5.0. EDSR 02-13-2006ITEM / 5.
MEMORANDUM
TO: Economic Development Authority
FROM: Heidi Steinmetz, Assistant Director of Economic Development ~~
DATE: February 13, 2006
SUBJECT: Discuss EDA Business Incubator Program
Attachments
• Program History and Partnerships summary
• Business Incubator summary
• Letter from Larry Hickman dated February 7, 2006
• Page 5 of the August 8, 2005 EDA Minutes xe: Incubator budget & program
• 2006 Incubator budget
• Pxogxam recommendations from Harlan Jacobs dated February 8, 2006
Background
More details on the following information axe avaIlable in the attached Pxogxam History &
Partnerships and Business Incubator srunmaxies.
Program Inception
In 1997, the City received a Federal Community Development Block Grant, which was
loaned to "I'escom Corporation fox the expansion of their manufacturing facility in Elk River.
As the loan was repaid, the City was allowed to use the funds fox other economic
development projects within the City so the City &EDA chose to fund a Business
Incubator Pxogxam. A transfer from this loan fund to the Incubator account occurs annually
to offset the difference between Incubator expenditures (FDA's rent to building owner and
Incubator consultant's retainer fee) and Incubator revenues (Incubator tenant rent).
Program Components: Lease Space. Access to Capital and Technical Assistance
Lease Space
Ever since the program's inception, the I~DA has leased space in the former Furniture &
Things building on east Hwy 10 from building owner Larry Hickman. Incubator tenants
sublease individual suites varying in size from 1,041 to 2,505 SF from the EDA, paying rent
through a mixture of cash and stock.
Dlvcuss ILU~ Rusmcs's Incubator Program
Pcbmary 13, 2U0!
Page 2 oF4
In 2002, the EDA directed staff to research alternative building locations fox the pxogxam
due ro the building's lack of city services and capacity fox light assembly uses.
Access to Capital
Between 1997 and 2003, Incubator tenants enjoyed access to capital from the Anoka
Sherburne County Capital Fund (~SCCP) and the Elk River Investmcnt Club; however
neither fund has been active fox the past several years. The Initiative Foundation in Little
Falls still operates its Seed Capital Fund pxogxam, although the Foundation prefers to follow
the Lead of either the ASCCF ox the Elk River Investment Club when investing in projects.
Technical Assistance
Incubator tenants receive technical assistance from Harlan Jacobs of Genesis Business
Centers. The EDA has worked with Mx. Jacobs as its Incubator consultant since the
program's inception. He recruits & pre-qualifies Incubator prospects, assists tenants to
establish relationships with equity funders and aids in the process for applications to venture
capital funders.
Incubator Tenants
Year of Entry Company Time in Incubator Status
1997 SolaxAttic 5 years Operating in founder's
ersonal residence
1998 -PxotectoxCaxe 1 year fox each All companies no longer in
-Watermark company business
Submersibles
-MAS Technolo ies
2000 -Cymbet -Cymbet, 8 mos. -Cymbet leasing 14,800 SF
-Vertical Publishing -Vertical Pub, 2 yrs. in Elk River
-Vertical Pub. no longer in
business
2002 -Bixby Energy -Bixby, 1 year -Bixby will soon be leasing
Systems -I~-Nedca, 4 yrs. in 95,000 SF of space in
-K-Netica May 06 Brooklyn Paxk (currently
leasing 23,500 SF in
Rogers)
-K-Netica, current
Incubator tenant
2003 -Lap2 Technology 18 mos. -Lap2 leasing 300 SF' in
Cox Elk River
Program Budget
Attached axe the August 8, 2005 EDA minutes which summarize the F,DA's latest program
budget discussion. Also attached axe pxogxam revenues and expenditures analyses from the
last several years.
In summary, fox the last several years, there has been an approximately $16,500 shortfall in
revenues fox the pxogxam. The shortfall is funded by the Tescom loan fund as mentioned in
Discuss RDA Rosiness incabaWr Program
February t3, 2006
Page 3 of 3
the above "Program Inception" section. The account's current cash balance of $133,095 will
fund the annual estimated fmancial gap of the program under its current structure and
vacancy fox approximately seven years.
Issue
Attached is a letter from Incubator building owner, Larry Hickman, indicating that he has
sold the building. The current lease between the EDA and Mx. Hickman allowed fox an
early expiration, which will take place on April 15, 2006. Therefore, it is appropriate for the
EDA to discuss the future of the Incubator program.
