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#06 Submit a grant application to construct business incubatorEconomic Development Memorandum Date: September 8, 2009 TO: City Council FROM: Doug Venable, Director of Economic Development SUBJECT: Authorization to Submit a Grant Application to the Economic Development Administration for Funding to Construct a Business Incubator I. Summary The Economic Development Administration has funding available to implement long- term regional economic development strategies. Funding is targeted to areas impacted by the flooding of 2008 – making the southern Wisconsin region eligible. Grants are available for 75% of project costs with a local match (cash or in-kind) of 25%. A consortium of development interests in southern Wisconsin has been meeting to develop a regional “Auto Adjustment Entrepreneurial Support Initiative.” The strategy seeks to link existing entrepreneur support programs to more effectively convert business start-ups into growing diversified employers for the future. The key deficiency identified in the Rock County area is the lack of suitable manufacturing space for start- up companies needing less than 5,000 SF. To fill this need, Staff is proposing an application to the EDA under this program to fund the construction of a 25,000 SF flexible multi-tenant industrial incubator building to be constructed in one of the City’s industrial TIF Districts. The budget for this project would be $1.5 million, with $1.125 million (75%) coming from the EDA grant and the $0.375 million local match coming from the TIF district through the value of the land for the project and other TIF funds. Recommended Action Staff recommends that the Council adopt a motion authorizing the Administration to submit an application to the EDA for funding the construction of a multi-tenant incubator building with local match coming from an existing TIF district. City Manager Recommendation I concur with the Economic Development Director’s recommendation. Suggested Motion I move to authorize the Administration to submit an application to the EDA for funding the construction of a multi-tenant incubator building with local match coming from an existing TIF district. ??? Economic Development Department Box 5005 Janesville, WI 53547-5005 755-3180 II. Background With the flooding during the summer, 2008, several Wisconsin and northern Illinois counties were declared disaster areas. The federal stimulus programs created in the fall, 2008 set aside monies for the Economic Development Administration to help communities deal with the economic impacts of the flooding and of the severe economic hardships caused by the distress in the US auto industry. EDA partnered with the WI Department of Commerce to work with community and regional groups to develop regional strategies to deal with these economic issues. A group of ED professionals, educational institutions, and entrepreneurial service providers have been meeting to create an “Automobile Adjustment Entrepreneurial Support Initiative” for southern WI and northern, IL. Partners include the City of Janesville, Rock County, Blackhawk and Gateway Technical Colleges; the UW- Whitewater Small Business Development Center and Innovation Center; Wisconsin Manufacturing Extension Partnership; Wisconsin Entrepreneur Network; the Eiger Lab in Rockford; Rock Valley College; and Northern Illinois University. These partners each have programs that have developed to meet the needs of entrepreneurs and growing small businesses. Each program has their own area of expertise that is sometimes unknown and unavailable to companies outside their immediate area. The concept of working together to share information and resources and to coordinate services provided to the entrepreneur should leverage resources and improve results. This regional approach to the coordination and provision of services is a high priority for the EDA. Using this regional initiative, local development needs can be met. III. Multi-Tenant Industrial Incubator Space A. Demand: An inventory of existing industrial and warehousing buildings shows that there are 162 structures that total 15 million square feet of space in the City of Janesville. Of this total, only 19 structures are smaller than 5,000 SF and of these small structures, none are currently vacant. While the economic slowdown has created 1.5 million square feet of vacant industrial buildings, none of the vacant buildings are designed or available to meet the needs of a start-up manufacturer that only needs 2,500 SF of space. B. Previous Efforts: This shortage of small industrial spaces has existed in Janesville for over 20 years. In the mid-1990s Forward Janesville created a ‘small business incubator’ by leasing 15,000 SF within the Hufcor building on Norwood Road, and sub-leasing smaller units (1,500 SF to 2,000 SF) to multiple tenants. This ‘incubator’ was fairly successful in meeting the demand for smaller industrial spaces for several years. However, the tenants that outgrew their spaces had difficulty in finding 5,000 SF to 10,000 SF spaces to move into, and stayed in the incubator. This limited the availability of spaces for other potential incubator tenants. One incubator tenant finally located and purchased a 20,000 SF building in the Janesville area. Since the building was larger than needed, two other incubator tenants relocated at the same time, leaving the incubator with unused space and a rental income shortfall. After about 6 months, Forward Janesville had to relinquish the lease of space within the Hufcor building, and the availability of smaller industrial spaces diminished. C. Proposed EDA Multi-tenant Industrial Incubator: A draft budget for an incubator project would look like this: 25,000 SF building @ $50/SF $1,250,000 ? 6.25 A. TIF site $ $40,000/Ac. 250,000 ? Initial Soft Costs for Incubator Mgr. 100,000 ? Total Project Budget $1,600,000 EDA Grant (75%) $1,200,000 ? Value of TIF Site (In-Kind) 250,000 ? Additional TIF Monies 150,000 ? Total Project Funding $1,600,000 A very preliminary operating pro forma would look like this: Gross Rental Income at $2.75/SF (NNN) $ 68,750 Less vacancy at 25% (17,188) Net Rental Income $ 51,562 Less CAM for vacant space ($2.00/SF) (12,500) Net Operating Income $ 39,062 The EDA proposal would include an initial $100,000 to cover start-up costs and the cost for an incubator manager while the facility is marketed and the initial tenants move in and receive services. The “manager” services could be provided by a City staff person, or by contract to a not-for-profit agency like Forward Janesville or the UW-Whitewater SBDC. Once the incubator was up and running, the operating pro forma shows that approximately $39,000 per year in net operating income could be used to continue to provide incubator services, to create a capital replacement fund for eventual maintenance items; and to cover unforeseen cash flow variations caused by tenant turnover. IV. EDA Grant Program Funding through the EDA for this project is currently available on a 75%/25% matching basis. As the preliminary budget above shows, a 25,000 SF incubator project should have a budget of $1,600,000 with 75% of the funds ($1,200,000) coming from the EDA Grant, and 25% ($400,000) coming from the industrial TIF district. Of the local funding required from the TIF district, $250,000 would be in-kind through the City donation of an industrial site plus another $150,000 in TIF Funds. (Even if the incubator were to be a tax exempt property, the budget for the incubator would be designed so that an equivalent payment in lieu of taxes would be made annually, so the TIF investment could be recovered). The funding is currently available and applications are being accepted until the funds are fully committed. The earlier an application is submitted, the better the chances that a grant award can be made. If the application is successful, a more detailed contract and budget would be negotiated with the EDA and the Council would have to take action in Open Session to approve the contract, to accept the grant award, and to commit the TIF funds for the local match. V. Recommendation Staff recommends that the Council adopt a motion authorizing the Administration to submit an application to the EDA for funding the construction of a multi-tenant incubator building with local match coming from an existing TIF district. Doug Venable Cc Eric Levitt, City Manager Jay Winzenz., Assistant City Manager