City loosens stake to increase daycare’s chances of survival

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by Jordan Green

City leaders are willing to relinquish a clause that would allow them to claw back property sold to a daycare to give the nonprofit the best shot at survival. They reason that keeping the daycare afloat will protect the city’s $527,000 investment in the facility and meet a need for childcare that they consider critical for the continue revitalization of downtown.

The unanimous vote by Winston-Salem City Council on Monday night to relinquish the city’s claim on the property of Mudpies Downtown East in exchange for a $200,000 payment by the daycare’s primary lender was not a surprise. The resolution was passed without comment as part of the consent agenda.

The deal had been worked out a week prior in closed session by the finance committee of city council.

“I think there’s an old saying you should never see sausage or laws being made,” Robert Clark, who chairs the committee, said at the time. “I’m glad we just did that in private.”

The daycare across the street from Wake Forest Innovation Quarter, which is operated by the nonprofit Northwest Child Development Centers, has racked up escalating debts since the city sold the property for the facility in 2011. Under the initial deal, the city sold the property to the nonprofit for $362,505, receiving a cash payment of $203,755. The remaining balance of $158,750 was to be forgiven based on new jobs being created and property taxes being paid. The property taxes are expected to repay the debt over a 10-year period.

Since the daycare opened in 2013, continuing financial challenges have prompted the city to step in and loan the nonprofit $483,000. The current balance on those debts is $399,250, putting the city’s total investment in the daycare at $527,000. The city’s investment is subordinate to a $2.1 million debt to BB&T, which financed construction of the building and leasing equipment. Part of the nonprofit’s debt to the bank is a $300,000 equipment lease at a high interest rate. The nonprofit wants to renegotiate the loan to purchase the equipment so they can reduce the interest rate. The nonprofit estimates the deal would increase their monthly cash flow by $8,000, which would in turn free up funds to repay the city loans.

But as a condition of approving the loan, the bank wants the city to relinquish a reversionary provision in the deed that allows the city to reclaim the land if it is no longer being used for the public purpose of providing nonprofit daycare services.

“Essentially, what we would like to see is some kind of resolution or option that could be signed by BB&T such that in the future the city has committed to a set hard number that the bank could then pay to have that released and they could go forward with a more smooth foreclosure and ultimate sale of the property,” Drew Phelps, a lawyer representing Northwest Child Development Centers, told the finance committee last week.

Clark said he came up with the $200,000 figure for the settlement.

“If they foreclose, most likely we would have to write off the loans,” he said, “and that $200,000 would certainly mitigate the pain.” He added that if the city’s asking price had been too high, the bank would likely have walked away from the deal, and this action could potentially protect the city’s $527,000 investment.

The finance committee was legally allowed to go into closed session under a state law that permits public bodies to preserve attorney-client privilege.

Clark said the reason for going into closed session is that he wanted City Attorney Angela Carmon to be able to explain some things to the other members of the committee without the knowledge of the nonprofit’s legal counsel.

“There’s different legal options that we have that I would prefer the other side not know about,” Clark said, “although they probably are aware of them.”

Northwest Child Development Centers CEO Tony L. Burton III said the nonprofit’s financial difficulties are tied to enrollment.

“We didn’t get the development in that area as fast as we thought we would,” he said. “One of the reasons we located there was the Innovation Quarter. The families that needed care did not come as fast as we expected. Now that people know that we’re there we’ve gotten the enrollment we need.”

Burton said enrollment at Mudpies Downtown East is up to 171 with a capacity of 196, while enrollment across the board is down. The nonprofit also operates a daycare on North Poplar Street at the other end of downtown, one in King and one in Mocksville, with plans to open a fifth facility near Lawrence Joel Veterans Memorial Coliseum. The Mudpies Downtown location on North Poplar Street has an enrollment of 99 with a capacity of 160. Burton said cuts to the department of social services have adversely affected parents’ ability to pay for daycare and the counties no longer make direct payments for daycare.

City leaders believe that quality daycare is essential to the successful revitalization of downtown, as Clark said when the finance committee met on Oct. 19.

Jason Thiel, president of Downtown Winston-Salem Partnership, said “there’s a lot of unmet need” for daycare in the center city. His own child was enrolled at Mudpies for about a year.

“Particularly in this part of downtown, near the Innovation Quarter, when you’re building new residential units and new employees are coming like Inmar, you have to think holistically so you can accommodate growth,” he said.

Thiel said childcare, like retail and restaurants, is a key component to attracting quality employers.

“At the time this is something that to me you have to go out and aggressively pursue the things that you need or you allow things to happen via the market,” he said. “I personally believe in a proactive approach in recruiting and playing a proactive role in determining how things unfold. The daycare was a strategic use; it was needed downtown. The market is playing a role. But there is some government help. It was controlled by the city. It was a public purpose. We are trying to build a well-rounded city. It wouldn’t have been able to happen without government assistance.”

As the sole Republican member of city council, Clark finds himself in an interesting position as the person who was tasked with putting together a deal to try to save Mudpies Downtown East.

“The medical school’s getting ready to move downtown, so there’s more folks coming,” he said. “So I think the demand will grow. I don’t think the city should be in the daycare business. If you look at the total investment, we have about 15 percent. I see us as a minor player trying to get a catalyst going.”

Clark noted that he voted against at least one of the city loans to Northwest Child Development Centers.

“I said, ‘You guys have got to get your financial house in order,’” he said. “I’ve already expressed in my vote my displeasure.

He added, “As chair of the financial committee, it is my job to try to come up with a plan to protect the city’s assets, and I think the plan we came up with encouraging BB&T to come up with that equipment loan and giving them almost $100,000 in cash flow, and make Mudpies a viable company and protect the city’s investment is a good one. I think I can wear two hats.”