City of Lawrence

City Manager’s Office

 

TO:

David L. Corliss, City Manager

 

FROM:

Diane Stoddard, Assistant City Manager

 

CC:

Cynthia Boecker, Assistant City Manager

Roger Zalneraitis, Economic Development Coordinator/Planner

 

Date:

 

November 5, 2009

RE:

Lawrence-Douglas County Biosicence Authority Request for the City and County to Acquire West Lawrence Labs Building

 

Background:

Attached is a request from the Lawrence-Douglas County Bioscience Authority (LDCBA) for the City and County to purchase a lab facility located at 4950 Research Parkway. The facility is approximately 17,460 square feet and offers extensive, well-maintained lab space which includes Good Manufacturing Practice (GMP) capabilities.  The facility is seen as a potential graduation facility for companies emerging from the incubator, or other small bioscience companies, so that they can be retained and grow in Lawrence.  The availability of community bioscience expansion capabilities has been a discussion item since the City and County agreed to participate with LDCBA and the University of Kansas in the Bioscience and Technology Business Center, now under construction on the KU campus.

 

A portion of the building is currently leased to CritiTech, a Lawrence-based research and development pharmaceutical company involved with the production and application of fine-particle compounds (www.CritiTech.com) and the building acquisition would keep CritiTech’s main office and activities in Lawrence for a minimum of five (5) years.

 

The LDCBA’s request envisions that the City and County would assist with issuing bonds to purchase the facility and the LDCBA would retire the debt with lease revenue from the building and the City and County would retain a building asset in the transaction.

 

Proposed Structure:

Should the City Commission wish to approve the request, the following is staff’s recommendation regarding a possible structure to accommodate the transaction in cooperation with Douglas County and the LDCBA:

 

Ø  The City would issue taxable general obligation-backed bonds of approximately $2.9 million to purchase the West Lawrence Labs Building. This financing would enable the purchase of the building, as well as the needed upgrade to HVAC systems in order to increase energy efficiency, reduce building operating costs, and appropriately segregate lease areas.

Ø  The City and Douglas County would enter into a cooperation agreement whereby the County agrees to guarantee half of the bond issue in the event that future lease revenue does not cover debt service.

Ø  The City and County would hold joint title to the building so that the City/County would have an asset to secure the investment.

Ø  The LDCBA would lease the building from the City/County.  The City and County would require approval of the building management structure, and approval of the terms of future lease arrangements made between LDCBA and tenants.  LDCBA would be responsible for the maintenance and operation of the building. LDCBA would provide the City/County with semi-annual reports regarding the income stream on the building and updates on maintenance of the building to ensure adequate reinvestment into the asset.  The report would show annual net cash flow on building.  LDCBA would manage the building and repay the City from lease payments on the building over a 25 year period.  For the first five years, principal payments would be deferred and LDCBA would pay $25,000 per year to the City to be applied to meet the interest payment. Beginning in the sixth year, LDCBA would pay principal plus interest calculated at approximately 50 basis points over the City’s average annual investment rate for the City’s idle funds for the previous year, to a maximum of 4%  (at rates earned from January to August of 2009, this would be approximately 2.3%). LDCBA would pay the first five years’ principal over the remaining 20 years of payments.  Based upon an anticipated bond interest rate of 5.5%, the City and County would share in the subsidization of interest costs annually, though for each entity this amount is anticipated to be less than $20,000 annually, with the exception of a slightly higher annual subsidy in the early years.  The City and County annual expenses are shown in the attached Sample Bond Amortization Schedule.  It is important to note that if the 5.5% interest rate assumption on the bonds varies up or down once the bonds are actually sold, the City and County annual contribution would vary accordingly.

Ø  Any net proceeds over the amount necessary to pay the City/County annually would be placed into a building fund to equalize any annual net cash flow losses experienced by LDCBA, to retire the debt earlier, reinvest in the asset, provide resources for marketing and attraction of new bioscience companies, or make up the interest subsidy.  The expenditure or assignment of funds in the building fund will be made annually upon consultation with the three entities- the City, the County and the LDCBA.

Ø  The West Lawrence Labs building would remain on the property tax rolls. 

Ø  The City-County-LDCBA agreement would require that LDCBA enter into an agreement with CritiTech whereby CritiTech agrees to commit to staying in Lawrence at its current employment levels or greater for a minimum of five (5) years and maintain its main office in Lawrence, unless the building is unable to accommodate their growth after the first three (3) years, or the company is sold, in the event of which CritiTech will pay an exit fee for LDCBA. 

Ø  LDCBA has preliminary agreement with the University of Kansas to option some portion of the building for possible use.

 

Staff Recommendation:

As suggested earlier, this facility would be a complimentary facility to the Bioscience and Technology Business Center facility and provide an option for companies to help meet the goal of retaining and growing bioscience companies in Lawrence.  The suggested structure accomplishes the acquisition of the building, while minimizing the risk to the governmental entities by enabling the entities to retain a capital asset.  Additionally, the structure accomplishes the goal of retaining CritiTech in the Lawrence community and enabling the future growth and development of biosciences in Lawrence and Douglas County.

 

Requested Action:

The City Commission should provide comment regarding the request submitted and the proposed transaction structure. Should the City Commission wish to proceed, the LDCBA would request a motion that the City Commission approves of the transaction in concept and it is suggested that the City Commission direct staff to prepare the necessary agreements and documents to facilitate the request. Should the City Commission so direct, it is anticipated that agreements and documents would be ready in December in order to facilitate a January bond issue. Staff also recommends that the City’s Public Incentive Review (PIRC) review the proposed structure for a recommendation to come before the City Commission in December, in accordance with the City’s overarching economic development policy.   Additionally, the City Commission should approve a conflict waiver for Gilmore & Bell to work on the agreements, as outlined, given that the firm serves as bond counsel for both the City and Douglas County.