10.0. EDSR 04-08-1996 Aiw ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY
IIP
Item 10.
MEMORANDUM
TO: Economic Development Authority
FROM: Pat Klaers, Executive 'r for
DATE: April 8, 1996
)T
SUBJECT: Business Incubator Program
City Consultant Harlan Jacobs, Anoka County Capital Fund President Roger
Jenson, the Mayor, County Administrator Dave Loch, County Economic
Development Coordinator Michael Darger, and I are meeting at 3:30 p.m. on
4/8/96 to discuss the possibility of the County Administration Building
serving as a business incubator location. Provided the discussions are at all
• productive, Harlan and Roger are scheduled to take a tour of the County
Administration Building prior to the EDA meeting. Undoubtedly, the results
of the afternoon meeting will be a major topic of discussion at the.EDA
meeting for this agenda item.
This item is also on the agenda to follow up on the March 25, 1996, meeting
with Harlan Jacobs. Harlan is under contract with the EDA to help develop
a business incubator program. We hope that Harlan will help us arrange for
a building to serve as the incubator and will be available to offer
management services to the businesses. Besides management services and a
building for the program, a key ingredient is financing for the small
businesses. In this regard, the Anoka County Capital Fund and Roger
Jenson are major players in any program that takes place in Elk River. On
4/8/96 Roger is anticipated to discuss options, alternatives, and strategies
with the EDA for helping to locate investors and raise money for the Capital
Fund to service the business incubator program.
s:\eda\meetings\businc48.doc
0
P.O. Box 490 • 13065 Orono Parkway • Elk River,CMN 55330-1743 • (612) 441-7420 • Fax: (612) 441-7425.
Equal Opportunity Housing and Equal Opportunity Employment
•
ANOKA COUNTY
1 ....41,A.
Niaws
A Publication for the
Residents of
ANOKA Anoka County
COUNTY
Spring 1996
&NOKA COUNTY "BUSINESS INCUBATOR" AIDS SMALL COMPANIES
fob creation model benefits Anoka County and the entire state
I Though much of the business news es,an exchange that helps beginning are being attracted to the entire State of
eve hear these days focuses on large con- entrepreneurs conserve working capital Minnesota.
;orations,downsizing managerial staff for salaries and other important expendi- ness Hinarlan
nr Jacobs,
president experienced
the Genesbusiis
and laying off production workers, the tures.
Genesis Business Center in Columbia Genesis helps emerging companies by Business Center,said the incubator
Heights—which funnels dollars and advice arranging initial investment funds through shows that public sector/private sector
toward small and emerging industries—is progressive community development collaborative efforts really work. 'This is
generating good and hopeful news about groups like the Anoka County Capital . a job creation model that practices coo-
today's business scene. Fund,which is supported by the Anoka nomic development the old-fashioned
The Genesis Business Center, County Board,seven Anoka County way. Unlike economic development pro-
formed in 1993 in cooperation with the banks,and Anoka Electric Cooperative. grams that only generate jobs paying min-
Anoka County Economic Development Investment funds are important to small imum wages,we produce business careers
Part ership(ACEDP), acts as a business business because investment money cre- that pay good,livable salaries"
"incubator for start-up high-tech compa- ates equity and often helps an emerging Currently,eight companies have
nies. The incubator,when combined with company avoid debt. Genesis and offices in the Genesis Business Center
equity investments to start-up companies. ACED?also assist new companies in and develop products ranging from spe-
produces a job creation model which is obtaining Minnesota Trade and Economic cialized medical devices to specialty
unique in the United States. Development Urban Initiative Fund dol- fiber-optic sensor systems. The Genesis
Genesis operates on a for-profit tars which target job creation efforts in Business Center is located in the
basis and provides small companies with urban areas. Columbia Heights Business Center at
fundamental services such as manage- With the Genesis Business Center 3989 Central Ave.N.E.
