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The Art of  Economic Development

The Art of Economic Development

Creative funding mechanisms and tax incentives are driving public and private collaborations on real estate deals.

If all goes as planned, the St. Paul Saints will open their 2015 baseball season at a brand new 7,000-seat stadium in Lowertown. Contributing to the $54 million cost of the regional ballpark will be $25 million in state bond funds, $10 million from the Saints, and $17 million from the City of St. Paul, which will own the facility. The project is a high- profile example of the public-private partnerships in real estate that are proving successful around the state.

Less well-known, but nicely illustrative of the financial mechanics that can underlie such deals, is the story behind the $2 million shortfall suggested by the numbers above.

The new ballpark will rise on a site formerly occupied by the old Diamond Products building. The 600,000-square-foot industrial dinosaur sat empty for several years before it was purchased July 31 for $2 million by the Saint Paul Port Authority, an economic development agency established by the Minnesota Legislature in 1932.

After the purchase, the Port Authority immediately “flipped” the building to the City of St. Paul in a land-swap deal. In return, the city agreed to deed to the Port Authority the Saints’ current field, Midway Stadium, and its 12-acre site in the industrial area of Energy Park.

When the new ballpark is completed, the Port Authority will knock down Midway Stadium, clean up the Energy Park site, sell it for commercial or industrial use, and use the proceeds to repay itself for buying the Diamond Products building.

The beauty of the deal from the standpoint of all that is right and good, maintains Port Authority President Louie Jambois, is that Midway Stadium is not only old and deteriorating, it’s in the wrong place to begin with. “Midway is on a site that should house industrial development. Diamond Products is on a site that should house a ballpark,” he says.

Then there are the economics of the deal. “Our history suggests,” Jambois says, “that we can put in at least a 200,000-square-foot building [at Energy Park] and create 200 to 300 private-sector jobs.” The development also is projected to bring in an estimated $250,000 in annual property taxes to the city, plus additional payroll taxes to the state.

The land swap with the Port Authority meant that St. Paul could apply for $25 million in state bond funds, not $27 million. The projections about jobs and tax revenues springing from Energy Park also “made the city’s application [for the state money] stronger than it otherwise would have been,” Jambois says.

Making Things Happen

Elsewhere in the state, public officials and community development specialists are similarly adept at finding ways to make projects happen. A Cambridge business, National Recycling, Inc., finished construction in 2012 on a new 47,000-square-foot building on land purchased from the city with the help of tax-increment financing. The company had to pay only $100,000 down for the land, says the City of Cambridge’s economic development director Stan Gustafson. Lower upfront land costs allow a business to “focus on putting money into buildings, equipment, and employees,” Gustafson says. At the same time, “tax-increment financing means that the city [later] will get paid back.”

In Lutsen late last year, the Lutsen Mountain Corporation, which runs the Lutsen ski resort, received loans from its electricity suppliers to buy new energy-efficient snow-making machinery. The Arrowhead Electric Cooperative gave the company a loan of $50,000, and Arrowhead’s electric wholesaler, Maple Grove–based Great River Energy (GRE), chipped in with a $350,000, low-interest loan via an energy-efficient equipment program.

Together those loans will cover half the cost of the new snow-making equipment, says GRE’s economic development director Tom Lambrecht. By using less electricity and water, the new machines are expected to achieve a 52 percent increase in efficiency. That, Lambrecht says, will help GRE and Arrowhead meet conservation goals set by the state’s conservation energy policy. A local economy heavily reliant on skiing should benefit as well.

Teaming Up

GRE supplies wholesale power to 28 electric cooperatives in Minnesota. One of them, Steele-Waseca Cooperative Electric, played a role in a major economic development project in Faribault that involved multiple players.

Sage Electrochromics, Inc., a maker of programmable building glass, is constructing a new 324,000-square-foot high-volume manufacturing facility next door to its original 60,000-square-foot building in Fari-bault. Scheduled for completion in the first half of this year, the project promises to create at least 145 new jobs.

