5.0. EDSR 09-09-1996 ITEM 5.
ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY
MEMORANDUM
TO: Economic Development Authority,
"V `, FROM: Paul T. Steinman, Director of Economic
/ r Development
DATE: September 9, 1996
SUBJECT: Business Incubator Program
I. Purpose of Memo
The purpose of this memo is to provide general background on the
business incubator program and outline issues regarding two scenarios
which staff is exploring for such a project.
II. Overview
The EDA has been discussing a "business incubator" project for quite
some time. Initial discussions occurred as early as 1991. Approximately
six months ago, Harlan Jacobs, Genesis Business Centers, was hired by
the EDA as a consultant on the business incubator project. The EDA has
moved forward over the past few months and is now discussing
undertaking a major phase of the project, which is to locate an existing
building and negotiate a lease/partnership arrangement with the property
owner.
Staff is currently discussing business incubator issues with the County
Board of Commissioners regarding the former administration building,
and also a private party. Staff feels both options remain viable and open
for further discussion at this time.
III. Primary Issues to Consider
City staff has identified the following issues which will provide updated
information to the EDA and allow for further discussion of the program:
P.O. Box.490 • 13065 Orono Parkway• Elk River, MN 55330-1743 • (612) 441-7420 • Fax: (612) 441-7425
Equal Opportunity Housing and Equal Opportunity Employment
EDA 2
Business Incubator Program
Sept.9, 1996
• • What are the two buildings being pursued for this project at
this time?
1. City staff, Harlan Jacobs, and Pat Dwyer attended a meeting of
the County Board of Commissioners on Tuesday, September 3,
1996. The purpose of the meeting was to introduce the topic of
utilizing the former administration building as a business
incubator facility. The meeting was primarily to introduce the
commissioners to the concept of a business incubator and to
open the lines of communication between the city and county
regarding this project.
The concept proposal presented to the county was that the city
EDA would lease the former administration building for an
amount that would cover the operating costs of the facility.
Issues involved in this proposal were discussed with the county:
• Upon full lease-up, this building would create 15-25 jobs
• Provides an opportunity for a new county/city partnership
in economic development
• The building becomes a taxable property
• City staff will be working with county staff to schedule a tour of
the Columbia Heights incubator with the County Board of
Commissioners. A few of the County Commissioners indicated
a verbal interest in going on this tour and seeing an actual
business incubator in process.
2. City staff is also working with a private property owner to
pursue his interest in leasing 10,000 to 15,000 square feet of
space to the EDA for use as a business incubator facility.
Harlan Jacobs and city staff have had discussions with the
private property owner and he has appeared to indicate an
interest. Staff has set up a tour of the Columbia Heights
facility with this private property owner, and will continue to
discuss this project with him.
• What are the technical aspects of the business incubator
program?
The primary emphasis of the business incubator program is to find
inexpensive space for the EDA to lease for a minimum period of two
years. The emphasis then would be to work with Harlan Jacobs to fill
that space with start-up companies at a rental rate that would cover
41 the EDA's lease rate. In the event the rental rate was not enough to
EDA 3
Business Incubator Program
Sept.9, 1996
• cover the EDA lease, then the EDA would be required to pay "out of
pocket" to cover these expenses.
In the event that the EDA was required to subsidize a business's rent,
we would be provided a certain number of shares in the business in
return for that subsidized amount. Another option discussed would be
to provide that subsidy in,the form of a loan to the business. Such a
loan could be converted to stock at any time at a pre-negotiated price,
or "called" if the business were to move from Elk River to another
community.
With the private property scenario, the property owner would be
brought in as a participant in the "stock barter". The EDA would
again attempt to negotiate a lease which would be equal to the amount
of operating costs in the facility. For the property owner's profit
margin, he would be offered stock in each of the businesses in the
facility, rather than cash (rent) in a typical leasing arrangement.
Attached to this memo is an outline of the two scenarios which
indicates specific square foot costs and projected expenses which the
EDA and Genesis Business Centers, as a partner in the project, may
be obligated.
i
• What would be the responsibilities of the EDA in this project?
Responsibilities of the EDA would likely include the following:
1. To guarantee coverage of operating costs,including taxes on a
facility throughout the period of the two year lease.
2. To assume all responsibilities associated with leasing and
managing the facility.
3. To show an on-going creation of 15-25 jobs in the facility.
4. To provide on-going technical expertise and services to the
tenants of the facility, including locating venture capital and
other sources of financing for their business.
