The Greyston Foundation: Financing a New Greyston Bakery
Summary by Lee Boyle and Jennifer Folsum
Project Summary
Over a three-year period that began in 1999, the Greyston Foundation was able to raise the funds necessary to build a $9 million, 23,000 square-foot baking facility in Yonkers, New York. The site is in a blighted section of town and about mid-way into the financing process the soil was determined to be a contaminated "brownfield." In spite of this and other setbacks, the Greyston Foundation was able to issue tax-free industrial development (IDA) bonds as the cornerstone financial piece. The bakery's financing also benefited from the Department of Housing and Urban Development's Enterprise Zone designation along with a similar designation from the State of New York.
Financial Component and Analysis
The Greyston Bakery is a fully functioning bakery located in South Yonkers, New York that primarily employs disadvantaged and chronically unemployed residents of Yonkers. The bakery is profitable, and its profits are used to help support the social service units of the Greyston Foundation such as Greyston Health Services and the Maitri Day Program. The bakery employs about 50 workers and produces mostly dessert foods such as cakes and brownies. The bakery sells its cakes and pastries to local restaurants, but most of its business comes from producing brownies and other ingredients for Ben and Jerry's ice creams.
In early 1999 it become clear to the operators of the Greyston Bakery that they had outgrown their baking facility and so they began looking for new space. The Bakery was committed to remaining in Yonkers and by mid-1999 had decided to try to build on an open lot just down the street from its current location, near the Hudson River. The property was attractive because it was within a new state Empire Zone, the state-level equivalent to a federal Empowerment Zone.
Greyston worked with Enterprise Foundation, Calvert Foundation, and the Heron Foundation to secure a total of $575,000 in below-market-rate loans for pre-development costs such as legal, design and architect fees. These loans involve interest rates ranging from four to six percent APR.
Through a connection of the Chair of the Board of Directors, Jonathan Rose, renowned designer Maya Lin (designer of the National Vietnam Memorial in Washington, DC) agreed to design the new facility. Working with architecture firm Cybul and Cybul, Ms. Lin designed a beautiful 23,000-foot facility with capacity for 120 workers.
The project gained significant momentum when Yonkers Industrial Development Agency (IDA) (www.cityofyonkersida.com) authorized Greyston to sell $ 4.5 million in tax-exempt bonds for construction. Greyston qualified for a Small-cap Industrial Bond, a form of tax-exempt municipal bond sanctioned by the federal government for businesses that have particularly positive social benefits.
Greyston found an investment banking firm based in New York called Advest (www.Advest.com), a specialist in economic development financing and industrial development bonds, to first help outline the project's different financing options. Advest was particularly helpful in identifying financing alternatives to tax-exempt bond such as direct placement of loans through various banks for Community Reinvestment Act (CRA) credit . Greyston finally settled on a tax-exempt option that the Advest helped Greyston write-up a financing proposal to go along with its business plan and began shopping for a bank to underwrite the bonds. Advest directed Greyston to ten banks and received serious interest from three and finally settled on the Key Bank (www.key.com), based in Cleveland, Ohio. In the end, Key Bank provided the letter of credit for the financing, which provided the security for the bonds which Advest sold. Once Greyston had secured a letter of credit, it decided to have Advest offer a variable rate bond, which has been historically much less expensive than fixed rate bonds.
Although Key Bank was only able to secure a $3.2 million bond sale (not the $4.5 million that was authorized by the Yonkers IDA), it was the lynchpin that allowed the rest of the $9.4 million deal to follow.
Though the bond portion only turned out to be about one third of total borrowings for the bakery, it was the centerpiece of the deal. Key Bank also offered an equity piece totaling $800,000, made possible by a $200,000 tax credit from NY State for investing in an Empire Zone.
Managers at the Greyston Foundation decided that a variable rate bond would be better than a fixed rate bond given market conditions. This differs from a fixed rate bond in that the bank issuing the bonds takes responsibility for paying the bondholders if Greyston cannot make its payments. Such a situation makes it much easier to value the bonds and their risk level because effectively the bonds are tied to the bank and not the issuing company.
Greyston was able to secure $1 million in loans from the US Department of Housing and Urban Development (from Section 108 funds) as well as $200,000 in federal dollars that was funneled through the Yonkers City Government.
Loan from Yonkers Bureau of Community Development was followed by a $500,000 grant from the US Department of Housing and Urban Development. Both monies came as a result of the Greyston property being within a NY State Empire Zone.