went consulting,financial counseling, offering an attractive,yet practical,busi-
office space,and introductions to poten- ness package to emerging companies,
tial investors. In return,Genesis receives good jobs are being created in Anoka
a percentage of stock in the new business- County and important business ventures
411
Genesis Business Centers,Ltd. Q X8/4/96 1912:13 AM D 1/4
GENESIS BUSINESS CENTERS, LTD,
3989 CENTRAL AVE.N.E.,SUITE 620
COLUMBIA HEIGHTS,MN.,55421
TELEPHONE 612 782 8576
FACSIMILE 612 782 8578
CELLULAR 612 790 3356
email:TedGenesis@AOL.com
Internet Website:
httpi/www.interage.co.ivgenesis/genesis.htm
To: Pat Klaers
Elk River EDA
From: Harlan Jacobs
Date: 8 April 1996
Re: Suggested Alternative Scenarios for Incubator Development
Dear Pat,
On the attached pages, please find the first of several alternative acquisition
scenarios for consideration as we collaborate on the establishment of an incubator in
Elk River. This particular scenario is offered to illustrate some of the important issues
to be faced in the development of a comprehensive program. This is just one approach
•
and is certainly not exhaustive. It could change dramatically depending upon the
• outcome of the meeting today with the county officials.
As we proceed we may develop variations on some of the themes as well as
4)
develop entirely new approaches.
Feel free to circulate this and future drafts for the comments and suggestions that
the members of the task force may care to offer. Please give me a call to ask any
questions or to seek clarifications of anything that is proposed here.
See you later today.
Regards,
Harlan
copy:
Roger Jensen
Anoka County Capital Fund
Genesis Business Centers,Ltd. ? it 8/4/96 (12:14AM D 2/4
•
•
Scenario A
for the Establishment
of an Incubator
in Elk River, Minnesota:
Utilization of County Administrative Building
The County Administration building located on the western edge of Highway 10
would be acquired by the newly established Elk River Development Corporation
ERDC-see below for further details) as quickly as possible under a 'rent with option
to buy basis.The rental term would be for a period of not less than two years subject to
a ninety (-90-) day cancellation clause exerciseable by the County if a third-party
buyer agrees to purchase the building and the ERDC does not exercise its right of first
refusal to match the price offered by the third party. The ERDC would also have a right
to purchase the building at a fixed price(at a price to be negotiated but at a price that is
not more than the current advertised price)for a period of not less than two years.
The ERDC would agree to pay as'rent' , during the term of this rental period, all of
the operating costs ( electricity, sewer, water, heating, cooling, snow removal, grass
• cutting, etc., but not property taxes, if any). The ERDC would seek special funding in
order to 'prime the pump'from one or more of the following organizations in order to
help defray as much as possible of the operating costs:
•Minnesota Technology, Inc.
•SotaTech
•Blandin Foundation
•Northwest Area Foundation
•Minnesota Department of Trade and Economic Development
Other appropriate individuals, trusts, agencies, and groups that support economic
development in'greater Minnesota' would also be solicited for support.
The building would be utilized as a business incubator. The fair market rental value
of the property would be calculated based upon comparable commercial facilities in the
community.The prospective incubator tenants would then be quoted a gross rate of $ X
per square foot per year ( the fair market value ). The cash operating costs would be
calculated as being $ Y per square foot per year. The prospective incubator tenants
would then be asked to pay the$Y per square foot of occupied space in cash and the
difference between the fair market value and the cash operating costs ( $ X - $ Y )
would be bartered for the stock of the incubator tenant.The barter would occur on the
basis of the fair market value of the incubator companies stock( as determined by its
offering memorandum or recent arms-length transactions).
•
Genesis Business Centers,Ltd. Q Qfl8/4/96 ' 12.14AM D3/4
Bywa of example,if the operating costs were determined to be$2 per square foot
per year andlu
the fair marketvalue of the property were determined to be
6per square
foot per year,and,if the prospective incubator tenant needed 2,000 square feet of space
and the prospective tenant was selling its common stock for$ 1.00 per share, then the
prospective incubator tenant would pay$4,000 per share foot per year in cash and the
prospective incubator tenant would tender 8,000 shares of its common stock to the
ERDC.