5. To provide sufficient guarantees so that the growth of the
incubator businesses occurs within Elk River and, in the case of
utilization of the former administration building, that the
growth also be allowed to occur elsewhere within Sherburne
County.
EDA 4
Business Incubator Program
Sept.9, 1996
costs
• What are the potential to the EDA involved in this
project?
Attached for your review is an analysis of the two scenarios which
have been discussed in this memo. The attachment provides a
detailed analysis of the two alternatives which are currently being
pursued. As you can see, the former administration building is
financially more feasible than the private party.
• What services will Harlan Jacobs provide to the project?
Harlan Jacobs, Genesis Business Centers, has initially discussed with
staff a fee of$500 $750 per month for on-going services which he
would provide to the business incubator. Mr. Jacob's services would
include such things as recruitment of tenants and counseling. In
addition, Mr. Jacobs would be providing additional counsel to the EDA
when necessary.
It is staff's perspective that Mr. Jacobs brings a real asset to the
business incubator program, especially in its infancy. However, staff
will continue to discuss alternative financial arrangements between
Genesis Business Centers and the EDA far on-going services in the
• event that the business incubator project proceeds.
IV. Conclusion
In conclusion, it is appropriate at this time for the EDA to discuss in
detail the aspects of the business incubator model and the EDA's future
potential involvement in this project. It is necessary also for the EDA to
be fully aware and accepting of the financial risks involved in such a
project, should it proceed.
s:\eda\meetings\busincpr.doc
ELK RIVER
BUSINESS INCUBATOR MODEL
Scenario A: Former Administration Building
City/Economic Development Authority commitments
• To guarantee payment of operating costs, including taxes, on the facility throughout
the period of the lease.
• To lease up and manage the facility.
• To immediately create 15 - 25 jobs and provide an opportunity for future growth of
these companies in Elk River and Sherburne County.
County Board commitments
• To provide the building for use as a business incubator for the period of two full
years.
• To provide grounds, and building maintenance services for the same period including
lawnmowing, snow removal, general bldg. maintenance.
• To remain open to an ongoing relationship with the City if the program is deemed
successful.
Former Administration building - 16,000 sf:
• EXPENSES:
• Annual operating costs, including taxes, electricity, gas, sewer/water:
$2.00 psf- 2.25 psf $32,000 - 36,000
Total $32,000 - 36,000
INCOME:
• Rental income $2.00 psf- 2.25 psf $32,000 - 36,000
• Genesis $ ??
• EDA $ ??
Total $32,000 - 36,000
Scenario B: Private property (10 - 15,000 square feet)
City/Economic Development Authority commitments
• To guarantee payment of operating costs, including taxes, on the space throughout the
lease period.
• To lease up and manage the space.
• • To immediately create 15 - 25 jobs and provide an opportunity for future growth of
these companies in Elk River.
Private property owner commitments `'�V` ,444411111 .
• To provide 10,000 to 15,000 s.f. for use as a business incubator for the period of at
least two full years.
• To provide other building maintenance services for the same period including
lawnmowing, snow removal, general bldg. maintenance.
• To remain open to a ongoing relationship with the City if the project is deemed
successful.
Example below based on 10,000 square feet:
Landlord asking price - $5 psf X 10,000 square feet= $50,000
EXPENSES:
• Annual operating costs, including taxes, electricity, gas, sewer/water:
$1.22 psf- 1.75 psf $12,200 - 17,500
• Landlord profit $3.25 psf- 3.78 psf $32,500 - 37,800
Total $4.47 psf- 5.53 psf Total $44,700 - 55,300
INCOME:
• Rental income $2.00 psf- 2.25 psf $20,000 - 22,500
• Genesis $ . 82 psf- 1.09 psf?? $ 8,200 - 10,900
• • EDA $ . 82 psf- 1.09 psf?? $ 8,200 - 10,900
• Landlord $. 82 psf- 1.09 psf $ 8,200 - 10,900
Total $4.47 psf- 5.53 psf Total $44,700 - 55,300
ISSUES
• Master Lease between EDA and Property owner
Standard master lease with following parameters -
• two year term, options to extend for additional years??
• EDA to cover operating costs
• Property owner to provide general maintenance, snow removal, etc.
• Sub-lease between EDA and Tenants
Provide a guarantee, as much as possible,that the business would grow and
expand in Elk River/Sherburne County
Tenants to provide leasehold improvements - minimal
• Management contract between EDA and Genesis
Discussing dollar amount.
Management. contract would have following parameters:
• Genesis would be responsible for leasing the space
44111 • Genesis would collect rent from tenants and pay EDA directly
• Tenant issues would be responsibility of Genesis/property owner