April 4, 2005
Contract and expand | How companies finance expansion, relocation and a host of other complicated scenarios
By Vanessa Cirulli
It wasn't long ago that Wahlco Engineered Products Inc. was going under. The Lewiston heavy-duty metal manufacturer had been through several owners, but it was Tennessee-based parent company Thermatrix that finally filed for Chapter 11 in 1999. More than 60 employees in the Lewiston-Auburn area were threatened with unemployment. But John Bader and six other managers with decades of experience at WEP had a plan to put the plant back on its feet.
By 2001, with help from their bank and a host of community-based gap financing institutions, they had not only put the Lewiston plant back in business, but they'd also bought their sister company in the United Kingdom. The group turned the company into what is now WahlcoMetroflex, a growing air pollution control system manufacturer with more than $9 million in revenues last year.
Every year, dozens of businesses like WahlcoMetroflex reinvest in, expand or simply relocate their physical plant. And while there are an array of programs to finance startups across the state, financing options for existing companies are less well-known ˆ though, in fact, expansion financing tends to be easier to receive, since there is less risk for lenders in operating companies than in startups. In the end, how Maine businesses finance expansion is as varied as the businesses themselves. With that in mind, Mainebiz decided to check in with a few companies across the state ˆ with expansions or relocations either underway or completed ˆ to see how they did it.
"When companies are looking to expand their physical space it's because they are increasing their revenues," explains Jerry Bazatta, vice president of small business lending in Maine for Portland-based TD Banknorth Inc. "But people forget about the [increased cost of] electric, the insurance... your taxes go up."
The key to anticipating the hidden costs of an expansion, says Bazatta, is consulting with a lender early on. "There's a lot of money out there," he says, adding that if companies are to tap into those funds, "they need to bring in the bank on day one." According to Bazatta, not exploring finances at the beginning of the project only causes frustration in the end.
While a conventional commercial loan keeps financing an expansion simple, a company that lacks sufficient capital or doesn't have a solid business plan sometimes makes it difficult for traditional lending institutions to take the risk, says Bazatta. But banks require assets as collateral, and smaller businesses often have little to put down. "A lot of times we'll be interested in a project, but we're not interested in taking on all of the debt ourselves," says Bazatta.
A simple deal
To offset the risk, lending institutions like Banknorth turn to a host of municipal, state, federal and community lending programs for gap financing support. The granddaddy of these independent lending agencies is the U.S. Small Business Administration. Created in 1953 under President Eisenhower as an independent agency of the federal government, the SBA aims to aid and counsel small businesses. Banks work in conjunction with the SBA to help shore up the risk, says Bazatta, and in turn, the SBA works with the lender. "If it's not viable, [the bank's] not going to make the loan in the first place," says Bonnie Erickson, public relations manager for the SBA in Maine.
The SBA has strict standards for the size of businesses with which it works, but since its funds come from a federal budget line item, the agency "can afford to take the risk," says Erickson. The relationship between the SBA, traditional lenders and gap financing institutions is "a model in Maine," says Erickson. "We're lucky to have these close relationships. The last thing the SBA wants to do is see someone go under."
One company benefiting from this relationship is Toegoz, a flip-flop company that recently relocated from a leased space in Sanford to a building it purchased on Riverside Industrial Parkway in Portland. Travis Holland, co-owner of Toegoz, found out about the SBA in a meeting with Norway Savings Bank, with whom Holland and his business partner, Dave Hoidal, have worked since they started the company in 1999. Using the SBA's 504 guaranteed loan program, which is aimed at operating companies, Toegoz was able to cut its down payment in half, to 10%, while the SBA picked up 40% and the bank the remaining 50% of the $975,000 loan. "It's the cheapest route," says Holland. All told, he says, the transaction was fairly simple to put together.
"The SBA 504 allows for a very favorable 20-year note, a fixed-rate commercial loan and a low down payment," says Steve Lovejoy, loan and investment officer for Coastal Enterprises Inc., the private, nonprofit development corporation in Wiscasset, which administers the SBA 504 program. "For a young, growing company like Toegoz, [the SBA 504] is very attractive," he says.
The current limit for a 504 loan is $1.5 million for most projects, but if the project meets a public policy goal, the SBA will contribute up to $2 million, according to Lovejoy. Manufacturing enterprises are eligible for up to $4 million.
In addition to underwriting SBA loans, since CEI is also a direct lender, it sometimes steps in to finance a portion of a business loan directly, according to Lovejoy. In some cases, it draws funding from a large portfolio of loan and private foundation sources to secure 100% of the borrower's loan. "There are so many different resources out there," Lovejoy says. "Maine has a lot of people that are trying to make things happen, and we're all trying to work together."
