Improvement Grant

To: Mayor and City Commissioners

From: City Manager David Corliss

Date: November 7, 2007

Re: Approved Deciphera Agreement

The City Commission unanimously approved the various Deciphera agreements at its meeting of October 23, 2007; however, there was neither adequate briefing materials for the tax rebate incentive nor adequate public discussion of this incentive at the meeting. This memorandum provides additional background on the approved agreements.

Highlights of the Deciphera Agreement

§ The maximum financial commitment of the City remains unchanged from the earlier commitment approved by the City in January. In fact, the City’s commitment may be less depending upon future employment growth. The tax refund provision does not increase the City’s contribution from the MOU commitment approved by the City in January 2007.

§ The City’s financial commitment is capped at $125,000 per year for ten years.

§ The financial commitments of the City and County are identical.

§ The Deciphera agreement is viewed as more favorable for the City than the January 2006 MOU in several important respects: the building is owned by a bioscience business – rather than leased to tenants if bioscience tenants can be found; several of the incentives are tied to employment numbers – the January MOU did not have performance requirements; the property will pay all property taxes, with only a portion to be refunded if certain goals are achieved - the January MOU did not require property tax payments and an empty building likely would have been exempt because of KBA ownership.

§ Deciphera currently employees 23 full-time and 3 part-time employees in the high tech pharmaceutical development industry.

§ In order to receive the full City financial commitments, Deciphera must maintain Lawrence as its world headquarters and primary location for bioscience operations and must conduct substantial commercial bioscience operations in Lawrence.

§ The investments of the Kansas Bioscience Authority and the Lawrence-Douglas County Bioscience Authority attest to the business strength of the public investments in Deciphera.

Background

On Thursday, December 28, 2006, an announcement was made by the Kansas Biosciences Authority, the City of Lawrence, Douglas County, the Lawrence Chamber of Commerce, Douglas County Development, Inc., and the Lawrence-Douglas County Biosciences Authority, that the KBA was purchasing the speculative building located at 3813 Greenway Drive from DCDI. The purchase amount was $2,475,000. The KBA announced that it intended to use the facility for bioscience related initiatives to spur economic development. The Memorandum of Understanding agreement was unanimously approved by the Lawrence City Commission at the subsequent Commission meeting of January 2, 2007. There was no public comment at this regular agenda item.

The MOU contemplated a future contract with additional details to finalize the transaction. The MOU provided that DCDI, City, County, and the LDCBA would provide $3,000,000 to the KBA’s costs of renovation/equipping in ten equal payments to be shared (1/6) DCDI; (1/6) LDCBA; (1/3) City and (1/3) County. This meant that the City would be responsible for $1,000,000 over 10 years, or $100,000 per year. Additionally, if as anticipated, the renovation/equipping costs exceeded $3,000,000, then the City, County, and LDCBA would be responsible for up to an additional $1,000,000, split as follows (1/2) LDCBA; City (1/4), and County (1/4).

So, the total financial commitment from the City for the project was $1,000,000 plus $250,000, for a total of no greater than $1,250,000 to be paid out over 10 years, or $125,000 per year.

There was no requirement related to the identity of any tenant(s) or the number of jobs in relation to providing the incentives. There was no guarantee that the facility would be occupied; however, there were at the time several possible tenants examining the facility, notably including Deciphera.

The issue of property taxes was not addressed in the MOU. The issue was to be addressed in a final contract for the purchase of the spec building. State law (K.S.A. 74-99b12) provides a property tax exemption for property owned by the KBA and used for a public purpose; however, the exemption does not extend to businesses conducting business on the authority’s property. Whether a future tenant of the building would seek and/or be granted a property tax abatement or exemption remained a possibility. It is possible that an empty KBA facility would have obtained a property tax exemption status.

Events Subsequent to the MOU execution

After the MOU execution, Deciphera indicated an interest in becoming a possible tenant to part of the facility, and then an interest in acquiring the facility. This was viewed as a positive development by all parties because ownership of the building (versus rental of only a portion of the facility) further strengthened Deciphera’s ties and commitment to growing its business in Lawrence. Work commenced on restructuring the proposed incentive arrangements to reflect Deciphera’s acquisition of the facility – rather than KBA ownership.

The Lawrence Chamber of Commerce provides the following information about Deciphera: Deciphera is a pharmaceutical company founded in Boston. Deciphera relocated to Lawrence in 2003. It has devised a proprietary method of testing certain molecular processes in the body to seek out, prevent and cure cancers and many other ailments. It has no drugs on the market, but hopes to have a product in preliminary trials for FDA approval in the near future. Examples and timelines of some of their research can be found online at www.deciphera.com. Deciphera currently has 23 full-time and 3 part-time employees. Two of the part-time employees are KU students that are working while completing their degree program. Of the 23 full-time employees, 13 have achieved the PhD level and 8 have a college degree. The current average wage for Deciphera employees is $72,000. Deciphera has no direct or in-direct affiliation with KU.

Deciphera Purchase and Related Incentives October 2007

The agreements approved by the Lawrence City Commission on October 23, 2007 provide the following:

Improvement Grant

The KBA is to pay $3,000,000 to Deciphera for acquisition and equipping the building; but will be reimbursed fifty percent by the local consortium (City, County, DCDI, and LDCBA) for a total of $1,500,000. The $1,500,000 reimbursement is to be paid $150,000 per year for 10 years by the consortium. The consortium split is as follows: City 31.25%; County 31.25%; LDCBA 25%; and DCDI 12.5%. The City’s annual requirement will be $46,875. The ten year total is 31.25% of $1,500,000 or $468,750. As required by the Kansas Cash Basis Law, the City’s annual commitment is required as an annual appropriation by the City.

