March 4 (Bloomberg) -- A block from Greenwich, Connecticut’s main street, where Saks Fifth Avenue and Tiffany stores vie for shoppers, sits the hedge-fund capital’s YMCA, brought to the brink of insolvency after building an Olympic-size swimming pool.
More than five years after it began, a project to expand and update the landmark Y remains unfinished as the cost soared 60 percent to $41 million. The Y halted construction and defaulted on $20 million of municipal bonds, leaving it to negotiate with creditors such as JPMorgan Chase & Co. as it tries to raise more money in a town that’s home to some of the wealthiest people in America.
“It’s sad,” said Michael D’Andrea, 65, a former Y director who dropped his membership last year to use another gym. “They might be rich here but they’re not stupid. People are going to say it’s like throwing money in a black hole.”
The Y’s predicament shows that even in Greenwich, charity has its limits. The town is home to about 100 hedge funds and industry leaders including Paul Tudor Jones, founder of Tudor Investment Corp., and Steven A. Cohen, the billionaire who runs SAC Capital Advisors LP. Its more than 60,000 residents had a median family income of $117,857 in 2007, more than double the $52,673 U.S. midpoint, according to Census Bureau figures.
The Y’s directors counted on donations as they sought to transform the institution into a modern, family-friendly place worthy of its surroundings, where the average home sells for about $2.5 million. Instead, as costs soared, contributions fell 30 percent to $3.7 million in 2009 from $5.3 million a year earlier, according to U.S. Internal Revenue Service filings.
Building for Giving
“It was kind of like, if you build it they would give,” said Jeffrey Asher, executive director of the Connecticut Health and Educational Facilities Authority in Hartford, the agency that approved the nonprofit’s $20 million tax-exempt bond sale in 2005. “You’d think in Greenwich that would be realistic.”
The default also illustrates a peril of investing in the $2.86 trillion municipal-bond market. The Y sold unrated securities backed initially by a letter of credit from the Bank of New York Mellon Corp. Municipal-bond defaults reached a record $8.5 billion in 2008 amid the credit crisis, falling to $2.7 billion last year, according to Richard Lehmann, publisher of Distressed Debt Securities newsletter.
Greenwich residents still support the Y, which opened the 50-meter (164-foot) pool in September 2007, according to Jeffrey Dishner, chairman of the organization’s board of directors. He said $6 million is needed to pay bills and finish renovating the original 57,200 square-foot building.
Return to ‘Fabulous’
“That will solve the problem once and for all,” said Dishner, chief operating officer of Starwood Capital Group LLC, a Greenwich-based private-equity firm started by hotelier Barry Sternlicht. “I still firmly believe we are going to get this project completed and return to a fabulous institution.”
Today, sections of the original red-brick building’s white-columned facade remain shrouded in debris-retaining green mesh. An exterior wooden staircase for construction workers extends from a four-story wing to the ground. A second phase of the expansion, to add a $7 million gym, has been suspended.
Parts of the Y’s unfinished interior are off-limits to its 6,000 members, including a planned child-care center and the old pool, which was to be converted into a therapeutic facility.
The Y had to undertake the ambitious overhaul or risk going out of business, said Sandra Waters, a director and Greenwich resident. She and her husband, Steve, are named on the wall of the new pool building to commemorate their donations. When project planning began in the 1990s, the building was run down and membership, at fewer than 4,000, was falling, she said.
‘Leap of Faith’
“We decided that really to save the Y we had to do that,” Waters said about the project. “We took a leap of faith.”
The board hired a new chief executive officer, John Eikrem, from a YMCA in Beverly Hills, California, in 1997 to oversee the project. The organization was renamed the Greenwich Family YMCA, to broaden its appeal.
In April 2002, the Greenwich Planning and Zoning Commission approved renovating the building and adding 45,300 square feet. The plan called for replacing the original 60-foot-long pool and gym built in 1916, as well as adding a 95-space underground garage on the 2.7 acre site, according to town records. Membership was projected to rise to 7,500, the records show.
