AURP 2006, ATLANTAA CREATIVE FINANCING RESEARCH PARK DEVELOPMENT FOR SUCCESSFUL. October 26, 2006

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1 AURP 2006, ATLANTAA CREATIVE FINANCING FOR SUCCESSFUL RESEARCH PARK DEVELOPMENT October 26, 2006 Vernon George George Henry George Partners

2 I. II. AGENDA Unique Research Park Characteristics For Financing Defining Financing Needs III. Financial Analysis IV. Financing Strategies V. Financing Multi-Tenant Space VI. Best Practice Case Study: UMB BioPark VII. Business Planning and Financial Benefits of Successful Parks 2

3 I. UNIQUE RESEARCH PARK CHARACTERISTICS FOR FINANCING 3

4 I. UNIQUE RESEARCH PARK CHARACTERISTICS FOR FINANCING Shallow Pockets Limited Tenant Focus More than Building Space Long term value not present value 4

5 I. UNIQUE RESEARCH PARK CHARACTERISTICS FOR FINANCING Enabler to Achieve Real Objectives Cash Flow/Profitability Not Primary Long Term Asset Oriented 5

6 NOT GO/NO GO DETERMINATION BUT CLEAR DEFINITION OF THE KIND OF PARK WHICH BEST MEETS THE NEEDS AND HOW TO GET THERE 6

7 II. DEFINING FINANCING NEEDS 7

8 II. DEFINING FINANCING NEEDS Assess the University's Research Base Characteristics of Research Base Attitude of Faculty and Administration Commitment to: Grow Research Achieve Strength Clusters Typically, Major University Priority Major Growth in Medical Pie 8

9 II. DEFINING FINANCING NEEDS Assess the University's Technology Transfer Acumen Staffing Relative to Research Increasing But Still Volume and Peers Modest Priority Experience working with Suffers From Faculty industry Mission Conflict University's policies for I.P., Conflicts and Release Time Technology Management Office Integration Into Total University Existing and Potential License and Start-up Income 9

10 II. DEFINING FINANCING NEEDS Assess University Support for Research Park Concept Perceptions of Faculty and Administration re the Costs and Benefits of a Research Park Student Perceptions re Park and Industry Interaction Support by Board of Regents for a University- Related Research Park For Public Universities, State Legislature Attitudes 10

11 II. DEFINING FINANCING NEED Assessing the Value Added Connection to Broadband Fiber Backbone of University Access to Specialized Facilities and Equipment With and Without Faculty Participant Adjunct Professorships Student Labor Professional and Academic Functions Receptiveness to Joint Research Projects NEEDED: CLEAR WRITTEN POLICY ON WHAT IS AVAILABLE, UNDER WHAT CONDITIONS AND WHO TO CALL 11

12 II. DEFINING FINANCING NEEDS Inventory Comparable Research Park Achievements Identify Most Instructive Park/Universities Determine External Funding Dimension Technology Communities Existing Technology Company Base Workforce Output Important Operating Characteristics Determine Real Research Park Absorption Land and Buildings, Types and Sizes Relationships to External Funding Comparables Provide Essential Counsel, Although Comparables Don t Exist 12

13 II. DEFINING FINANCING NEEDS Making the Incubator an Essential Marketing Tool Why Important Does Incubator Need Important Part of Park Walls/New Walls Marketing Strategy Producing High Share of How Do the Finances Work Park Tenants and Park Can It Be Collaboration Employees Center How Can You Predict Success How Can You Evaluate and Document Success Start-up and Venture Capital Need 13

14 II. DEFINING FINANCING NEEDS Capturing the Relationship Marketing Potential Understand Comparable Park Marketing Success Scan for Early Victories Primary Source of Tenants: Faculty/Referral 44 % Economic Agencies 23 Developer/Broker 16 Media/Shows 5 Word of Mouth % Identify University Research Strengths Inventory Relevant Faculty Industry Relationships Prepare Pursuit Strategies 14

15 I II. DEFINING FINANCING NEEDS Forecast Probable Absorption Analyze Subject University Strengths Understand Local Market Characteristics Use Comparable Park/University Experience Apply To Subject University Research Strengths Make Basic Forecasts Adjust for Other Important Locational Factors Make Final Projection of Range of Probable Absorption of Land and Floor Space 15

