UI Research Park: Investment and returns

CHAMPAIGN – The gleaming new buildings at the University of Illinois Research Park have generated upward of $3.2 million in property tax revenue for Champaign, its schools and other taxing districts.

On the flip side: The university, state and local governments have sunk $47 million into the park and related developments since its inception in 2000, according to a News-Gazette analysis.

The amount is less than the $64 million developers say they've invested in the park, but it represents a significant taxpayer contribution, directly or indirectly.

It also doesn't count ongoing costs, such as the $1 million the university pays each year to rent space in the park for UI offices. Or the $41 million the UI has spent to move its research farms south of Curtis Road to make way for the research park and other campus expansion.

City and UI officials say the investment has been worth it. The university's new conference center is generating income. Companies at the park have brought in more than $20 million of federal small-business grants. And other intangibles benefit the campus and the community, they said.

"The return on the investment comes in a variety of ways," said Avijit Ghosh, UI vice president for technology and economic development. "It comes in creating opportunities for faculty to create these new businesses. It comes in seeing the fruits of the research becoming real products and services. It comes in job creation. It comes in attracting companies here who then get into research relationships with the university.

"Those are really the ways we get the returns from projects like this."

UI, state share

The university has spent $19.2 million on the research park so far – not including operating costs or purchases of farmland for the South Farms' relocation. Only a small piece of that move was required for the park's first phase west of First Street, but the relocation was key to development of the new I Hotel and Conference Center to the east and much of the park development to come.

The state, meanwhile, ended up paying for three major buildings associated with the park, at a cost of almost $23 million.

In 2000, then-Gov. George Ryan's VentureTECH initiative provided $8 million to build the EnterpriseWorks business incubator for UI-related startup businesses, which eventually replaced the old Technology Commercialization Laboratory.

In 2004, the UI received state funding to buy the former I Building from Fox/Atkins for $8.2 million. Originally intended as offices for high-tech firms, it's now called the Forbes Natural History Building and houses the Illinois Natural History Survey and the Illinois State Geological Survey.

A second survey building is going up to the west at a cost of $6 million, also funded by the state.

The university's multimillion-dollar investment encompasses everything from construction costs to recruiting dinners for potential tenants.

The major components:

– About $7.6 million went into park infrastructure, according to the university. That includes site planning, road improvements, new telecommunications and utility lines, and relocation of farm and research activities – such as the fish research ponds previously located where the iCyt building is.

– Although the park's developer, Fox/Atkins, built most of the new buildings there, the university has taken on some construction and building costs. The UI's share of the I Hotel and Conference Center amounted to $11.6 million. The UI paid for the conference center and Fox/Atkins paid for the hotel and restaurant.

– The university also has ongoing costs associated with the park. The UI pays more than $90,000 monthly, or about $1.08 million annually, to rent space in the park for departments ranging from the College of Liberal Arts and Sciences to the Osher Lifelong Learning Institute, according to Bruce Walden, UI director of real estate services.

Other costs include mowing, staffing the university's research park office, and reimbursing Fox/Atkins for expenses associated with marketing the park – including welcome baskets and meals for prospective tenants, documents show.

The university's annual expenses for the research park operation, including the state-built Enterprise Works business incubator, are forecast at about $1 million for the fiscal year that began July 1.

Tenant rent, land-leases and parking fees all produce income for the park, and the fiscal 2009 budget showed a $220,000 surplus to be reinvested in park improvements.

But overall the park requires a subsidy from the university. For 2010, the university has allocated about $269,000 for the park itself – including $150,000 for marketing and new infrastructure expenses – plus almost $240,000 of state money for EnterpriseWorks, or more than a half-million dollars altogether.

Laura Frerichs, associate director of the park and former vice president of Fox Development Corp., said the park should become self-sustaining as land-lease income continues to rise with new development. The park received almost $112,000 in fiscal 2009 from Fox/Atkins and Romanek Properties – the Chicago firm that purchased two research park buildings from Fox/Atkins – as rental payment for the land on which its buildings are located, well above the $99,123 projected. That figure has risen steadily in recent years and is projected to rise to $122,000 this year.

A 2007 study of North American research parks found that about half of the parks surveyed generated earnings, but the numbers tended to be small. A quarter earned less than 5 percent of their operating budget, according to the study by Battelle Technology Partnership Practice for the Association of University Research Parks.

Research parks usually require "at least in the short-term, cross subsidization by their partners, communities, and higher-education sponsors," the study said.

Research park companies do bring in several million dollars in federal small-business grants each year. The grants help companies cover research and development costs during their early years.

In 2008 UI research park companies, including those in EnterpriseWorks, received nearly $6.3 million – 80 percent of the total grants coming to Champaign County. Since 2004, park companies have brought in almost $20 million of those grants.

"A lot of our small companies in this area rely on those for income," Frerichs said.

