Proposed east Winston-Salem daycare remains in financial limbo

by Keith Barber

Two hundred eighty-eight billion of the $787 billion in federal funding distributed by the American Recovery and Reinvestment Act of 2009 was aimed at tax benefits. To help spur investment in urban and economically depressed areas, or “recovery zones,” the legislation allows cities and counties to authorize funding for recovery zone area projects.

However, the individual municipalities are not held accountable for the bonds issued to underwrite projects. A letter of credit issued by a bank is the tool used to secure financing under each recovery zone area development project.

The financial advantage of a developer applying for a project in a designated recovery zone area is clear, said Denise Bell, Winston-Salem’s finance director.

“There’s a window of opportunity that the federal government through their stimulus program is allowing projects that would not normally qualify for tax-exempt status to qualify for tax-exempt status,” Bell explained.

Receiving a 35-percent break on interest on a project sounded like a win-win situation to Greensboro developer Lee Porter until he discovered the maze of regulations and bureaucracy he had to wade through to get his $1.9 million daycare facility project approved by private lenders and public boards like the Forsyth County Industrial Facilities & Pollution Control Financing Authority.

Porter’s project was approved by the Winston-Salem Finance Committee last November, and later by the city council. Gaining governmental approval was the easy part. Securing private funding for the project proved to be another matter altogether.

“You get about a 35 percent discount on your interest rate, but on top of that, you’ve got the cost of getting [the bonds] issued,” Porter explained. “Plus you’ve also got the cost of getting an annual letter of credit which is 2 percent of the bond total. The cost of getting those bonds issued and the interest rate on those bonds is cost prohibitive, but we’re plugging away.”

Bell explained that getting a relatively small bond issued — $3 million or less — requires private placement. That’s when a local institution finds lenders willing to loan the money without going into the public market.

Porter said he had received an education on the concept of private placement from Bell. The tutorial altered his expectations and his perspective on the project, he said.

“There is no actual money associated with these bonds,” Porter said. “It’s simply the authority of the municipalities to issue these bonds with a tax-free status. The money comes from private investors.”

Porter, president of Birch Development, is proposing to build a Mud Pies daycare facility in the 1300 block of North Liberty Street. Despite a modest project budget of $1.9 million, Porter estimated the fee for getting the bonds issued to be between $125,000 and $200,000. These upfront costs have severely hampered Birch Development’s efforts to get the project off the ground, he said.

“The two banks I’ve talked to will not take any real estate for that letter of credit,” Porter said. “They want cash.”

Birch Development is about two weeks away from submitting construction plans for the project, “but that is at a dead standstill until we get financing in place,” Porter said.

Jim Shaw, president of Liberty Street Community Development Corp., said he and Porter have been working diligently to secure funding for

the daycare center.

“I feel like we’re really on top of it,” Shaw said recently. “I’ve been on the phone all afternoon with banks, with [Durham-based] Self-Help [credit union], and I think Wachovia has a great interest in financing the bond sale. Hopefully by this time next week, we’ll know where we’re going to go with it.”

Self-Help is a nonprofit whose mission is to create and protect “ownership and economic opportunity for people of color, women, rural residents and low-wealth families and communities,” according to the group’s website.

The genesis of the project dates back three years ago when the city purchased the parcel from Shore Properties LLC as part of its Liberty Street Corridor redevelopment project, Paige said. Beginning in 2008, the city put out a request for proposals to solicit developers for the property. After no developers responded, the city turned to the Liberty Street Community Development Corp., and to Shaw.

Shaw then contacted Porter, and Birch Development came on board.

Tony Burton, CEO of Northwest Child Development Centers, said if the project goes forward, it would represent the largest facility in his organization’s network, and fill a void in an economically depressed area of Winston-Salem. “Especially in the area and the population we’re looking at, there is a growing need for childcare,” Burton said. “What’s happening here in Winston, a lot of [people from] sur- rounding communities are coming into Winston for work — that’s bringing a lot of parents to the area. This project will give us an opportunity to expand the quality of our services.” Currently, Northwest Child Development Centers runs six daycare facilities in Forsyth, Stokes and Davie counties. The agency offers childcare from birth to pre-kindergarten, childcare training for staff members in conjunction with local universities and family services for those who need additional assistance, Burton said.

Parents can apply for scholarships and vouchers through state education

initiatives like Smart Start and More at Four. Northwest Child Development Centers plans on partnering with HATCH — a local nonprofit dedicated to enriching early childhood education — to equip the new childcare facility with the latest technology.

“We use smart boards, which allows children to work with computers in the classroom,” Burton said. “They already use one of our centers to put their technology center.”

Burton estimates the new childcare center would create 35 new jobs with the potential to serve 200 additional children.

Northwest Child Development Centers currently employs 77 people with the capacity to serve 700 children. However, despite strong demand for childcare services in east Winston- Salem, the agency serves only 480 children to help maintain its 5-star rating, Burton said.

Despite the bureaucratic red tape and financial roadblocks, Burton hopes Porter and Birch Development will press forward to complete a project that is considered vital to the redevelopment of the Liberty Street Corridor.

“As far as the Liberty Street area, one thing this project would do for local universities with early education programs is offer area students the internship and work experience opportunities,” Burton said. “It would also offer employment opportunities for recent graduates of those schools. As the area is being redeveloped, it would bring more traffic, more awareness and more business opportunities to the area.”

The city of Winston-Salem supports the construction of the new Mud Pies daycare center “because it’s an excellent fit for that part of the city,” Paige said.

Responsibility for convincing institutional and private lenders the project is economically viable falls squarely on the shoulders of Shaw and Porter.

“It’s a difficult concept,” Porter said. “The market is going to determine whether it’s a viable project. You have public figures out there saying ‘We’re just giving them the money,’ and there is no money.”

Paige said four projects were submitted to city council by last year’s

Dec. 15 deadline. One proposal to build a skin surgery center estimated in the $6 million range is scheduled to go before the county’s industrial facilities & pollution control financing authority this month.

Due to the modest size of the Mud Pies daycare project, it may not fall into a category of for-profit projects that could benefit from the federal stimulus package, Paige said. Bankers will ultimately decide if the project is economically viable or not.

The financial wrangling has set back the start of construction of the proposed daycare center. The original completion date was set for June 2010. Now, the best-case scenario would be the facility breaking ground in late spring, Porter said.

“If somebody showed up tomorrow and said, ‘I’ve got financing,’ it would take a month to get all that paperwork and then another two months before breaking ground. Then, we’re looking at a seven-month construction process,” Porter added. “I think there are probably some opportunities and situations where that type of financing will work, I just don’t what they are.”

Shaw said the successful construction of the new daycare facility in the 1300 block of Liberty Street would symbolize something greater to the residents of the neighborhood.

“Before 1997, there hadn’t been a new building built on Liberty Street in 36 years,” he said. “We have a great love for this area. Liberty Street runs through the heart of downtown Winston-Salem, and we want to see it fixed up like the rest of the city.”

A vacant lot at the intersection of East Northwest Boulevard and North Liberty Street is the proposed site for a new Mud Pies daycare facility. If the project gets the necessary funding, it would create 35 new jobs and serve 200 children. (photo by Keith T. Barber)