16 III. FINANCIAL ANALYSIS 16

17 III. FINANCIAL ANALYSIS Selection/Acquisition of New or Existing Site Importance of Proximity Accommodation of Low cost startup Growth and/or larger tenant accommodation strategies If Site Already Owned, Consideration of Alternate and Potentially Better Uses (Opportunity Cost) Preliminary Site Analysis Factors: Location Features Development Characteristics Environmental Issue Preliminary Cost Estimates Income Faculty Participation Administration Support Proximity Research Support 17

18 III. FINANCIAL ANALYSIS Site Infrastructure / Environment Best Business Park Environment in Town Land Preparation and Landscaping Utilities and Fiber Municipal Return Participation State and Federal Private Developer Package 18

19 III. FINANCIAL ANALYSIS Cash Flow Modeling Land and Building Absorption Pace Land Price/Floor Space Rents Operating Costs from Comparable Projects Development Costs from Architects/Engineers Land Costs Build/Utilize Cash Flow Model Cash Requirements Profitability Tests Feasibility Provides Basis For Project Monitoring 19

20 III. FINANCIAL ANALYSIS Land and Building Model GROSS REVENUE Entity Pays Govt. Pays Land Leases $193,388 $193,388 Rental Revenues $1,530,000 $1,530,000 Vacancy and Collection Loss ($31,500) ($31,500) TOTAL GROSS REVENUE $1,691,888 $1,691,888 PARK OPERATING EXPENSES Entity Operating Expenses $150,000 $150,000 Building Space OE $427,500 $427,500 TOTAL GROSS REVENUE $577,500 $577,500 PARK OPERATING EXPENSES Anchor Building Debt Service $937,513 $937,513 Infrastructure Debt Service $101,331 $0 TOTAL OPERATING EXPENSES $1,038,844 $937,513 NET CASH FLOW $75,544 $176,875 CUMULATIVE CASH FLOW ($343,114) $771,523 Results poor w/o public participation 20

21 III. FINANCIAL ANALYSIS Land and Building Model GROSS REVENUE Entity Pays Govt. Pays Land Leases $193,388 $193,388 Rental Revenues $1,530,000 $1,530,000 Vacancy and Collection Loss ($31,500) ($31,500) TOTAL GROSS REVENUE $1,691,888 $1,691,888 PARK OPERATING EXPENSES Entity Operating Expenses $150,000 $150,000 Building Space OE $427,500 $427,500 TOTAL GROSS REVENUE $577,500 $577,500 PARK OPERATING EXPENSES Anchor Building Debt Service $937,513 $937,513 Infrastructure Debt Service $101,331 $0 TOTAL OPERATING EXPENSES $1,038,844 $937,513 NET CASH FLOW $75,544 $176,875 CUMULATIVE CASH FLOW ($343,114) $771,523 With Public Participation, THIS DEAL GETS DONE! 21

22 IV. FINANCING STRATEGIES 22

23 IV. FINANCING STRATEGIES Required Amenities To Make Financing Sources Confident Strong and Sustained University Commitment Sound Implementing Strategy Firm Commitment To Value Added High Quality Operating Environment Cutting Edge Telecom Daycare/Community Orientation Indoor and Outdoor Networking Spaces 23

24 IV. FINANCING STRATEGIES Components of the Research Park Development Process Requiring Financing Land Infrastructure Marketing Operations Multi-tenant Building Space Incentives Single Tenant Space Incubator Company Space Technology Transfer/commercialization Partnership 24

25 IV. FINANCING STRATEGIES Important General Financing Sources Earmarks and Federal Program Financing Venture Financing and the Financing Strategy Private Developer Roles Local Economic Development Entity Role State Governmental Role Universities in Anchor Roles 25

26 IV. FINANCING STRATEGIES Venture Funding Trends 30,000,000,000 25,000,000,000 20,000,000,000 15,000,000,000 10,000,000,000 5,000,000, nd Qtr 1997 TO 2000 Change, $2,711,115,000 or 75% Source: Price Waterhouse Coopers 26