To help pay for the work, the Y sold a 30-acre island in Long Island Sound to the U.S. Fish and Wildlife Service for about $5.5 million in 2003. It also shut down rooms on the top floors of the building that were rented to transients in anticipation of the overhaul. The temporary residences were a legacy from the origins of the Young Men’s Christian Association, started in London in 1844.
When the state agency approved the Y’s debt sale in 2005, officials there were concerned that the amount might be too great a burden, Asher said. The Y had less than $2 million of cash and other easy-to-sell assets on hand, after excluding proceeds from property sales, he said. At the time, he was the authority’s chief financial officer.
The Y sold variable-rate bonds, instead of conventional fixed-rate securities. The backing from the bank’s letter of credit gave investors protection from losses in the event of a default, Asher said. New York-based Gates Capital Corp. underwrote the securities, according to bond documents.
Fundraising was certain to rise to meet costs once the work began, and membership would reach 10,000, Eikrem told Asher’s agency in June 2005, according to minutes of the meeting. The minutes say that “$500,000 as capital campaign contributions for each year has been added to the financial projections,” based on fund-raising at Connecticut YMCAs.
In the months before the credit crisis began, the Y held its most successful annual golf tournament, raising about $120,000 at the nearby Tamarack Country Club, according to a video of the event. In May 2007, it attracted about 600 people for wine and hors d’oeuvres and brought in $25,000 at the Stone Chase mansion, a new 18,000 square-foot home built “on spec” by a Y director in the northern reaches of the town.
In all, the organization has raised $21.8 million since the project began, including $13 million from directors and $8.8 million from the community, said Rachel Reese, a spokeswoman.
Some of that cash helped cover operating losses. In 2008, the nonprofit reported expenses from operations of about $6.92 million and fee income of about $4.03 million, according to IRS filings. In 2009, operating costs rose 14 percent to about $7.88 million, while fees increased 12 percent to about $4.5 million.
By the time the pool opened, the estimated cost to finish the project was approaching $40 million, up from $25.8 million. The increase stemmed partly from rising prices for materials such as steel and from unanticipated site-preparation complications. Eikrem left the Y in 2007 and was followed by a succession of three leaders.
The project ground to a halt in July 2009. Later that year the Y stopped making monthly interest and principal payments, triggering a default on its bonds. The organization had budgeted more than $1 million a year for debt service.
Worth Construction Co., the project’s Bethel, Connecticut-based general contractor, filed a lien against the property seeking $4.1 million, according to court records. Erik Loftus, a lawyer at Anderson, Reynolds & Lynch in New Britain, Connecticut, which represents the company, declined comment when reached by telephone. Four other companies also filed liens, totaling about $856,000, according to the records.
Holding $13 Million
JPMorgan, which in 2008 succeeded the Bank of New York as the letter of credit provider, now holds about $13 million of the Y’s bonds. The New York-based bank sued late last year, asking a Superior Court judge in neighboring Stamford to make the Y’s property available for other uses.
Rebecca Witherell, an heiress whose $100,000 donation in 1912 paid for the original building, put a provision in the deed that restricts it to the exclusive use by the Y. The building is listed in the U.S. National Register of Historic Places. JPMorgan’s suit remains pending, according to court records.
Tom Kelly, a spokesman for the bank, the second-largest in the U.S. by assets, declined comment.
“The creditors are doing what they need to do to preserve their position,” said Dishner, the Y’s board chairman. They are “being quite helpful” by giving the organization more time to raise money, he said.
Dishner declined to comment on local news reports that Greenwich Hospital, which is part of the Yale New Haven Health System, is in talks to take over the new pool.
“Greenwich Hospital is constantly exploring new opportunities to enhance the health and wellness of our community,” said George Pawlush, a spokesman for the institution.
The Y has joined the bank in asking the court to remove the deed restriction, according to Reese, the spokeswoman. Dean Montgomery, a lawyer at Bentley, Mosher, Babson & Lambert PC in Greenwich who represents the trustee for Mary D. Washbourne, an heir of the Witherell estate, declined comment.
“A lot of people worked really, really hard to try to make it a better Y,” said Frank Farricker, a Greenwich Planning and Zoning commissioner. “A lot of people made exceptional sacrifices. There is a lot of concern that it may not survive and that would not be a good thing for the town.”
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