Sage’s decision to remain in Faribault while quintupling the size of its facility was far from casual. The company hired a site-selection firm that solicited economic incentives from locales across the country. To keep Sage at home, the City of Faribault, Rice County, the state, and other entities chipped in on a package of tax breaks, grants, and loans totaling $17 million in value to the company, says Rice County’s economic development director Deanna Kuennen.

Generous as that may sound, the offer fell millions of dollars short of the incentive package offered by a town in New York that emerged as Faribault’s top competitor. But the Minnesotans finally carried the day, Kuennen says, partly because Sage “knew their workers here.”

Local and state tax breaks and tax credits for job creation, available through Minnesota’s Job Opportunity Building Zone (JOBZ) program, came into play when Faribault was able to transfer JOBZ status from five acres elsewhere in the city to the Sage building site. JOBZ is scheduled to expire in 2015, but a special exemption by the state Legislature extended its benefits for the Sage project until 2020, Kuennen says. The total estimated value of tax breaks and credits to Sage through 2020 is $10.3 million.

As a rural utility provider, Steele-Waseca Cooperative Electric has access to loans from the U.S. Department of Agriculture’s (USDA’s) Rural Development Program. Steele-Waseca, backed by GRE, guaranteed $740,000 in low-interest loans from the USDA for the Sage project. Other contributors included the Faribault Industrial Corporation, a nonprofit economic development entity, and the State of Minnesota, which provided a training grant in addition to the JOBZ incentives.

Because the Minnesotans knew “there was a big gap between us and [the competing town in] New York,” Kuennen says, the Rice County commissioners—through the county’s Housing and Redevelopment Authority—did something unique in her experience: “They stepped forward with a $1 million loan from general fund dollars. A million dollars is a lot to Rice County. That speaks to our commitment to growing quality jobs.”

Projects the size of the Sage expansion are rare in outstate Minnesota communities. A far more typical example of the kinds of help businesses receive from local governments, Kuennen says, is a start-up company called Living Greens Farm. The Faribault company will engage in “aeroponic” farming, growing leafy green vegetables in a warehouse, their roots not in water but in a moistened textile material.

Last year the principals invested $4.1 million to buy an existing 30,000-square-foot building, plus land, improvements, and equipment, Kuennen says. The city and county helped out with property tax abatements worth up to $100,000 over five years.

Tax abatements are popular mechanisms to encourage development. So are the USDA loans available through rural utility providers, says GRE’s Lambrecht. At least two-thirds of GRE’s 28 cooperatives participate in the program, he says. Since 1999, GRE has been involved as a backer in about 65 USDA loans, 11 of them aimed at hospitals or clinics. What’s on the near horizon? “We might do additional financing in USDA for Sage through Steele-Waseca,” he says.

Federal Funding

As a metropolitan agency, the Saint Paul Port Authority is not eligible for USDA’s rural loan program, but it has 80 years of experience finding money for redevelopment projects. “We have a small property-tax levy that we use to pay back bonds we sell,” Jambois says. “With [the bond proceeds], we buy property to redevelop. Then we use our redevelopment know-how as bait to attract funds from the national, state, and county levels.”

Partly because it cleans up a lot of contaminated “brownfield” sites, Jambois says, the Port Authority has received money over the years from the Environmental Protection Agency and the U.S. Department of Energy. It has received allocations of new markets tax credits from the U.S. Treasury Department. And it has tapped into funding from a long list of state and regional sources. Those include Ramsey County, the Metropolitan Council, the Minnesota Department of Transportation, and the Minnesota Department of Employment and Economic Development.

“But it’s all about setting the stage for private-sector investment,” Jambois says. The Port Authority specializes in turning obsolete, decaying buildings into shovel-ready sites for new development. “If a company has a choice of a shovel-ready site versus a contaminated brownfield site,” he says, “they’ll take shovel-ready every time.”

Uptrend?

Nobody is turning cartwheels over the state of the commercial real estate market right now, but Kuennen, Gustafson, and Jambois cautiously agree that after the doldrums of 2009 and 2010, companies have begun to take more interest in expansion.

