Greenpoint Manufacturing and Design Center, Brooklyn, New York

"The fatal flaw of most social entrepreneurs is their tendency to try and go from 0 to 100 percent immediately…burning out quickly along the way. Start slowly, generate cash flow and a track record…" --David Sweeny, CEO, Greenpoint Manufacturing and Design Center

Project Summary

Like many social-economic development projects, the Greenpoint Manufacturing Design Center (GMDC), the only not for profit industrial developer in New York City, rose from the toil of a few opportunistic problem solvers. In this case David Sweeny set out to create and preserve quality blue-collar jobs for low income New Yorkers. While working at the North Brooklyn Community Development Corporation, before founding GMDC, David Sweeny studied ways to create jobs for skilled and semi-skilled tradesmen in low-income Brooklyn neighborhoods. Industrial abandonment led by local manufacturers seeking more affordable rent, had left thousands of low-moderate income residents either unemployed and on welfare, or commuting to outlying industrial zones for manufacturing jobs they relied on for economic independence. In 1958, New York City had more than 1 million manufacturing jobs and fewer than 300,000 people on welfare; in 1990 more than 1 million people were on welfare and fewer than 300,000 in manufacturing.

The decreasing availability of quality affordable light manufacturing space continued throughout the 1990's due to zoning changes and increasing competition from "dot com" companies and residential developers. A few small-time artisans and craftsmen, fleeing high rents in Manhattan, began to set up shop in an abandoned and dilapidated manufacturing building on Manhattan Avenue in Brooklyn. These few were the beginning of a re-birth of manufacturing to the Greenpoint neighborhood in Brooklyn.

In 1994, after he was asked by the City of New York to help resolve a situation between the City and tenants at the Manhattan Ave. building, Sweeny joined forces with the tenant group, to realize their shared vision of new manufacturing space and jobs in Greenpoint. The group formed GMDC and acquired the building for one dollar from the City of New York. At the time of the sale the building was in need of such extensive repair, that GMDC was thought to have taken on a $14 million liability for one dollar. Thus began the arduous process of making the building inhabitable. Initially only 40,000 of nearly 400,000 square feet were made inhabitable; translating to only 12 tenants. GMDC ultimately sunk almost $7 million into the building that now houses 72 small manufacturing businesses employing over 500 workers; 70 percent of them live in the Greenpoint or nearby Williamsburg neighborhoods of Brooklyn.

Central to Mr. Sweeny's success renovating and achieving 100 percent occupancy of the 1155 Manhattan building, as well four additional Brooklyn buildings over the last eight years, has been his ability to penetrate mainstream financial channels that traditionally have shunned non-profit organizations.

Financial Challenge:

GMDC's financial challenge was not very different from funding challenges facing non-profits across the country. Public funding was scarce and inconsistent, and private lenders were typically unenthusiastic about GMDC's not for profit business model and considered them more risk than they were worth. Sweeny commented at one point in the beginning that "…we were shopping for a line of credit and were continually rejected…, the banks gave us good chat on the phone, but they were skeptical." At the outset, GMDC lacked both a management track-record and consistent cash flow, and furthermore, owned a piece of property whose value was ambiguous at best and negative at worst (at least from the standpoint of the City of New York). Yet completion of renovation and improvements on the 1155 Manhattan building would require an estimated $7 million dollars; much more than they could possibly obtain from normal non-profit funding channels.

Upon GMDC's purchase of the building, one million dollars in capital was granted by the City of New York Municipal Assistance Corporation, and funded through general obligation bonds. While these funds were originally intended only to help bring the building up to absolute minimum inhabitable standards (based on NYC building codes), Sweeny's team was able to put them to a more important use. GMDC leveraged the grant funds to obtain further public funding that allowed them to complete the renovations necessary to accommodate positive cash flow generating occupancy levels.

The combination of this seed capital, Sweeny's contacts in the economic development arena, and the popularity of the "bring blue collar work back to Brooklyn" cause, enabled GMDC to tap into various other public funding resources. In 1996, GMDC received its first loan, for $250,000, from the Non-Profit Finance Fund (NFF); a New York based "Community Development Financial Institution" (CDFI). This loan enabled Sweeny to complete renovations of sufficient space for to twelve new tenants. With rents from these new tenants, GMDC began to finance additional improvements, adding tenants as more and more space was completed.

Between 1996 and 1999 GMDC received $600,000 from NFF as well as $700,000 in small grants and loans from various other foundations and public funding sources like the New York Foundation and the Federal Office of Community Services. This capital supplemented another $3 million in renovation capital obtained from GMDC's retained earnings. However, public funding was insufficient to complete renovation of the 1155 Manhattan site. Private financing was essential to obtain the estimated $2.5 million necessary to complete the project.

