6.0. EDSR 11-13-1996 ITEM 6.
ELK RIVER ECONOMIC DEVELOPMENT AUTHORITY
•
MEMORANDUM
TO: Economic Development Authority
< ,j .ROM: Paul T. Steinman, Director of Economic
Development
DATE: November 5, 1996
SUBJECT: Business Incubator Program
I. PURPOSE OF MEMO
The purpose of this memo is to outline issues for discussion regarding
the business incubator program.
ik II. OVERVIEW
At its last meeting, the EDA directed staff to outline a discussion at its
next meeting of the specific financial and other impacts of the business
incubator program currently being discussed. With this is mind, staff
has undertaken an effort to outline financial projections and research
alternative funding sources for this project.
Staff has also had additional discussions with a property owner who
continues to be interested in working with the EDA on this program.
Harlan Jacobs, Genesis Business Centers, Inc., will be available at this
meeting to address questions and provide input on this project.
III. PRIMARY ISSUES TO CONSIDER
The EDA has the following primary issues to consider with regard to
this discussion:
0 What are the general parameters of the business incubator
program currently being discussed?
4) The general parameters of this program currently are as follows:
13065 Orono Parkway • P. O. Box 490 • Elk River, MN 55330-1743 • (612) 441-7420 • Fax (612) 441-7425
Equal Opportunity Housing and Equal Opportunity Employment
Business Incubator Program
Page 2
•
Lease approximately 15 000
• square feet.�
• Minimum two year lease term.
• Potential lease rate - approximately $1.50 per square foot.
• Sublease the space to 7-10 start-up businesses at a sublease
rate of approximately $2.00 per square foot.
• Provide approximately $10,000 in lease hold improvements
in each of the first two years.
• Pay for ongoing services of Genesis Business Centers of
approximately $6,000 per year.
• Barter stock with each of the start-up businesses in the
amount of$1.50 per square foot per year.
Other general guidelines of the program might be as follows:
• Retail businesses will not be considered
• Businesses already established in Elk River will not be
considered.
• Businesses which compete exclusively in the local market
with other similar local businesses will not be considered.
• Focus on high tech companies which can show a
ill demonstrated ability to create a specified number of high
quality jobs in the Elk River area within a specified number
of years.
• Businesses must have a completed business plan at the time
of application.
• Businesses must have a marketable product (or within a
couple months of marketability) at the time of application.
0 What is the anticipated timeframe for securing a space,
completing lease hold improvements, and lease up?
If the EDA continues to receive cooperation from the private party
with which they are currently working, the timeframe would be as
follows:
January, 1997 Sign lease with private property
owner.
March, 1997 Space available - begin lease hold
improvements.
April, 1997 First tenant takes occupancy.
December, 1997 Facility approximately 66% leased.
Business Incubator Program
Page 3
0 What are the financial implications of this project?
Attached to this memo are the following items:
• Business"Incubator Financial Projections
• Business Incubator Concept
• 1997 EDA Budget
• EDA Statement of Financial Activity for month end October 31,
1996
As is indicated on the attached financial projections sheet, the
annual cash flow in 1997 is $30,400, and in 1998 is $21,000. Major
expenses affecting the start-up operation include approximately
$22,500 in lease hold improvements and an additional $3,000 for
signage. It is also important to note that staff is projecting in 1997
the average amount of square feet which will be leased is
approximately 7,000, out of a total of 15,000 square feet available.
Staff is anticipating that in 1998, we will obtain an average 80
percent leased facility (12,000 square feet).
The other significant aspect of the financial projections sheet is the
bottom line, worst case scenario for EDA financial exposure in this
project. As is indicated, if all expenditures in 1997 and 1998 were to
be undertaken, and not a single square foot was subleased to
tenants, the total out-of-pocket costs to the EDA would be
approximately $87,000. This is based upon receiving zero dollars in
rent in all of 1997 and 1998. This is probably an unlikely scenario
due to the fact that the EDA is proposing to sublease the space for
$2.00 per square foot gross, which is approximately$5.00 per square
foot below market rate.
The initial two year investment for this program will more likely be
equal to the annual cash flow as indicated on the financial
projections sheet. This indicates an investment of$30,400 in 1997
and $21,000 in 1998. This investment is based upon an average of
7,000 square feet leased in 1997 and an average of 12,000 square
feet leased in 1998.
It should be noted that the financial projections are also based upon
the fact that the EDA can lease the space from the private party at
$1.53 per square foot. This figure has yet to be negotiated, and any
changes to this figure would affect the annual cash flow.
Business Incubator Program
Page 4
ill A stock barter transaction is anticipated to be an integral part of
this project. As indicated on the attached "Business Incubator
Concept" sheet, the landlord, Genesis Business Centers, and the
EDA, would each barter stock with the individual businesses at a
rate of$1.50 per square foot per year. The attached Business
Incubator Concept is based upon the first full year (1998) of
operation of the facility.
0 What are the potential funding sources for this project?
Staff has been researching potential funding sources for this project
other than the annual levy funds of the EDA. At the present time,
staff has identified the two following alternative funding sources:
• Micro Loan Fund Current Balance $255,563
• DTED Loan Fund Current Balance $ 75,420
As you are aware, the DTED loan fund contains recycled federal
Community Development Block Grant funds, which were granted to
the City of Elk River and, in turn, loaned to Tescom. This fund is
increasing at a rate of approximately $2,500 per month from Tescom
loan payments.
