certifying their eligibility.

“Self-certification, in and of itself, is not a good control against waste, fraud and abuse,” said Kim, the comptroller for state government accountability. 

In a written response to the audit, ESD’s then-compliance director, Felisa Hochheiser, said the agency and Lendistry did the best they could in an emergency.

“ESD properly utilized attestations instead of consulting incomplete datasets [of PPP and RRF recipients] and potentially delaying the distribution of much needed grant funds,” Hochheiser said.

Lendistry, through a spokesperson, declined to comment and referred Newsday to ESD. 

Agency spokesperson Emily Mijatovic said the ineligible grantees represent a tiny fraction of the 40,842 small businesses that were helped.

“Ineligible recipients are being contacted, and ESD is actively pursuing full recoupment,” she said.

Grantees confused, angry

The repayment demands have been greeted with a mixture of bewilderment, anger and resignation on Long Island.

At least three grantees said they are challenging the audit’s findings, two have repaid the money, three appear to have closed permanently and one said they were told by a state official not to worry about returning the money. Ten didn’t respond to certified letters and visits by Newsday or declined to comment for this article.

Applying for the state relief and then responding to the repayment demand has been confusing and frustrating for Jerry Pagoulatos, part owner of Snack House Inc., which operates Sunrise Diner in Wantagh. His father started the business in 1972.

When Snack House applied for a state grant of $31,174, only its first PPP loan of $164,657 had been forgiven — and ESD rejected the grant request because the PPP loan amount exceeded the guidelines at the time, Pagoulatos recalled.

“ESD later contacted me and advised that my application had been reevaluated and approved following the program's expansion,” he said, referring to Gov. Kathy Hochul raising the PPP limit to over $250,000 in August 2021.

Upon receiving a letter from a law firm demanding repayment of the grant, Pagoulatos said he explained Snack House’s eligibility and provided a timeline of his applications for federal and state relief.

"They ceased requesting any repayment," he said.

Pagoulatos added that he also sent a letter to ESD, and the agency’s senior vice president of small business capital access, Rafael Salaberrios, “verbally confirmed that no repayment would be required.”

In a brief interview in March with Newsday, Salaberrios said ESD had hired the law firm to help ineligible grantees navigate the repayment process. He declined to comment further.

Asked about Snack House, the ESD spokesperson said last month that the agency “has not waived repayment for any business identified as ineligible absent a formal written determination.”

When Ibrahim Sergi received the repayment letter about his $16,950 grant, he said he thought it was a scam.

“We put down all the correct information on the application, and then after all this time, they say, ‘You’re not eligible.’ It doesn’t make sense,” said Sergi, owner of specialty coffee purveyor Sergi Enterprise Inc. in West Babylon.

He said repaying the grant funds would be difficult because his 10-year-old shop hasn’t fully recovered from the pandemic. Some months, he dips into his savings to keep the doors open and pay his three employees.

“We’ve cut hours as much as we can," Sergi said. "Business is not great.”

State agency required to recoup money

Still, the auditors are requiring ESD to recoup the grant funds. Repayment letters have been sent, and in some cases, the office of state Attorney General Letitia James has begun negotiating payment plans that include interest charges, grantees reported.

The ESD spokesperson, citing the potential for litigation, declined to provide details about the interest charges and the consequences for grantees who refuse to repay. Auditors from the comptroller's office recently told ESD that they will review the collection efforts.

Eric Alexander, founder of the LI Main Street Alliance, which represents 45 downtowns and helped small businesses apply for the grants, said those found to be ineligible "need to be held accountable, but the intention here wasn't criminal."

He and others noted that then-Gov. Andrew M. Cuomo’s shutdown of most economic activity in 2020 to combat COVID-19’s spread was devastating to small firms. Many never reopened, and those that did have struggled to turn a profit ever since.

He and Scott Wexler, executive director of the 2,000-member trade group Empire State Restaurant & Tavern Association, suggested the State Legislature and Hochul consider waiving repayment of the grants for restaurants, gyms and other hard-hit industries.

“ESD doesn’t have the legal authority not to go after the funds, but perhaps we’ll see legislation down the road that allows for some amnesty,” Wexler said.

In St. James, Tucci contended his gyms qualified for the state help because their two PPP loans totaled $1 million, or about 20% of their pandemic losses.

Prior to submitting its grant application, Energy Fitness had been “unable to obtain sufficient business assistance from federal programs,” he said, citing the state program’s eligibility requirements.

“Our industry was among the hardest hit by COVID-19,” Tucci said. “To say we didn’t qualify is incredible. I will fight this."