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Committee Minutes

Growth Fund Committee
Tuesday, May 16, 2006, 4:00 p.m.
Urban Development Conference Room
1405 1st Avenue North, Grand Forks, ND 58203

Chairman Doug Christensen called the meeting to order.

Roll Call:

Present were: Gerald Hamerlik, Terry Smith, Eliot Glassheim via conference call, and Doug Christensen. Not present: Jon Ramsey, who has recused himself. Also present were: Klaus Thiessen, Keith Lund, Dr. Jim Petell, Rick Dregseth (Assurity Financial), Greg Hoover, Tu-Uyen Tran, Channel 8 television, Rick Duquette, Judi Paukert, Hal Gershman, Bruce Gjovik, Curt Kreun, Peggy Kurtz, Jonathan Fu, and Connie Mangan.

Approval of Minutes from 4/27/06 Meeting:

Terry Smith asked for clarification in the previous minutes, where Mr. Hamerlik stated “that PS Doors would not then approach the Growth Fund for compensation on any expansion on that site” and asked if that included coming back for a PACE loan. Mr. Hamerlik said that was only for further requests on this site, but did not include coming back before the Committee with a PACE request. Terry Smith asked that these minutes reflect that PS Doors will not come back for more remediation, but can come before the Committee with a PACE request. Gerald Hamerlik moved and Terry Smith seconded to approve the minutes of the 4/27/06 meeting. Voting “AYE”: Gerald Hamerlik, Terry Smith, Eliot Glassheim, and Doug Christensen. Voting “NAY”: None. MOTION CARRIED.

Monthly Report – April 2006:

Greg stated that the April 2006 monthly report was sent out in the meeting packets, which basically summarized the activity with PS Doors, LM Glasfiber, and Concrete Inc., plus the status report on the loan portfolio and status of funds. Mr. Hamerlik asked that the monthly report be received and filed.

REAC Application:

Doug stated REAC stands for Research Enterprise and Commercialization Campus. Mr. Hamerlik asked if anyone was present on the conference call with Eliot and Eliot replied there was not. Klaus introduced the project and said that the UND Research Foundation (UNDRF) would come forward to request support in a number of areas. Dr. Petell is here to answer any questions. The request will be for an initial building which is referred to as the Centers of Excellence and Life Sciences and Advanced Technology, which will be constructed on the proposed campus. Keith said that the UNDRF is proposing to construct a 50,000 square foot facility and are requesting 20 acres of land donated from the JDA, grant of $500,000, and contingent financing of two loans, one for $500,000 and one for $650,000 to accommodate any shortfall of funding from the EDA grant for infrastructure. Total project costs are $11 million for construction of the facility and $700,000 for off-site infrastructure. Sources are $3.5 million from Centers of Excellence; $6.2 million private financing; $1.5 million EDA grant for onsite infrastructure; $500,000 grant from the Growth Fund; the land; and contingency financing to accommodate any shortfall in EDA funding.

Mr. Hamerlik said, in the literature provided, the UNDRF uses the term “intellectual properties”. Dr. Petell replied that the legal definition has to deal with any type of intellectual capital from individuals or a group, so it could be an idea or an invention which then becomes a commodity with a patent, a copywrite, or a trademark, etc. Mr. Hamerlik asked if all the companies that may come in will be taxed after 10 years. Keith stated that UNDRF or any spaces leased by UND is not subject to real estate taxes. Any private company that leases space from a non-taxpaying entity in North Dakota is required to pay leasehold real estate taxes. The proposal does include a provision that UNDRF would enter into a “payment in lieu of taxes” agreement where they would pay real estate taxes for any property that would not be subjected to taxes. In short, after 10 years, the entire property pays taxes. Mr. Hamerlik asked why 10 years. Keith replied to support the upfront cash flow for the building when they need it the most and before full occupancy and tenancy. Mr. Hamerlik stated we asked Concrete Inc. to change their request to the regular five-year declining tax exemption so granting a 10-year exemption would be a departure from what we have already established. Keith explained that the difference is that the UNDRF doesn’t have to pay taxes but are agreeing to do something they aren’t required to do. Eliot asked what were the percentages of the building in the taxing and non-taxing categories, Dr. Patel replied about 65-70% would be corporate, and would be taxable, and the rest would be 501c3. Mr. Hamerlik asked what UND was putting into the project and Dr. Patel replied that UND will put in, through the Research Foundation, intellectual property assets. Doug said the application indicated that UND had committed $439,500 to rent space in the building. Dr. Patel stated that the total bonded amount is $7 million and cash would be $6.2 million to be used towards the building and the balance goes to pay for the first two years of rent. Mr. Hamerlik asked, if something was sold, why the return rate would only be 50%. Keith replied that the proposal states that the Foundation is laying the seed development therefore increasing the value of the surrounding land and they would participate in some of those gains, and would provide some of those gains back to the JDA. Doug asked for an explanation of the EDA grant. Keith replied that the Foundation intends to approach EDA for a $1.5 million grant for onsite infrastructure. It’s a 1 to 1 match, so if they secure $1.5 million from EDA, then the total project cost needs to be $3 million. The part of this that is eligible as a match is the off-site infrastructure, which the UNDRF is covering, which is $650,000 of road costs. It also includes the onsite infrastructure costs of $1.5 million and the value of the land. The actual hard costs are the two infrastructure projects. Eliot asked how much was the value of the land. Doug referred to page 3 tab 6 of the proposal, which says, “development land includes the prior onsite improvements and off-site improvements using City EDA funds”. The $6/sq.ft. was used to calculate the land value based upon information they got from the Planning Department and prior evaluations. Doug said he took the $6/sq.ft. and divided the $1.5 million by 20 acres and came up with $1.71 to subtract from that, so the land would probably be presented at $4/sq.ft. Dr. Patel said, when the State did their due-diligence analysis, they came in at $3/sq.ft. Doug said if you assume $3/sq.ft., it would be $650,000. They would need help on that grant of at least $200,000 using those numbers. They are going to build the road to get credit on their grant.