Taking incentives
Rynel Inc., a manufacturer of polyurethane foam, was landlocked on a Boothbay property that couldn't accommodate any expansion. In 2003, the company began searching for a location within 30-40 miles of Boothbay that not only would allow it to double its current 20,000-square-foot facility, but that also offered high-speed Internet access and town water and sewer. In addition, the new facility had to make sense for Rynel's employees. After a year of research, Rynel decided to lease space from National RE/Sources, a redeveloper of "brownfield" industrial sites that has purchased the former Maine Yankee site in Wiscasset. National RE/Sources is building a 40,000-square-foot facility to suit Rynel's needs in the Point East business park. Rynel expects to move in later this year.
Leasing the space from National RE/Sources saved Rynel $3 million in building costs, according to Todd Batchelder, Rynel's CFO. "We didn't have to put down a down payment," he says. "They are financing the building, our lease gives us a purchase option and they are receiving a commitment from us that we're going to make 15 years of lease payments."
Rynel's financing is a combination of bank debt, equipment lease financing and local and state tax breaks. "We've gotten some great support from Bangor Savings over the years," Batchelder says of Rynel's leading lender, which is providing working capital support and a portion of the company's equipment costs. In addition, Rynel uses lease financing from Citizens Bank ˆ a new relationship for Rynel, but an existing one for Batchelder, who worked with the bank at a previous job ˆ for additional manufacturing and production equipment needs. That means the company avoids paying for the equipment up front and in cash, says Batchelder, adding that the strategy yields significant cash flow advantages and keeps the initial costs of the move lower overall.
Part of Rynel's decision to locate in Wiscasset resulted from the availability of tax incentives through Gov. John Baldacci's Pine Tree Zone program. The company plans to reap the benefits of employment tax increment financing, refunds of corporate income tax and insurance premium taxes, and a sales and use tax exemption for zone-related construction materials and equipment purchases. The Pine Tree Zone program also includes municipal tax increment financing, a five- to 20-year property tax exemption based on the increased value of the project property due to new construction or significant improvements.
According to Don Alexander, Wiscasset's economic development director, the exemption allows the town to keep up to 100% of all new taxes generated from Rynel's property, averaging $84,000 per year. However, through a credit enhancement agreement, Wiscasset will offset Rynel's expansion costs by returning 35% of the new taxes, or about $30,000, back to the company in each of the next 20 years, says Alexander. The remaining 65% goes to Wiscasset's economic development fund.
A bankruptcy buyout
While Rynel's expansion required financing finesse, the most challenging and creative financing plays out in bankruptcy buyout situations, says CEI's Steve Lovejoy, because "no one knows what's going to change." So when John Bader and his six partners decided to buy Wahlco Engineered Products Inc. from Thermatrix in 2000, they pulled an array of financing institutions into the deal. "We just started knocking on doors," says Bader. "We put a presentation together and told them what we could do. We had the talent, the expertise, the wherewithal ˆ but not enough money."
Based on the $2.5 million worth of assets the group wanted to buy out of bankruptcy, Boston-based Wells Fargo Business Credit ˆ former associates of Bader's when they were Beacon Business Credit ˆ was willing to lend 50% of the estimated total cost of the buyout. "Banks typically use assets to secure their part of the loan," says Ken St. Amand, loan portfolio manager for the Lewiston-Auburn Economic Growth Council, which helped fund the purchase. By contrast, he says, Maine's gap financing institutions lend on good management, personal assets, a solid financial plan and the company's benefit to the community.
The junior lenders involved in the WahlcoMetroflex project included CEI, the Finance Authority of Maine, the Androscoggin Valley Council of Governments and the LAEGC. Together, the groups contributed $900,000 to the project. While the LAEGC and lending institutions like it don't do high-risk deals, according to St. Amand, the total possible funding from partnering with other community agencies can be significant. Bader concurs, saying the deal "would not have happened without all the agencies in Maine."
As in the WahlcoMetroflex deal, it's common for community agencies like CEI to work alongside the SBA and banks, so the agencies try to make the borrowing process as simple as possible. When two or more of the institutions are employed on a single project, for example, only one application is required. The agencies then collaborate with each other and the community to share resources and risks.
According to St. Amand, community lending institutions look for deals that create jobs with a livable wage within a certain timeframe. "The bank doesn't care about jobs in Maine," says Bader, referring to the company's senior lender. "These guys do. They want to bring jobs and growth to the area, so they're really motivated and they have a lot of expertise dealing with complex deals." Between all of the parties, Bader's group was able to put together a financing package totaling $4.5 million based on the projected cost of the buyout. They closed the deal in 2001 for $1.5 million ˆ $3 million under budget. (Due to the lower-than-expected cost, the company decreased the amount of its Wells Fargo loan, keeping enough to cover the cost of equipment and provide some working capital. But the firm kept the $900,000 in loans from local agencies, due to more favorable interest rates.)