Incubator Consultant Recommendations
Incubator consultant Harlan Jacobs has provided the attached recommendations regarding
the future of the program. In summary, Mr. Jacobs' recommendations axe as follows:
• There is little need for a facility to house pxogxam due to lack of available seed
capital.
• Once the ASCCF is ready to make investments, the EDA may consider finding a real
estate developer/building owner/manager who would use a new ox existing building
for an incubator pxogxam.
• The EDA may consider continuing to market Elk River and maintain the existing
retainer with Mr. Jacobs on a month-to-month basis for six months with asix-month
renewal option.
Staff recommendation
Staff recommends that the EDA consider the following direction regarding the future of the
Incubator Program:
• Put the Incubator pxogxam on hold (after the lease expires in April) and direct staff
to complete an analysis of the program and explore options fox a new Incubator
pxogxam model, which may including the following:
o New rent structure discontinuing the stock offering
o New location located on city services
o New building owner/partner
o Discover new venture capital funds
• Immediately discontinue marketing the program and the retainer with Incubator
consultant until a new pxogxam model is secured.
If an incubator is not feasible, explore the options of investing the Tescom loan fund
balance into a new ox different economic development pxogxam.
G~
Elk River Business Incubator Program
History & Partnerships
History
• Started 1997
• EDA leased 13,186-SF (6 suites) of former Fuxnimre & Things building, located on East Hwy 10
EDA has accepted a total of 9 companies into the program, including:
(Dates listed axe when companies entered the program)
• Solar Attic - March 1997
• ProtectoxCare, Inc. - Feb. 1998
• Watermark Submersibles, Inc. -March 1998
• Mt1S Technologies - May 1998
• Cymbet (formerly Integrated Power Solutions) - Aug. 2000 (Graduate)
• Vertical Publishing - July 2000
• Bixby Energy Systems, Inc. -January 2002 (Graduate)
• K-Netica Corporation - May 2002 Current Tenant
• Lap2 Technology Corporation - September 2003 (Graduate)
Partnerships
Needs of early stage high-tech companies:
I. Ca ital -includes location requirements fox operations of company
a. Anoka-Sherburne County Capital Fund
- Up to $50,000 total
b. Elk River Investment Club
Up to $25,000
c. Initiative Foundation (Central MN Region)
- $25,000 - $50,000
II. S ace
a. Elk River Business Incubator
Currently leasing 5,813-SF (3 suites)
Source: Federal Community Development Block Grant provided as loan to Tescom
Repayment of loan/giant to City is used to fund the Business Incubator Pxogxam in
supplement to the portion of cash rent received from tenants.
ILb. Continued...
b. EDA in turn subleases to early stage high technology companies for up to 2-years
Rent structure consists of 30% cash rent & 70% rent in stock value.
Cash rent goes to EDA
Stock is divided between:
1/3 EDA
1/3 BuildingOwnex/Landlord
1 /3 Incubator Consultant, Harlan Jacobs, Genesis Business Centers
III. Technical Assistance
a. Genesis Business Centers, Harlan Jacobs
- Recruit & pre-qualify incubator prospects
- Assist tenants to establish relationship with equity fundexs
- Aid in process fox applications to venture capital fundexs
b. Example - Cymbet Corporation
- Secured $4.5 million in overseas investments in the year 2000
- Secured $16.5 million of 2"'round private equity financing in Dec. 2004
February 7, 2006
Heidi Steinmetz
City of Elk River
13065 Orono Parkway
Elk River, MN 553s0
Dear Heidi,
I am writing this letter to inform you the rental space for the incubator
EDA's lease will be expiring April 15, 2006 due to the sale of the building.
I would like to thank you for your past relationship with the incubator rental
space program. It was a pleasure working with you.
Sincerely,
~.
Larry Hickman, Pres.
Furniture & Things, Inc.
15612 JARVIS STREET N.W. • ELK RIVER, MN 55330-6220
PHONE: 763 4.41-7011 • FAX: 763 633-7020
{ti([r~{urnitureandtliin~aCOm www.furnitureandtliin~s.com
Economic Development Authority Minutes
August S, 2005
Page 5
from the City. She stated that staff recommends that the EDA Finance Committee review
the request prior to an EDA recommendation to the Council. President Gongoll suggested
that if necessary, the EDA could review the request at a special EDA meeting.
Commissioner Motin stated that he had some concerns that the applicant was requesting
both types of assistance from the City. Commissioner Gongoll stated that the request
should go through the Finance Committee fox their recommendation.
Ms. Steinmetz asked Mx. Inman if his `But Fox" analysis fox the company would be affected
by the additional financing. b1r. Inman stated that the was small in comparison to their
whole package, and should have no direct impact on the "But For" finding.