Although the DTED loan fund may appear to be a good potential
funding source, it also has the strictest requirements for use of any
of the funding sources controlled by the EDA. This is due to the fact
that the DTED loan fund is federal dollars. Business incubators are
an eligible use of these federal dollars, but the project needs to meet
one or more of the national objectives as identified below:
• Benefit low and moderate income persons.
• Correct slums/blight objective.
After discussions with state officials responsible for administration
of these federal dollars, it appears as though the business incubator
project may be able to meet one or both of these national objectives.
Simple modifications to the EDA micro loan fund guidelines would
allow use of this funding source for the business incubator project.
Staff will continue to research these and any other potential funding
sources.
Upon proceeding with this project, staff would recommend
establishing an initial loan from one of the available funding sources
Business Incubator Program
Page 5
. to the business incubator project. This loan would be paid back at
the time when the project was generating sufficient cash flow. If
there were not sufficient cash flow, the loan would be deferred, or
eventually discontinued if the program were deemed to be
unsuccessful.
IV. CONCLUSION
In conclusion, staff would ask that the EDA provide general direction
on whether or not to pursue the business incubator project at this time.
V. ATTACHMENTS
• Business Incubator Financial Projections
• Business Incubator Concept
• 1997 EDA Budget
▪ EDA Statement of Financial Activity for month end October
31, 1996
•
eda\meetings\bsninc.doc
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BUSINESS INCUBATOR CONCEPT
• Example based on 15,000 square feet in first full year of operation:
• EDA lease rate $1.53 psf $23,000
• Expected rental income $2.00 psf $24,000 (80%leased)
• Landlord stock barter $1.50 psf per year $18,000 in stock
• Genesis stock barter $1.50 psf per year $18,000 in stock
• EDA stock barter $1.50 psf per year $18,000 in stock
Significant year 1 expenses:
• Leasehold improvements $1.43 psf?? $10,000
• Signage $ 3,000
•
•
• ECONOMIC DEVELOPMENT AUTHORITY
1994 1995 1996 1997
ACTUAL ACTUAL ADOPTED PROPOSED
PERSONAL SERVICES $ 33,659 $ 40,144 $ 42,850 $ 46,600
SUPPLIES 819 1,159 800 800
OTHER SERVICES & CHARGES 105,371 39,961 45,350 45,350
TRANSFERS OUT 1,000 1,000 1,000 1,000
TOTAL $ 140,849 $ 82,264 $ 90,000 $ 93,750
EXPENDITURE ANALYSIS
PERSONAL SERVICES
Regular Salaries $ 25,500
Part Time Salaries 12,600
Over Time 400
Employee Pensions (50%) 4,000
Employee Insurance (50%) 4,100 $ 46,600
SUPPLIES
• Office Supplies 800 800
OTHER SERVICES & CHARGES
Economic Development Consultant 1,000
Legal 1,000
Advertising 17,000
Marketing 2,000
Printing/Newsletter 6,000
Postage - 4,500
Telephone 800
Miscellaneous(Chamber of Commerce) 6,000
Development Activities 6,550
Insurance 500 45,350
TRANSFERS OUT
General Fund 1,000 1,000
$ 93,750
•
STATEMENT OF FINANCIAL ACTIVITY
FOR THE EDA,MICRO AND DTED LOAN FUNDS
IIIFOR THE PERIOD OCTOBER 31, 1996
ECONOMIC DEVELOPMENT AUTHORITY
1996 Month to Year to
Budget Date Date
Cash Balance $ 96,742
Revenues
Property Tax 73,840 - 44,196
HACA 12,060 - 5,738
Refunds&Reimb. - - 1,054
Interest Income - 249 2,523
Total Revenues 85,900 249 53,511
Expenditures
Personal Services 42,850 - 27,393
Supplies 800 68 1,075
Other Services&Charges 45,350 1,966 45,585
Capital Outlay - - 2,316
Transfers 1,000 - -
Total Expenditures 90,000 2,034 76,369
*********************************************************************************************************************************
• MICRO LOAN FUND DTED LOAN FUND
Month to Year to Month to Year to
Date Date Date Date
Cash Balance $ 255,563 $75,420
Revenues
Application Fees - 500 - -
Interest Income 3,331 5,506 - -
Loan Payments 57,337 161,928 2,591 25,910
Total Revenues 60,668 167,934 2,591 25,910
Expenditures
Loans - 37,500 - -
Legal Services - 715 - -
Total Expenditures - 38,215 - -
Status of Micro Loans as of October 31:
Business Current Business Current
Alltool Grant Y Pomeroy Tool Y
Roma Tool Grant Y Designing Women Y
Second Generation Y Tescom Y
Indy Lube Y Larose Y
Beaudry Y Water Laboratories Y
III R&D Sales Y E R Automall Y
Mork Clinic Paid in full T J Properties Y
Carpe Kairos LLC Y Galli-Vaulth Hearth Y
Internet 5 Y