27 IV. FINANCING STRATEGIES Venture Funding by Industry, 2006-Q2 Other (16%), 1,044,000 Software (20%), 1,262,000 Media/Entertainment (5%), 332,000 Networking/Equip (6%), 352,000 Industrial/Energy (7%), 417,000 Semiconductors (9%), 555,000 Source: Price Waterhouse Coopers Telecommunications (10%), 632,000 Medical Devices (9%), 549,000 Biotechnology (19%), 1,202, Number in Thousands ($000 s)

28 IV. FINANCING STRATEGIES Investments by Stage of Development $2,410,000,000 $2,920,000,000 $724,000,000 $292,000,000 Later Stage Expansion Early Stage Startup/Seed 0 3,000,000 2,500,000 2,000,000 1,500, ,000 1,000,000 Source: Price Waterhouse Coopers 28 Number in Thousands ($000 s)

29 IV.FINANCING STRATEGIES Investments by Region, 2006-Q2 Philadelphia Metro, 275,000 Other, 667,000 Southeast, 294,000 Texas, 336,000 Northwest, 368,000 LA Orange County, 453,000 Silicon Valley, 2,253,000 DC Metro, 455,000 NY Metro, 536,000 Source: Price Waterhouse Coopers New England, 708, Number in Thousands ($000 s)

30 IV. FINANCING STRATEGIES Anchor Tenants Important Part of Critical Mass Direct Source of Project Revenue Important to Developer Participation Firm and Specific Commitment on University Access Community Incentive Package Often Needed 30

31 IV. FINANCING STRATEGIES University and Government Park Tenant Role Intellectual Critical Mass Particularly Remote Parks Secure Financing Can Cause Community Discomfort if Dominant 31

32 V. MULTI-TENANT TENANT FINANCING IMPORTANCE 32

33 V. MULTI-TENANT TENANT FINANCING IMPORTANCE Most Important Differentiator Heart of Private Technology Market Tenants Often Not Credit Worthy What-ever-it-takes, Because Without Multitenant Space You Are Not Really in the Market 33

34 V. MULTI-TENANT TENANT FINANCING IMPORTANCE FINANCIAL AND ECONOMIC IMPACTS OF START-UPS Spin Off Companies** Employees per company 8 to 10 Salary per employee $70,000 Payroll per company per year $560,000 to $700,000 Percent university hires 31% State payroll taxes per company per year $42,000 to $52,500 Sales per company per year $500,000 to $1,000,000 Typical investment* per company per year $300,000 to $400,000 Percent companies that stay in Georgia 77% Percent of companies that access university resources: Sponsored Research 27% Incubator 11% Leased Space 8% Contract Services 1% 34

35 V. MULTI-TENANT TENANT FINANCING IMPORTANCE While Meeting University Space Needs While Meeting Governmental Space Needs Attract Private Anchors with Favorable Rates Utility or University Standby Guarantees Local Bank Consortium Financing Make Condition for Exclusive Developer Role Residual Value Insurance 35

36 V. MULTI-TENANT TENANT FINANCING Private Market Gap Credit of Tenants IMPORTANCE Back-up Market Depth Venture Capital Timidity Most Time Consuming Space in Class 36

37 V. MULTI-TENANT TENANT FINANCING IMPORTANCE Enhanced Value, Purchase and Leaseback Developer Achieves Historic and Other Favorable Depreciation Designation, Which Enhances Cash Flow and Achievable Project and Loan Value Allows Additional Increment in the Purchase Price Back to the University, with Condition it be Used for Tenant Improvements This Supports Higher Tenant Rents Which Allows the University to Participate Further in the Future in a Similar Way 37

38 V. MULTI-TENANT TENANT FINANCING IMPORTANCE Building Developer Earmarked Company Investment Building Developer Invests in Tenant Companies with Funds Earmarked for the Company to Improve the Space Investment Risk Enhanced by Potential Liquidity Event and the Improved Space Created for Future Tenants 38

39 V. MULTI-TENANT TENANT FINANCING IMPORTANCE Guaranteed Lease-up, Enhanced Financing Established Venture Fund Joint Ventures with Technology Building Developer VC Commits to Place its Companies in the Building to Guarantee Quick Rent Up, Higher Rents and Enhanced Financing Additional Increment of Funds Partially Used for Tenant Improvements 39