Commissioner Motin noted that the transportation bonding bill has been approved for the
Northstax Corridor project and the project will be going to final design. He stated that $80
million in Federal funds has been indudcd in the 2006 Federal Budget.
9. Consider Year 2006 EDA Budget and Resolution Regarding EDA Lew
Ms. Steinmetz reviewed the 2006 projected expenditures and revenues. She noted that the
60/40 split for Personal Services between the EDA and HRA will continue fox 2006. Also,
the budget includes a $2,500 contribution to the Initiative Foundation. Ms. SteinmeU
discussed the proposed Business Incubator expenses, noting that the Business Incubator
continues to be funded since 1997 from repayment of the Tescom loan. She reviewed the
current lease agreement with Mx. Larry Hickman and contract with Harlan Jacobs of Genesis
Business Centers.
Commissioner Dwyer stated that he feels payment to Mx. Jacobs should be 100 percent
incentive-based.
President Gongoll stated that he felt the retainer was worthwhile, since Mr. Jacobs provides
a service.
The Commission discussed the issue of a retainer versus an incentive fee, and the state of
the Business Incubator Pxogxam.
Commissioner Tveite suggested decreasing the retainer and including bonuses fox filling the
three spaces.
Commissioner Motin stated that he had concerns with giving incentives and felt a flat rate of
$125 a month when all three Incubator spaces were full would be appropriate. He suggested
that the Commission look at this issue when the 20071ease with b1r. Hickman expires.
President Gongoll stated that the EDA needs to look at what they want to put into the
Business Incubator project and what they expect to get out of it.
MOTION BY COMMISSIONER FARBER, SECONDED BY COMMISSIONER
TVEITE TO APPROVE THE 2006 EDA BUDGET, INCLUDING THE 2006
BUSINESS INCUBATOR BUDGET AS PRESENTED; AND, TO APPROVE
RESOLUTION OS-01, A RESOLUTION ESTABLISHING THE TAX LEVY FOR
THE ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY IN AND FOR
THE CITY OF ELK RIVER, MINNESOTA. MOTION CARRIED 6-0.
BUSINESS INCUBATOR
Economic Development Authority (EDA) discussion on the establishment of a business
incubator program began in earnest in 1996. These discussions led to the EDA entering
into a lease for office space and completing some building leasehold improvements in
1997. This followed with the first business incubator tenants occupying office space in
1998.
The goal of the business incubator program is to develop long-term relationships with
young, growing companies that have an emphasis on new technologies and to help
these companies become established. After a few years in the city business incubator
office space, the companies should be sufficiently established so they can go out into the
Elk River community and either rent building space at market value or hopefully,
construct a facility for their business.
The concept behind the business incubator program is to offer discounted office space
for emerging businesses so that these companies will have time to develop without the
burden of having a significant cash outflow for operating expenses. The city works with
Harlan Jacobs of Genesis Business Centers to recruit prospects for the incubator
program and also to provide technical advice to the young companies on establishing
business plans. Another piece of the collaborative puzzle is the city working with the
Anoka-Sherburne County Capital Fund, the Elk River Investment Club, and the Central
MN Initiative Foundation in order to help provide venture capital investments for new
businesses.
The city incubator program is located at 16820 Highway 10. In 2003, the EDA renewed
its lease for two years, but on only 7,037 square feet. The space leased includes three
office suites, common space, and one small conference room. In addition the building
owner, Larry Hickman, assumes responsibility for all building maintenance. (This current
lease is a slight reduction from 7,500 square feet and 4 offices that was in the previous
lease and a big reduction from 6 offices and 13,000 square feet that was in the original
1997 lease.) Currently two of the office suites are occupied and the EDA staff and
incubator consultant are actively soliciting proposals for additional tenants. In 2002 the
EDA directed staff to explore moving the incubator program into a building that would be
more "technology-friendly" for the types of companies that are being recruited.
Limitations of the present building include lack of municipal services and
production/assembly space. Identifying a new site has been a challenge due to finding
the right building owner with interest in the incubator program, and the cost of a new
building causes a change in the economic structure of the program.
Funding for the business incubator program comes from the cash rent that the EDA
receives and from a transfer out from the loan program that was established for this type
of project. With minimal rents being received and minimal leasehold improvements being
required, it is estimated that the loan fund for this project will last only another 4 years. At
the time of evaluating new site options for the program, discussions also need to take
place regarding the success of the program, funds for the program after 4 more years,
and the desirability to continue the program.