In early 2000, Greyston became aware that the site on which it was planning to build contained contaminated soil and would require an extra $1 million to be cleaned up. This complication nearly spoiled the deal, but Greyston was able to acquire environmental risk insurance in early 2001, which satisfied the lenders. Greyston was able to pay for the insurance and environmental clean-up costs using money that it acquired in early November 2001 from a $900,000 legal settlement with the party responsible for the contamination - an electric utility company that had created the contamination nearly 100 years ago. As a result, the Greyston Foundation signed a voluntary clean-up agreement with the State of NY that releases Greyston from any liability to the State for the contamination.
Initially, the Key Bank offer was for $5 million, but the appraisal of the new facility turned out to be lower than expected due to the economically depressed neighborhood. Therefore, the Key Bank reduced its offer to $4 million, which caused Greyston to look for subordinate lenders.
One million dollars of less-secured subordinate loans were secured with the Nonprofit Finance Fund (www.nonprofitfinancefund.org), an organization that loans money for projects with a financial mission. This loan was possible using a small part of the bakery's appraised value as well as the bakery's equipment, inventories and receivables as collateral.
Predevelopment loans totaling $575,000 from Enterprise, Heron, Calvert Foundations were secured throughout 1999 and are not included in the formal project costs (sources) that Greyston uses to summarize the financing of the Bakery.
Total Project Development Sources:
City of Yonkers IDA Bond $2,425,000 (Real Estate Bond) City of Yonkers IDA Bonds $700,000 (Equipment Bond) Interest on Bonds $100,000 NFF Loan $989,000 HUD Section 108 Loan $1,000,000 Greyston Foundation Loan $475,000 Brownfield Revolving Loan $276,250 Brownfield Revolving Grant $148,750 City of Yonkers Loan (CDA) $200,000 HUD EDI Grant $500,000 Empire State Development Grant $80,000 Greyston Bakery Equity $300,000 Greyston Foundation Equity/ Deferred Dev. Fee: $1,104,474 City of Yonkers TIP $300,000 KCDC/Key Bank Equity $800,000 Total Project Sources $9,398,474
KCDC = Key Bank Community Development Corporation
CDA = Community Development Activity
NFF =
EDI =
IDA = Industrial Development Agency
TIP=
Lessons Learned/Significance of Project
Take advantage, to the full extent possible, of every government incentive available.
These deals require much more complicated and take much more time to complete than traditional real estate transactions which normally involve just one bank and one equity partner. Projects like this that utilize a main lender and subordinate lenders as well government agencies make for deals that are extremely complicated and take lots of time to close. Such deals require at least one lawyer from each involved party and any alteration that is made in the deal can effect the role each party, which may require the deal to be significantly rewritten.
Transferability of the Project
It helps to get to know people in the non-profit finance world. Greyston was led to Advest by Greg Stanton, a former Wall Street investment banker who now heads up GMS Capital Access, a firm that specializes in helping socially responsible businesses. Without Advest or a similar firm, this deal would not have succeeded.
Investment Banking Firms that could be alternatives to Advest: Goldman Sachs, Merril Lynch, JP Morgan.
Recommendations
Supporting Documents
Contacts
Contact persons at Greyston Foundation:
Chuck Lief, President
914-376-3900 ext.264
Karen Tumulte, Executive Assistant
914-376-3900
Karent@greyston.org
Miro Weinberger, VP, Capital Projects
914-376-3900
Mirow@greyston.org
Other contacts:
Greg Anderson
Advest Group
212-484-3853
gregory.anderson@advest.com
http://www.advest.com/
About the Authors
Lee Boyle and Jennifer Fulsom are Masters of Business Administration candidates at the McDonough School of Business at Georgetown University. Mr. Boyle currently works part-time in the Social Research department at Calvert Asset Management, the nation's largest socially responsible mutual fund company. He will work in Calvert's marketing department this summer. Prior to business school, Mr. Boyle was a policy analyst for the US Congress, Deputy Press Secretary for President Clinton's Initiative on Race, and an inner-city teacher in Washington, DC. During business school Ms. Fulsom pursued a summer internship in investment banking and consulted on a variety of financial services consulting projects. Prior to business school, Ms. Folsom was an Associate in the High Net Worth Group at Legg Mason Wood Walker, Inc., where she helped manage a $3 billion client portfolio.