Student Corner: Federal grant funds for redevelopment: Overcoming challenges with “security” and cash flow

Community and Economic Development – Blog by UNC School of Government

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Student Corner: Federal grant funds for redevelopment: Overcoming challenges with “security” and cash flow

By CED Program Interns & Students

Published April 18, 2013

The STARworks Center for Creative Enterprise is located in Star, North Carolina. The organization is a product of the Central Park North Carolina Regional Partnership, a non-profit partnership between seven counties in the south-central region of North Carolina. The mission of both STARworks and Central Park is to support a new economy through entrepreneurship and job creation in the creative, agricultural, and alternative energy industries throughout the region. STARworks supports small businesses by providing inexpensive work space, technical assistance,and shared resources.

STARworks recently received a $1.175 million grant from the Economic Development Administration (EDA) of the U.S. Department of Commerce. The grant was awarded to support redevelopment of a 187,000 square foot, former textile mill into a new home for Central Park NC Regional Partnership and STARworks. The excitement of receiving a sizable federal grant was quickly quashed when the organization’s leadership learned details of the grant’s security requirements and payout provisions. Adequate security for the grant meant that the value of the project provided sufficient collateral and, in cases where additional funding had been provided by other sources, the EDA maintained an acceptable lien position.

Given the particular circumstances, STARworks needed an innovative solution in a short time period in order to meet EDA’s requirements.

EDA grants (like many federal grant programs) required first lien position on the property to be improved as a requirement of the grant.  Unfortunately, STARworks already had a loan on the property and the current mortgage lender controlled the deed. The other major issue with the EDA grant was that it required STARworks to complete the work first, then get reimbursed.  While this too is a common requirement, it created a significant cash flow issue, requiring STARworks to have up to $300,000 of cash on hand.

The DFI team at the School of Government helped identify options for STARworks, which are being implemented currently. First, in order to address the security issue, DFI recommended that STARworks divide the property, which included several buildings, in order to create separate deeds on portions of the property. Doing so allowed STARworks to section off the portion of the building where the grant would be invested. This concept satisfied both the requirements of the EDA grant and the needs of the existing mortgage lender.

This solution also had the added benefit of making it possible for STARworks to attract a short-term loan to address the cash flow needs created by the grant. With this new structure in place, DFI helped to identify mission driven private lenders to make this significant investment a possibility.

David E. Todd, Regional Counsel at EDA’s Atlanta office, said that EDA grants typically request first lien position, and most of the time there is not any difficulty in taking that position. However, if there is some pushback from a lender, EDA will usually offer to share a first lien. If a shared first lien is not an option and EDA would like the project to go forward, they will consider alternatives.

STARworks anticipates that the redevelopment project will be completed by 2015. The project will bring 50 new jobs and $1.5 million in private investment to the area. The funds are crucial to the mission of STARworks, and the businesses emerging from the incubator are the beginning of a new economy in the Central Park Region of North Carolina.

Sources:

• http://www.starworksnc.org/
• http://www.centralparknc.org/
• Interview with Nancy Gottovi, Executive Director, STARworks. 3/18/2013.
• Interview with David E. Todd, Regional Counsel, Atlanta Regional Office, EDA.
• http://www.eda.gov/news/pressreleases/2012/07/19/central_park_nc.htm

Alexandria Murnan, a current graduate student in the UNC Department of City and Regional Planning, is a Community Revitalization Fellow at the School of Government.