"For years and years this company was run by people who weren't local," says Bader. "Then the people who worked here became owners."
By 2001, with help from their bank and a host of community-based gap financing institutions, they had not only put the Lewiston plant back in business, but they'd also bought their sister company in the United Kingdom. The group turned the company into what is now WahlcoMetroflex, a growing air pollution control system manufacturer with more than $9 million in revenues last year.
Every year, dozens of businesses like WahlcoMetroflex reinvest in, expand or simply relocate their physical plant. And while there are an array of programs to finance startups across the state, financing options for existing companies are less well-known ˆ though, in fact, expansion financing tends to be easier to receive, since there is less risk for lenders in operating companies than in startups. In the end, how Maine businesses finance expansion is as varied as the businesses themselves. With that in mind, Mainebiz decided to check in with a few companies across the state ˆ with expansions or relocations either underway or completed ˆ to see how they did it.
"When companies are looking to expand their physical space it's because they are increasing their revenues," explains Jerry Bazatta, vice president of small business lending in Maine for Portland-based TD Banknorth Inc. "But people forget about the [increased cost of] electric, the insurance... your taxes go up."
The key to anticipating the hidden costs of an expansion, says Bazatta, is consulting with a lender early on. "There's a lot of money out there," he says, adding that if companies are to tap into those funds, "they need to bring in the bank on day one." According to Bazatta, not exploring finances at the beginning of the project only causes frustration in the end.
While a conventional commercial loan keeps financing an expansion simple, a company that lacks sufficient capital or doesn't have a solid business plan sometimes makes it difficult for traditional lending institutions to take the risk, says Bazatta. But banks require assets as collateral, and smaller businesses often have little to put down. "A lot of times we'll be interested in a project, but we're not interested in taking on all of the debt ourselves," says Bazatta.
A simple deal
To offset the risk, lending institutions like Banknorth turn to a host of municipal, state, federal and community lending programs for gap financing support. The granddaddy of these independent lending agencies is the U.S. Small Business Administration. Created in 1953 under President Eisenhower as an independent agency of the federal government, the SBA aims to aid and counsel small businesses. Banks work in conjunction with the SBA to help shore up the risk, says Bazatta, and in turn, the SBA works with the lender. "If it's not viable, [the bank's] not going to make the loan in the first place," says Bonnie Erickson, public relations manager for the SBA in Maine.
The SBA has strict standards for the size of businesses with which it works, but since its funds come from a federal budget line item, the agency "can afford to take the risk," says Erickson. The relationship between the SBA, traditional lenders and gap financing institutions is "a model in Maine," says Erickson. "We're lucky to have these close relationships. The last thing the SBA wants to do is see someone go under."
One company benefiting from this relationship is Toegoz, a flip-flop company that recently relocated from a leased space in Sanford to a building it purchased on Riverside Industrial Parkway in Portland. Travis Holland, co-owner of Toegoz, found out about the SBA in a meeting with Norway Savings Bank, with whom Holland and his business partner, Dave Hoidal, have worked since they started the company in 1999. Using the SBA's 504 guaranteed loan program, which is aimed at operating companies, Toegoz was able to cut its down payment in half, to 10%, while the SBA picked up 40% and the bank the remaining 50% of the $975,000 loan. "It's the cheapest route," says Holland. All told, he says, the transaction was fairly simple to put together.
"The SBA 504 allows for a very favorable 20-year note, a fixed-rate commercial loan and a low down payment," says Steve Lovejoy, loan and investment officer for Coastal Enterprises Inc., the private, nonprofit development corporation in Wiscasset, which administers the SBA 504 program. "For a young, growing company like Toegoz, [the SBA 504] is very attractive," he says.
The current limit for a 504 loan is $1.5 million for most projects, but if the project meets a public policy goal, the SBA will contribute up to $2 million, according to Lovejoy. Manufacturing enterprises are eligible for up to $4 million.
In addition to underwriting SBA loans, since CEI is also a direct lender, it sometimes steps in to finance a portion of a business loan directly, according to Lovejoy. In some cases, it draws funding from a large portfolio of loan and private foundation sources to secure 100% of the borrower's loan. "There are so many different resources out there," Lovejoy says. "Maine has a lot of people that are trying to make things happen, and we're all trying to work together."