Expenditures for the business incubator program are shown on the adjacent page. The
other professional services line item is for the consulting contract with Mr. Jacobs. In
2003 the EDA increased the monthly consulting services to $1000 for Mr. Jacobs' work
to identify prospects, complete due diligence of prospects, and to assist companies in
the incubator. The other expenses in the budget are self-explanatory.
BUSINESS INCUBATOR
The goal of the business incubator program is to develop long-term relationships with
young, growing companies that have an emphasis on new technologies and to help
these companies become established. After a few years in the city business incubator
office space, the companies should be sufficiently established so they can go out into the
Elk River community and either rent building space at market value or hopefully,
construct a facility for their business.
BUSINESS INCUBATOR REVENUES
2003 - 2006
$20.000
'
G
$16,000
` ?
~~ 1':... r .
$18,000
r ~ i;
" n y~fA ' S;
812.000 ~'
rv
~
~
~
~
•2003 ACTUAL
$10
000 "~ ~ ~' _
,
`~ ~ " ^ 2004 ACTUAL
, ~ +~'`"~ 02005 AMENDED
°T
~
58,000
"~~ 02006 PROPOSED
~i
~
'
°
' .:
$8.000 Ls.r *,+ ..
..r^,
.
€ < rz , ....
>•t '
`:.
'ri'se.. '
54.000
=
~
i+
~
~ ~ .t~. ~ .x r
$2,000
,
..v:
~ ~
E
GENERAL PROPERTY INTERGOVERNMENTAL OTHER REVENUES TRANSFERS IN
TA% REVENUES
535,000
$30,000
525,000
$20,000
515,000
$10 000
55,000
i
BUSINESS INCUBATOR EXPENDITURES
2003 - 2006
wi
~k
•2003 ACTUAL
•2004 ACTUAL
^2005 AMENDED
02008 PROPOSED
~+x
'~ ,t`^ ~i'. az ~
~~
;SONAL SERVICES SUPPLIES OTHER SERVICES& CAPITAL OUTLA'
CHARGES
BUSINESS INCUBATOR
REVENUE ANALYSIS
2003 2004 2005 2008
ACTUAL ACTUAL AMENDED PROPOSED
GENERAL PROPERTY TAX $ - $ _ $ - $ _
INTERGOVERNMENTAL REVENUES - - - _
OTHER REVENUES 10,532 16,914 15,000 15,000
TRANSFERS IN 17,528 10,336 16,500 17,100
TOTAL $ 28,060 $ 27 250 $ 31 500 $ 32 100
Dollar Increase ($810) $4,250 $600
Percent Increase -2.89°h 15.60°h 1.90%
OTHER REVENUE
Rent Income ........................................... 15.000 15.000
TRANSFERS
Transfer from Loan Funtl ........................................... 17,100 17,100
$ 32,100
EXPENDITURE ANALYSIS
2003 2004 2005 2006
ACTUAL ACTUAL AMENDED PROPOSED
PERSONAL SERVICES $ - $ _ $ _ $ _
SUPPLIES 31 _ _ -
OTHER SERVICES & CHARGES 28,030 27,251 31,500 32,100
CAPITAL OUTLAY
TOTAL $ 28,061 $ 27,251 $ 31500 $ 32100
Dollar Increase ($810) $4,249 $600
Percent Increase -2.89°h 15.59% 1.90%
SUPPLIES
Operating Supplies ........................................... $ - $ -
OTHER SERVICES d CHARGES
Legal Services ........................................... -
Other Professional Services ........................................... 13,500
Advertising/Marketing ........................................... 3,000
Building Rent ........................................... 15,600 32,100
CAPITAL OUTLAY
Buildings-Leaseholtl lmprovemems ........................................... - -
$ 32,100
BUSINESS INCUBATOR BUDGET
2003 - 2006
$33,000 00
~
$32,00000 ~'
$31 000 00 ~'"
$30 000 00
$29 000 00 ~ ~~ '•
:tf ~ ,.ti,4t,
^Revenues
$28,000.00 ,
~ ^Expenditures
$27,000.00 ~
_
$26,000.00
$25,000.00
$24,000.00
2003 2004 2005 2006
Page 1 of 2
Steinmetz, Heidi
From: TedGenesis@aol.com
Sent: Wednesday, February 08, 2006 1:40 PM
To: Steinmetz, Heidi
Cc: TedGenesis@aol.com
Subject: Recommendations and Proposal
Dear Heidi:
Thanks for taking the time to meet with me. The discussions with you and your colleagues were helpful to what
might be called the need for'mid course' corrections.