40 V. MULTI-TENANT TENANT FINANCING IMPORTANCE What States are Doing Direct Construction Direct Loans TI Grants 40

41 V. MULTI-TENANT TENANT FINANCING Direct Construction IMPORTANCE New Jersey Technology Center Building Trades Union Financing NJEDA Developer Role Louisiana Incubator State Financed at the Three Medical Schools Ohio Similar Incubator and Multi-tenant Northwest Louisiana State Lease Anchors Bond Sale Recruited Anchor From Afar 41

42 V. MULTI-TENANT TENANT FINANCING TI Improvement Loans IMPORTANCE Connecticut Innovations Biotech Facilities Fund Total 225,000 Sq. Ft. Start-ups Have Averaged 9,000 Sq. Ft. and Grown to 28,000 Sq. Ft. Often Invest in Companies First Position Lien With Right to Release Very Good Loss Experience 42

43 V. MULTI-TENANT TENANT FINANCING Wet Lab Grants IMPORTANCE University City Science Center Private Developer Builds Building Lease for Major Incubator/Multi-tenant Component State Grant To Build Out the Space and Long Term Lease Allows Them to Capture the Enhanced Cash Flow 43

44 V. MULTI-TENANT TENANT FINANCING Build-to-suits With Incentives Essential to Attraction Success Important Part of Leadership Park Vision Creative Financing as Incentive Concentrate on Relationships Strength Areas Site Consultants RFP s IMPORTANCE 44

45 V. MULTI-TENANT TENANT FINANCING Private Developer Building Finance IMPORTANCE Tax Credit Capturing Efficient Parking and Infrastructure Instillation 45

46 VI. UMB BIOPARK MODEL 46

47 VI. UMB BIOPARK MODEL University Purposes Favorable Research Space Financing Enhance Economic Development Role Recruit and Retain Top Faculty 47

48 VI. UMB BIOPARK MODEL Components of Financing Approaches University Provides Site and Bankable Lease Ground Floor Financial and Professional Anchors Private Developer, Townsend Capital (now Wexford Equities), Finances/Develops State Revolving T.I. Financing 48

49 VI. UMB BIOPARK MODEL University Anchor Commitment Meets Research Space Need Major Cash Flow Share University Space Financed Separately Achieves Low Shell Rate 49

50 VI. UMB BIOPARK MODEL State Tenant Improvement Grant Grant to University Keeps Rents Low to Benefit Small Tech Companies Costly Special Improvements Revolves Through University Cash Flow Participation Makes Tenants of Faculty With Concepts 50

51 VI. UMB BIOPARK MODEL Benefits of this Approach Favorable University Space Costs Rent Cash Flow Share Townsend Capital Achieves Multi-tenant Space Makes Prospects Tenants Attracts and Harvests World Class Faculty 51

52 VII. FINANCIAL BENEFITS OF SUCCESSFUL RESEARCH PARK DEVELOPMENT 52

53 VII. FINANCIAL BENEFITS OF SUCCESSFUL RESEARCH PARK DEVELOPMENT The Business Plan: Fund Sources and Uses and Specific Steps For Achievement Multi-Year Cash Flow Model Is the Basic Tool Short and Longer Term Projections Of Annual Operations Startup Funds Continuing Budget Support Adequacy Of Cash Flow Dealing With Risk/Return Obtaining Key Commitments Project Responsibilities 53

54 VII. FINANCIAL BENEFITS OF SUCCESSFUL RESEARCH PARK DEVELOPMENT For the University Land Lease Compensation for Playing Key Financial Role in Deals Master Lease, Direct Lease, or Lease Guarantees Asset Value On Liquidation Real Estate Profits Building A Long Term Financial Asset Research Funding From The Tenant Companies Development Foundation Funding From The Tenant Companies Nurturing Of University Start Ups To License Value Faculty Consulting Opportunities Student Job Opportunities 54

55 VII. FINANCIAL BENEFITS OF SUCCESSFUL RESEARCH PARK DEVELOPMENT For the Community Important Job Growth Personal Property Taxes Image of A Successful Community Sales and Business Taxes (Some Communities) Taxes and Fees From Development and Operations of Tenants Employee Generated Benefits Enhanced Competitive Position For Tech and Related Companies Set High Development Standards 55

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