Taking incentives
Rynel Inc., a manufacturer of polyurethane foam, was landlocked on a Boothbay property that couldn't accommodate any expansion. In 2003, the company began searching for a location within 30-40 miles of Boothbay that not only would allow it to double its current 20,000-square-foot facility, but that also offered high-speed Internet access and town water and sewer. In addition, the new facility had to make sense for Rynel's employees. After a year of research, Rynel decided to lease space from National RE/Sources, a redeveloper of "brownfield" industrial sites that has purchased the former Maine Yankee site in Wiscasset. National RE/Sources is building a 40,000-square-foot facility to suit Rynel's needs in the Point East business park. Rynel expects to move in later this year.
Leasing the space from National RE/Sources saved Rynel $3 million in building costs, according to Todd Batchelder, Rynel's CFO. "We didn't have to put down a down payment," he says. "They are financing the building, our lease gives us a purchase option and they are receiving a commitment from us that we're going to make 15 years of lease payments."
Rynel's financing is a combination of bank debt, equipment lease financing and local and state tax breaks. "We've gotten some great support from Bangor Savings over the years," Batchelder says of Rynel's leading lender, which is providing working capital support and a portion of the company's equipment costs. In addition, Rynel uses lease financing from Citizens Bank ˆ a new relationship for Rynel, but an existing one for Batchelder, who worked with the bank at a previous job ˆ for additional manufacturing and production equipment needs. That means the company avoids paying for the equipment up front and in cash, says Batchelder, adding that the strategy yields significant cash flow advantages and keeps the initial costs of the move lower overall.
Part of Rynel's decision to locate in Wiscasset resulted from the availability of tax incentives through Gov. John Baldacci's Pine Tree Zone program. The company plans to reap the benefits of employment tax increment financing, refunds of corporate income tax and insurance premium taxes, and a sales and use tax exemption for zone-related construction materials and equipment purchases. The Pine Tree Zone program also includes municipal tax increment financing, a five- to 20-year property tax exemption based on the increased value of the project property due to new construction or significant improvements.
According to Don Alexander, Wiscasset's economic development director, the exemption allows the town to keep up to 100% of all new taxes generated from Rynel's property, averaging $84,000 per year. However, through a credit enhancement agreement, Wiscasset will offset Rynel's expansion costs by returning 35% of the new taxes, or about $30,000, back to the company in each of the next 20 years, says Alexander. The remaining 65% goes to Wiscasset's economic development fund.
A bankruptcy buyout
While Rynel's expansion required financing finesse, the most challenging and creative financing plays out in bankruptcy buyout situations, says CEI's Steve Lovejoy, because "no one knows what's going to change." So when John Bader and his six partners decided to buy Wahlco Engineered Products Inc. from Thermatrix in 2000, they pulled an array of financing institutions into the deal. "We just started knocking on doors," says Bader. "We put a presentation together and told them what we could do. We had the talent, the expertise, the wherewithal ˆ but not enough money."
Based on the $2.5 million worth of assets the group wanted to buy out of bankruptcy, Boston-based Wells Fargo Business Credit ˆ former associates of Bader's when they were Beacon Business Credit ˆ was willing to lend 50% of the estimated total cost of the buyout. "Banks typically use assets to secure their part of the loan," says Ken St. Amand, loan portfolio manager for the Lewiston-Auburn Economic Growth Council, which helped fund the purchase. By contrast, he says, Maine's gap financing institutions lend on good management, personal assets, a solid financial plan and the company's benefit to the community.
The junior lenders involved in the WahlcoMetroflex project included CEI, the Finance Authority of Maine, the Androscoggin Valley Council of Governments and the LAEGC. Together, the groups contributed $900,000 to the project. While the LAEGC and lending institutions like it don't do high-risk deals, according to St. Amand, the total possible funding from partnering with other community agencies can be significant. Bader concurs, saying the deal "would not have happened without all the agencies in Maine."
As in the WahlcoMetroflex deal, it's common for community agencies like CEI to work alongside the SBA and banks, so the agencies try to make the borrowing process as simple as possible. When two or more of the institutions are employed on a single project, for example, only one application is required. The agencies then collaborate with each other and the community to share resources and risks.
According to St. Amand, community lending institutions look for deals that create jobs with a livable wage within a certain timeframe. "The bank doesn't care about jobs in Maine," says Bader, referring to the company's senior lender. "These guys do. They want to bring jobs and growth to the area, so they're really motivated and they have a lot of expertise dealing with complex deals." Between all of the parties, Bader's group was able to put together a financing package totaling $4.5 million based on the projected cost of the buyout. They closed the deal in 2001 for $1.5 million ˆ $3 million under budget. (Due to the lower-than-expected cost, the company decreased the amount of its Wells Fargo loan, keeping enough to cover the cost of equipment and provide some working capital. But the firm kept the $900,000 in loans from local agencies, due to more favorable interest rates.)
"For years and years this company was run by people who weren't local," says Bader. "Then the people who worked here became owners."
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