Keith said that the project is $650,000 land value at 5 acres, $650,000 offsite infrastructure, and $1.5 million onsite infrastructure, which totals $2.8 million. This means, at a 1 to 1 match, if EDA comes in as hoped, that will provide a $1.4 million grant for onsite infrastructure, which means there may be a $100,000 shortfall. Hal asked if the deferral of taxes would be considered part of the match and Keith replied he didn’t know. Doug asked when work would begin and Dr. Patel replied that they would like to break ground in September.

Doug stated we will have to work out the governance of the tech park and that Greg had previously suggested that we go out for an RFP to get consultants to assist us. Doug asked how the park will be laid out and Dr. Patel felt we need to come up with an overall master plan first. Greg added that a master plan would deal with both the physical layout and the governance for the whole 77 acres. Dr. Patel stated they need to come up with a value of the onsite infrastructure. Doug said you won’t get credit on your grant for what you spend with the grant money. Keith replied that the Foundation is not using the grant money to pay for the $650,000; they are using the proceeds from the private finance. Eliot asked if they were still short on the match and Doug feel they are between $150,000 and $250,000 short. Keith stated that an appraisal and the actual cost of the land will determine if we are short. Part of this request is approval of a $500,000 contingent loan if we are short from EDA for any reason. Doug asked what the terms should be on that loan and Keith replied the City’s EDA RLF fund has a minimum interest rate of 4% and maximum contribution of $500,000. Doug asked when we would get it back. Dr. Patel stated he is hoping they don’t need it if they can put together the financing package. Keith added that the proposed terms were 12 years, amortized at a straight immediate payback. Eliot asked if they had the sources to cover that and Keith replied they would need to demonstrate that this could be serviced. Eliot said he saw on page 2.2, tab 8, that they want another $650,000 contingent loan and Keith replied that original discussions contemplated a $500,000 grant, a $500,000 loan and the City using EDA resources of $650,000 to pay for the road, but that wasn’t a possibility. So there is about $1.1 million in contingent financing. Mr. Hamerlik said part of the request is for 20 acres. Eliot said, in looking at tab 10, he was not sure that the repayment of two loans of $500,000 and $650,000 were in there. Dr. Patel stated they were not included because they believe they won’t need the financing, again it was a contingency financing. Eliot said, according to their proposal, they will have a positive cash flow after the first two years and should they need to repay the contingent loans, payment could come out of the positive cash flow. Doug said another issue is whether it would be ballooned at the end of 5 or some kind of repayment after 3-5 years, but they are going to sell a bond with the land and building as collateral, so he was not sure if there will be anything left for a payment.

Terry said if we do 6.5 acres, it would cover $850,000 match without any cash out of our pocket, assuming we get $3/sq.ft. Eliot said the proposal indicates the projection of 100-140 jobs and $50 million income over five years and asked if there were any consequences for falling short. Doug replied the State requires this under the statute and these are issues that Greg and Klaus will have to address. Klaus said we should look at this as an anchor tenant in the City’s Research Enterprise and Commercialization Park. This is a partnership with UND and we, as a city, are intent on developing that park. Eliot asked who benefits from the intellectual properties that are commercialized. Dr. Patel replied the UNDRF has a commitment back to UND to pay for its inventors per the intellectual property policy, which turns out to be about a 70% return. One of the hopes is that they can generate money to pay for future patents. Dr. Patel left the meeting, along with Channel 8 News and Tu-Uyen Tran.