As mentioned, we have two obvious success stories at hand in Elk River and one that only strayed as far as
Rogers no doubt still helping to create a good employment picture in the Elk River neighborhoods. Cymbet and
K-Netica (formerly KnowledGenetica) are likely to remain and grow in Elk River although with a new CEO at the
latter we need to work hard to help him gain a perspective on the value of the community as a site for its long
term development plans. And Bixby Energy may yet decide to return to a site within the city limits so we should
all continue to make efforts to remind them that they are welcome back at any time.
With three success stories out of nine companies incubated, the Elk River EDA's sponsorship of the Elk River
Incubator Program should readily be judged a success for any objective observer. And when Solar Attic is
added as a home based business still operational in the community the slats are even slightly better.
Having said that, there is little need at the present time for a facility to house the incubator program. The lack of
seed capital (sharply absnet since the untimely demise of Roger Jensen of the Anoka Sherburne County
Capital Fund (ASCCF)) has made it difficult to recruit companies from the southern metro area of the twin cities
and elsewhere (the companies tend to stay in the entrepreneur's home until the seed capital is again readily
available).
In the old days, we were able to use space as needed (and avoid paying for space that was not needed). Until
we find another building owner/manager willing to provide flex/space on an as needed basis, it is hard to justify
the expenditure of community funds for the space for an incubator program.
Several approaches can be taken until the situation improves (i.e., the ASCCF is again an active investor in the
community thus helping various investment clubs and/or regional initiatives to 'hitch hike' on the'due diligence'
of the ASCCF). When it does improve, it is highly likely that the pent up demand (from entrepreneurs now ready
to leave their homes and secure a business office) will make it clear that a worthy community development
purpose is being funded by EDA expenditures for rent for the incubator program.
One approach would be to begin in earnest to find a real estate developer/building owner/manager who would
use a new or existing building for an incubator program on his/her property as a means to getting the space
leased over the long term. A developer may be able to justify a below market rate for the rent to be charged to
members of the Elk River Incubator Program (ERIP) by consoling him/herself that a given building with a given
level of vacancy is actually an opportunity to turn a problem into a benefit. The building owner could offer
attractive rental terms for the first year of a multi year lease; While the cash rent in the first year would be below
market, the balance of the lease would be at market rates or higher. It is also possible that the owner would
accept a portion of the rent in cash (perhaps 2/3rds) and take stock or warrants in some negotiated amount as
a trade-off for the cash left on the table. And this would eliminate the payment of real estate commissions
thereby helping to justify the lower rent in the first year.
The building owner might have a long rectangular building or a 'L' shaped building at which he or she could put
3-5 startup companies (members of the incubator program) into an average of 800 s.f. of space per company.
These could be at one end of the building. As one would grow it could move into the middle or take space at a
purposeful distance away from the incubator stage companies.
2/8/2006
Page 2 of 2
Further, K-Netica has indicated that it might be a good candidate for being an anchor tenant at the far end of a
building and then growing towards the middle.
During the period in which the incubator program is out-sourced to the private sector building
owners/managers, it is proposed that Genesis continue to serve the economic development interests of the City
of Elk River and its EDA by means of continuing to market Elk
River as a destination for high tech and/or growing companies. This marketing is done literally on a global basis
as Genesis participates in several conferences around the U.S. and throughout the world. And the national
interest in energy alternatives at this time makes Elk River a great location for companies at various stages of
development to consider this community for its base of operations. Perhaps, with the developments at the
major utility company based in Elk River, this may also be a good time to ask for special one time incentives or
assistance from that company to help put together an energy focused incubator/economic development
program.
It is proposed that the City of Elk River's EDA retain Genesis for general marketing purposes at the same
monthly rate of compensation on a month by month basis for six months with a six month renewal option at the
same rate of monthly compensation at the sole and absolute discretion of the City of Elk River's EDA.
It is anticipated that by the end of the first six month period, the seed capital situation in the markets will be
stabilized and generally regarded as on the mend/upswing. It is then anticipated that the demand for flex space
for early stage companies will be at a significantly higher level than it is at present (February 2006).
Respectfully submitted
Harlan
Harlan T. (Ted) Jacobs
President, Genesis Business Centers, Ltd.
3989 Central Avenue NE Suite 630
Columbia Heights MN 55421
(North Suburban Minneapolis/Twin Cities)
Tel 763 782 8576
Fax 763 782 8578
Mobile (Minnesota/Wisconsin/Europe,Canada):
612 701 8153
Mobile in rest of U.S.A.:
612 743 8730
TedGenesis@aol.com
HarlanGenesis@mac.com
HarlanJacobs@GenesisCenters.com
www.GenesisCenters.com
2/8/2006