In this approach,it is intended that the following objectives would be met:
•The incubator tenants would be exposed to the realities of the marketplace in terms of
the fair market value for rent.
"The incubator tenants would become aware of the need for cash funds to cover the
direct operation of the facility.
•The incubator tenants would be helped by the ERDC accepting their shares of
common stock as an'alternative currency' in that their prospective investors would be
encouraged by the ERDC's willingness to accept common stock in lieu of cash ( it
represents a third party validation of the worth of the stock of the incubator companies).
•Long-term, the ERDC would develop a portfolio of common stock earned from the
barter transactions with the various incubator tenants. As this portfolio matures and
• hopefully appreciates in value, it is possible that the capital gains ultimately realized on
this portfolio would provide funding for the following purposes:
"Payment of any mortgage placed on the property to finance the acquisition of
the facility by the ERDC.
"Payment in part or in full of future operating costs of the building after the
property is acquired and, among other factors, the costs go up by the amount of the
property taxes.
•A 'built-in' investment fund dedicated to making investments in the common
stock of the incubator tenants is established.
The Elk River Development Corporation (ERDC) would need to be established in
order to have a legally constituted(for profit entity)to act as the lessee under the short
term rental program described above.Then,at the appropriate time,after the short term
rental program has been successful,to acquire the property either by outright purchase
of the property (or by the placement of a downpayment and the assumption of a
mortgage).
The ERDC would be established as a limited liability company ( functionally a
corporation that confers the limited liability status of a shareholder and at the same
Genesis Business Centers,Ltd. ? 41;8/4/96 (912:16 AM D 4/4
• time avoids the double taxation of a corporation by being treated as a partnership for
tax purposes). A group of between seventy-five (-75-) individuals would subscribe to
the common stock of the ERDC. These individuals would each invest$ 10,000. From
the total proceeds of$750,000( netting about$730,000 after the legal and accounting
costs of organization and the preparation of the securities offering memorandum are
paid),the ERDC would do the following:
'Pay the full cost of the building ( $550,000 estimated) and acquire same
without any mortgage or financing(fee simple ownership).
•Have a working capital reserve fund of$180,000.
The 75 shareholders would own a pro rata share of ownership in the ERDC.They would
then benefit, as capital gains are realized, from the portfolio to be developed by the
operation of the incubator (barter transactions) and ultimately the disposition of the
building.
To the extent that banks or trusts or foundations or other institutional investors would
wish to subscribe for shares of the common stock of the ERDC, the amount of
investment per entity could increase to$25,000 or$50,000 or more. If for example, ten
institutional investors wished to purchase $ 25,000 of common stock each, then the
balance of the funds to be acquired ($ 500,000) could be acquired from either fifty
individuals at$10,000 each or from 100 individuals at$5,000 each. ( For purposes of
keeping matters simple and less costly, it is necessary to keep the number of
• individual investors to 100 or fewer ( primarily to avoid the costs and difficulties
imposed by the Securities and Exchange Commission associated with regulated
investment companies).
Genesis Business Centers,Ltd.,would invest$10,000 in ERDC in order to be a
founding shareholder and to underscore Its long-term commitment to the project.
The incubator would be managed under a contract with Genesis. Genesis would
provide the investment selection management services for the incubator ( who
comes in, how much stock is bartered, etc.,). Genesis would hire a person to be
on-site manager of the facility. ( Every effort would be made to hire an Elk River
resident or a Sherbume County resident for this position.) The management
contract would provide a reasonable cash payment on a monthly basis( primarily
to cover the cost of the on-site manager). A portion of the bartered common
stock portfolio would be allocated to Genesis in consideration for the investment
management services to be offered in addition to a modest monthly fee to be
paid in cash.
S