The Saints stadium deal was just one of 10 items on the Saint Paul Port Authority’s 2012 list of accomplishments. The list is longer than it has been in recent years, Jambois says. He notes, however, that some redevelopment projects are only on the list because the Port Authority was able to buy property cheaply in harder times.

For instance, one notable win last year was the Port Authority’s sale to Ironton Asset Fund of 3M Corporation’s original headquarters building at Beacon Bluff, a 61-acre site on St. Paul’s east side. When 3M, which decades ago moved its main campus to Maplewood, finally abandoned the last of its Beacon Bluff buildings in 2008, the Port Authority stepped in, acquiring the property in 2008 and 2009.

In other words, Jambois says, “We bought the 3M property when the economy was in the tank.” Then the agency took a few years to knock down several structures and do the necessary environmental cleanup. “If not for all that,” he says. “We wouldn’t have seen the 2012 we had.”


Shovel-Ready Sites Await Buyers

Cambridge Opportunity Industrial Park sits on 107 acres 45 miles north of the Twin Cities. Most of the park is occupied, but 39 acres remain buildable. As an enticement to companies looking for a place to set up shop, the site is certified by the State of Minnesota as “shovel-ready.”

That amounts to a promise that most of the unpleasant surprises known to delay or sabotage commercial developments have been anticipated and eliminated. The planning, zoning, surveys, and title work on a shovel-ready site have been completed. Public infrastructure needs—roads, sewers, utilities—are in place or planned out. All necessary environmental studies and soil analysis have been done.

Shovel-ready sites are attractive to corporate buyers because they “take [some] risk out of development,” says Kevin McKinnon, director of the business and community development division of the Minnesota Department of Employment and Economic Development (DEED). “Businesses know what they’re getting into when they try to develop a site.”

DEED launched Minnesota’s Shovel-Ready Certified Sites program in 2010. Cambridge’s industrial park is one of 15 certified sites to date in cities from Fairmont in the south to Grand Rapids in the north.

“I was sold [on the program] right away,” says Stan Gustafson of the City of Cambridge. “Years ago, manufacturers would look at a site and plan to build on it three years later. Now they want to choose a site and dig today, and know that they won’t say ‘Whoops.’”

DEED does not pay for any preparation, paperwork, testing, or physical improvements needed to make a site shovel-ready; all of that is up to the landowner and the local government. What DEED certification supplies, for a $3,000 application fee, is consulting on how to meet the criteria and marketing of certified sites on DEED’s web site and elsewhere.

The great benefit Gustafson sees in certification is that it functions as an independent seal of approval: “So it’s not just me or Cambridge saying that this site is shovel-ready, it’s the State of Minnesota.”

Why have only 15 municipalities invested in certification so far? The top reason, economic development specialists say, is probably that many areas lack sites that are close to meeting shovel-ready criteria. The major expense lies in preparing such sites, not in certifying them. A sluggish market for commercial real estate has discouraged property owners from investing heavily in site preparation when there are fewer buyers.

Connexus Energy, headquartered in Ramsey, supplies power to 60 cities and has offered to pay DEED’s shovel-ready certification fee for a certain number of cities each year. A 2011 meeting to introduce the idea attracted representatives from 11 cities. Two of them, Isanti and Centerville, went on to earn DEED certification, says Brian Burandt, Connexus manager of business and community relations.

No cities took advantage of Connexus’ offer in 2012. As of December, the sites in Isanti, Centerville, and Cambridge were still on the market. Of the 15 DEED-certified sites in the state, only St. Cloud’s Airport Industrial Park had found any buyers. Last September, German farm-equipment maker Geringhoff bought an existing 110,000-square-foot building at the St. Cloud location and announced that it will invest $20 million in a new manufacturing operation.

Though Geringhoff didn’t dig, sources at DEED say that the site’s shovel-ready status did factor into the company’s decision because it will greatly simplify any future expansion.