Doug said he doesn’t want to give them 20 acres in which the City has $2 million invested but said he could agree on 5 acres for their building and parking lot. We made a commitment back in January for a $500,000 grant and we should honor that. He also agreed on a $500,000 loan out of our EDA RLF money that will cover a possible shortfall in the other EDA grant. The State got an appraisal of the land at $3/sq.ft. and the TSC land down the road sold for about $3/sq.ft. so it’s a comparable sale. The proceeds of the rest of the land, if and when it is sold, should come back to the City. Terry said he agreed on a $500,000 grant and the contingent $500,000 EDA RLF loan. He was also not in favor of the 20 acres but felt that 6.5 acres would cover the $850,000 for the onsite utilities. That way, they can make their match without taking money out of our pocket. Doug felt we have to get the EDA RLF money spent. Eliot asked if they were using any of the 20 acres for match. Doug said we’ll put in our own 15 acres towards their match when they approach EDA and they will be our partner. Tu-Uyen Tran returned to the meeting. Doug said the EDA grant doesn’t require a mortgage on that land, so it’s a good deal for us because we can get the infrastructure built. Eliot asked if we would keep title to the 15 acres and the Foundation would have 5 acres and Doug replied yes. Keith said, in conversations with EDA, it’s possible for the Growth Fund and UNDRF to make a joint application for this portion of the project and to contribute land owned by one or the other as a match. Rick Duquette asked for clarification that the 15 acres can be used as a match for EDA funds and Doug replied they could. Keith said if the total 20 acres, even though we retain title to 15 acres, is committed to the campus, it will count towards match if that land is dedicated to the project and the infrastructure is built on that land. Greg added that we have to be co-applicants in the project. Doug said this is good for us because we still have our park, there’s a tenant in the park, and we get the co-management of the park. Mr. Hamerlik was concerned about the word “committed” in terms of the 15 acres. What happens if there isn’t a sale possible by us for this campus, can we then sell that to someone else? Greg said this will come up during the master planning process, and again is a commitment by the City to develop the full 77 acres as a commercialization and research park. We will treat it as a PUD and will put requirements on what types of businesses that can go in, so for all intents and purposes it will be locked up for research and development. There is little likelihood that someone will put a non-technology related business there. Doug said we should not get ahead of ourselves and commit the whole 77 acres. Tu-Uyen Tran left the meeting. Doug said we are putting 20 acres of the 77 acres into our industrial park that is adjacent to 32nd Avenue. If this doesn’t work, and we want to sell the ground, then we could give them the option to buy it. Klaus added, as long as we give it a reasonable time frame to ensure that we give it our best effort. Mr. Hamerlik stated he was just looking for an option out down the road if we need it.

Mr. Hamerlik asked what the interest rate would be on the conditional loan. Greg replied, based on cash flow, 4% is what makes it work, but in talking with EDA, we tend to look at the floor as our ceiling and there are other communities that are charging more interest. Doug said, once they reach a certain level of occupancy, they should start paying it back. Keith said that EDA’s instructions were not to have any deferrals and it would be more appropriate to have a long amortization period (10-12 years) with a 5-year balloon. Doug agreed and wondered if we should settle on a 5% interest rate. Terry said 4% sounds reasonable and Mr. Hamerlik agreed. Doug said on the contingent financing, we will give them 4%, a 12-year amortization, with a balloon with 5 years. Doug asked about the 5 acres and the Committee agreed. Doug moved to authorize EDC staff to return to the UND Research Foundation with the following offer: The City is willing to contribute 5 acres of land, a grant of $500,000, and make EDA RLF funds available up to $500,000 to cover any shortfall in their EDA request, and, to the extent they borrow those funds, they have to pay them back at 4% interest with a 12-year amortization and a 5-year balloon; with the following contingencies: UND Research Foundation has to have a commitment from a private lender for $6.2 to $7 million, that the ND Centers of Excellence will go forward with a $3.5 million award, and they are approved for an EDA grant of at least $1 million, with the goal of $1.5 million. Doug stated when they submit their EDA application, the City will be a joint applicant and will commit 15 acres for the application. Assuming everything is good to go, the Growth Fund Committee will then ask staff to work on a governance agreement of the entire property. Klaus said we will bring this back to the Committee before sending it out. Eliot Glassheim seconded the motion. Mr. Hamerlik asked if this is the Growth Fund Committee’s recommendation to the JDA and Doug replied it is the Committee’s recommendation to EDC. When it comes back to us, then it goes to the JDA. Voting AYE: Terry Smith, Eliot Glassheim, Gerald Hamerlik, and Doug Christensen. MOTION CARRIED. Doug said that staff has done a very good job on this project and the City’s loss of Mr. Lund is the EDC’s gain.

Project Update:

Klaus stated he had no update at this time. Greg provided an EDA RLF update. We have a requirement that, over a 2-year reporting period, at least 75% of the funds must be obligated and expended. This is called the capital utilization rate. We did fall short of this requirement and the balance was $48,000, which we put into an interest bearing account. Our office will work with the EDC to get this above 75% and, as we go forward, we will make a request of EDA to allow us to use this account first rather than ours.

Other Business:

There was no other business.

Adjournment:

Mr. Hamerlik moved to adjourn.

Respectfully submitted,

Peggy Kurtz
Urban Development

Doug Christensen
Chair