Transaction:

The first quarter of 1999 GMDC was generating positive cash flow and had bolstered its balance sheet with over $3 million in retained earnings. From a financial perspective, Sweeny's persistent focus on cash flow resembled more of a for-profit business than a not for profit community development organization. GMDC first considered approaching a private lender upon the recommendation of one of David Sweeny's contacts at Sandler, Oneil & Partners, a New York securities firm. Sweeny and his team shopped the loan around until they found interest at First Republic Bank. First Republic had just entered the New York City market from their home base in California, and was hungry for Community Reinvestment Act (CRA) credit. Combined with GMDC's reputation as a "Tiffany" economic redevelopment project in New York City, potential CRA credit was enough to spark serious interest from First Republic. To further solidify a deal, Sweeny was able to demonstrate GMDC's ability to generate sufficient net income to cover First Republics required 1:1.5 debt service coverage ratio. From the look of things, GMDC was now a very bankable prospect.

However, the transaction was not without other challenges. Placing a value on the facility was very difficult due to the fact that it was still largely deteriorating and unfinished. Sweeny pushed for an "as complete" appraisal, which would allow for the full $2.5 million plus a safety margin of additional equity, based on a maximum 50 percent loan to value ratio. First Republic initially insisted on an "as is" appraisal, but Sweeny was able to change their mind by demonstrating how the completed building would be self-sufficient with less than $1 million in revenues.

As with most "brown field" development projects, GMDC faced a substantial environmental cleanup liability that First Republic understandably wanted nothing to do with. Sweeny and his team were successful in obtaining an indemnity bond, which satisfied First Republic's requirement and helped move the project forward. GMDC closed on the $2.5 million loan in the summer of 1999.

This transaction provided Sweeny and his team with sufficient momentum and confidence to successfully continue their pursuit of private capital to fund new growth opportunities. GMDC's 1155 Manhattan building is an outstanding example of the remarkable capacity of non-profits to employ sound business models of profitability to become "bankable" and obtain the necessary capital to achieve their socially responsible goals. GMDC has gone on to finance four more buildings in the Greenpoint and Williamsburg neighborhoods of Brooklyn, using a mix of grants and loans from private and public sources.

Financial Structure:

The transaction with First Republic was a variable rate seven-year loan for $2.5 million, collateralized with the property at 1155 Manhattan. An initial three year grace period, during which only interest payments were due, enabled GMDC to complete the renovation and lease the additional space before principal payments came due. The variable interest rate was based on 3% over the 11th District Cost of Funds, limited to a minimum-maximum range of 7.10% to 12.95%.

The Greenpoint Manufacturing and Design Center Local Corporation is structured as a non-profit holding corporation with three subsidiary's, the Local Development Corporation, the Brooklyn Waterfront Corporation, and the Manhattan Avenue Holding Corporation. GMDC generates revenue from two primary sources, rent and sales of custom office furniture produced by its for-profit subsidiary "SPACECRAFT FURNITURE & MILLWORK." In fiscal year 2001 the corporation had a debt ratio of 59% and a debt to equity ratio of 1.45; both of which have proven acceptable to private lenders due to GMDC's consistent rental income and healthy net change in assets margin of 21%. There has typically been a waiting list of tenants for all of GMDC's developments.

Lessons Learned & Transferability:

According to David Sweeny, the most important lesson he learned in the process of taking GMDC from theory to reality was that patience, persistence and cash flow is critical. Careful regulated growth, lean management operations, and successful leverage of available subsidized capital were key to GMDC's access to mainstream financial resources. However, our observations of Sweeny and GMDC demonstrated to us not just the importance of the three qualities mentioned above, but also the importance of knowing or obtaining the identities of community development and finance players in the local area. Sweeny built strong relationships with key contacts during his time with the North Brooklyn Community Development Corporation; relationships he continued to nurture while at GMDC. Doing so not only helped Sweeny ensure sound financial advice, but also led to introductions that yielded critical access to mainstream capital markets. Strong relationships and knowledge of local community development programs and policy not only enabled the purchase of a city owned building for $1, but allowed GMDC to find public grant money that was sufficient to leverage for additional subsidized loans. Each of these steps was critical to building an organization with sufficient financial health to access mainstream financial channels.

Authors:

Daniel Jackson and Margarita Muzzall are Master of Business Administration degree candidates at the McDonough School of Business at Georgetown University. Before coming to Georgetown, Daniel was business manager for a "for-profit" elementary and secondary school district in Southern California. Margarita worked in project finance for First Union Bank in Virginia.