Employment Award(s)

The KBA and the consortium (City, County, DCDI, and LDCBA) shall each pay to Deciphera a one-time total sum not to exceed $500,000 based on certain employment goals.

CITY’S SHARE OF EMPLOYMENT AWARDS

WITHIN 10-YEAR PERIOD

Deciphera Achieves Employment Goal:	City’s Contribution of Employment Award:
50 Employees or greater	$39,062.50
100 Employees or greater	$39,062.50
150 Employees or greater	$39,062.50
200 Employees or greater	$39,062.50
Total City Contribution if Deciphera achieves all employment goals within the 10-year period:	$156,250.00

If all of the employment goals are met in the 10 year period, Deciphera will receive a total of $1,000,000 ($500,000 from the KBA and $500,000 from the consortium). It is unlikely that the grants will ever occur in the same year (e.g. it is not likely that the 50 employee and 100 employee goal will be reached in the same year). The consortium split is as follows: City 31.25%; County 31.25%; LDCBA 25%; and DCDI 12.5%. So in a goal threshold year, the City’s one time share will be 31.25% of $125,000, or $39,062.50. The City’s total obligation under the 10 year agreement, assuming total employment of 200 employees or greater, totals 31.25% of $500,000 or $156,250. As required by the Kansas Cash Basis Law, the City’s annual commitment is required as an annual appropriation by the City.

Before the tax refund provision is used, the City’s total maximum financial commitment is $468,750 (improvement award) + $156,250 (employment award assuming goal attainment) = $625,000. This is one-half of the City’s total financial commitment.

Tax Refund

All property taxes shall be due and owing on the property. The 2006 property tax bill for the spec building was $88,237, based on an appraised value of $3,003,200. The spec building is being sold by DCDI for $2,475,000, and there is speculation that the County Appraiser’s appraisal amount will be reduced to reflect this sale price (but it will increase as improvements are made to the property in the future). Pursuant to the agreement, the consortium agrees to provide a refund of certain paid property taxes, if certain employment targets are met, and the property taxes exceed certain amounts as set out in Exhibit A to the agreement. The Exhibit contemplates a stair-step build-out of the facility as Deciphera grows. Milestones are identified at an initial finish of 22,500 square feet, growing to 45,000 square feet, then to a complete build out of 67,400 square feet, with a 17 employee per year growth schedule. The property tax refund is obviously contingent upon several factors: mill levy, assessed valuation, build-out, and employment numbers. The property tax refund expires after 10 years. There is no Lawrence School District participation in the tax refund program; however, the private DCDI and private/public LDCBA does participate. The consortium split is as follows: City 31.25%; County 31.25%; LDCBA 25%; and DCDI 12.5%. A hypothetical example follows:

If in year 4 of the 10 year property tax refund program, Deciphera employs at least 77 full-time employees, and the property tax paid is $114,123, then the tax refund is $49,569. The City’s share of the tax refund is $15,490.31. The property tax refund is lower, on a proportionate scale, if the employment numbers are lower. Additional examples are provided in the attached memorandum from Matt Hoy.

Additional Consortium Projects not related to Deciphera

The Consortium Agreement provides that “[t]he remainder of the $4,000,000 committed by the Consortium members shall be held and used by the LDCBA for additional projects similar to the Deciphera arrangements or for (i) the enhancement or creation of life-science and bio-science services and/or shared lab space; or (ii) incubator space, including equipment and/or potential leasehold subsidies.” There is no timeframe for either the receipt of remaining Consortium funds nor when those funds will be spent. As a continuing major funder to the LDCBA, the City can expect an active voice in the timing and the use of these funds.

Key Provisions of the Agreement: Compare and contrast with earlier MOU Agreement previously approved by the City Commission

The total Consortium commitment is capped at $4,000,000 over the 10 year period. This cap includes any tax refund that may be paid. The City’s share is 31.25%; so the City’s cap for financial participation (including any tax refund) is $1,250,000, which equals out to $125,000 per year. The earlier MOU agreement was similarly capped at $1,250,000, which equaled out to $125,000 per year. As noted above, the earlier MOU did not tie the City’s financial contribution to any employment numbers. While it is hoped the Deciphera exceeds its employment goals, it is possible that Deciphera will not meet all of the employment goals for either the employment grants or the tax refund, thereby decreasing the Consortium and City contributions to Deciphera.

Deciphera makes several important commitments under the agreements in order to receive the employment awards: Deciphera must maintain Lawrence as its world headquarters and primary location for bioscience operations and Deciphera must conduct substantial commercial bioscience operations in Lawrence, Kansas. Significantly, Deciphera has also acquired rights of first refusal on adjacent property to the spec building indicating an interest in possible future expansion at the East Hills Business Park. This provides the possibility of future expansion by Deciphera in Lawrence, Kansas.

The following table provides a comparison of the Deciphera agreement and the January MOU.

	Deciphera - October 2007	MOU - January 2007
City Financial Commitment
Total	$1,250,000	$1,250,000
Annual	$125,000	$125,000
Performance Incentives
Improvement Grant	$468,750	$1,250,000
	(paid over 10 years)	Assuming maximum expenditure (paid over 10 years)
Employment Award	$156,250	No link to employment numbers
	if 200 employees within 10 years
Property Taxes	100% taxes paid to all units	Statutory exemption applies
	A portion refunded based on:	Not known about future property tax status
	employment numbers
	buildout square footage
	(stops after 10 years)
	School Revenue Unaffected
Other	Deciphera commits to Lawrence as world headquarters with expansion possibilities Agreement provides funds for incubator and/or incentives for other bioscience initiatives	Unknown Bio Tenant(s) Incubator space possibilities