Local governments pitch in

The city of Champaign committed up to $3.75 million in future taxes to the project – $3 million for the hotel and conference center and $750,000 for the park itself. That's in addition to the property tax abatements that came with the park's inclusion in the city-county enterprise zone.

Champaign will also provide about $30,000 in local matching funds for a $6.9 million project to extend Fourth Street to Windsor Road, and Hazelwood and Gerty drives east to Fourth Street. The UI will kick in $100,000, said city engineer Roland White. The work is needed for the park's next phase east of First Street. The Fourth Street extension will also help improve traffic flow at UI athletic events, he said.

"We're talking about getting $6 million in state and federal money through that $130,000. It's a pretty good investment," White said.

In 2000, the city rewrote its economic development policy for the park, creating instead a new high-tech incentive program awarding up to $750,000 to the developers over 20 years. The city pays Fox/Atkins $3 per square foot of new space created for high-tech businesses not already located in Champaign-Urbana or Savoy. The incentive amounted to several times what was available under the previous policy.

The city has paid $541,085 toward that $750,000 cap, said Craig Rost, Champaign's deputy city manager for economic development.

That incentive is also available to other new developments across Champaign, as most commercial and industrial property in the city is part of the enterprise zone. And the city has negotiated incentives in other areas – the Apollo Industrial Park on North Market Street, for example, where it's paid $450,000 for a job-creation incentive, mostly in the last 10 years, Rost said.

The city tries to ensure that any business incentives are covered by the new tax revenue generated by the project, Rost said. An early version of the research park development agreement had the UI continuing to own the land, which meant it wouldn't have been taxable, Rost said. So the document specified that the UI would own the property but any improvements would be taxable, and the income from that new tax stream would cover the incentives paid for new high-tech space in the park.

"It was a wild guess," Rost said of the city's projections. "But we've been fairly close to growth estimates."

In addition, the city gave several streets to the university and created a new zoning classification for the park and waived building, street and sewer inspection requirements. Developers also received a $750,000 Illinois FIRST grant from the state for roads and infrastructure.

Another big chunk: The city expanded the boundaries of the enterprise zone to include the research park. The enterprise zone provides five-year property tax abatements from the city, county and, until recently, the Champaign Park District, which opted out in December 2006. Enterprise zone boundaries had expanded, and with the imposition of tax caps the park district could no longer afford to participate, said Executive Director Bobbi Herakovich.

The enterprise zone also gives developers a sales tax exemption on some construction materials, with a few restrictions.

The property tax abatements were expected to total $1 million over 20 years, and tax records show that estimate was fairly accurate. Through 2007, the city, county and park district abated $577,465 in taxes for research park developments, according to a News-Gazette analysis of county property tax records. That's $305,125 for the city, $122,182 for the county and $150,157 for the park district.

In that same time the development generated about $3.26 million in new property tax revenue for the Champaign school district and other taxing bodies not part of the enterprise zone, the analysis showed. (That doesn't include leasehold taxes paid by startup companies inside EnterpriseWorks.)

That number will continue to rise as new buildings come on line. The I Hotel, for example, is expected to pay more than $100,000 in property taxes next spring.

Rost said the numbers represent "a significant positive tax gain." Enterprise zones are designed to save companies money in the short term but over time generate more tax revenue for cities, schools and other taxing districts as the abatements expire, he said. So any positive bottom line at this stage is good news, he said.

Motorola's share

Still, almost half of that new tax revenue, $1.45 million, came from Motorola – which is no longer in the park. The company closed its software design center in 2007 as part of a national restructuring. The property is now owned by Fox/Atkins, which recruited new tenants and so far has filled about half the Gateway Building, as it's now known.

The former Motorola property generated about $202,000 in property taxes in 2008 – about $20,000 less than the previous year.

Motorola was also paying property taxes – in Urbana – before moving to the park in early 2001. County records show it paid nearly $90,000 in property taxes in 2000.

At the time, some local officials were none too pleased that Motorola received enterprise zone incentives to merely move across town. The company received abatements only on a secondary property, its parking lot, not the building itself, which was constructed before the new enterprise zone agreement was completed, Rost said. Motorola at one time planned to expand its building on South First Street. The abatements totaled about $6,350.

County board Democrat Tom Betz of Urbana is uncomfortable with property tax incentives generally, though he concedes the research park can help spur economic development by attracting well-paying jobs and, thus, more taxpayers. But "that was a real bad use of tax incentives," he said.

Motorola got a "rather substantial benefit," he said, "then they left. Some of these entities stay just as long as they get the abatement. ... I think we should keep some degree of healthy skepticism."

Rost said it's always a concern when a major employer leaves and buildings sit empty, but Motorola's decision had nothing to do with the park.

I Hotel and Conference Center

In a separate agreement with the university, the city promised up to $3 million toward the new I Hotel, which opened last August. The developers will keep any new hotel-motel tax revenue up to $3 million or for 15 years, whichever comes first. After the five-year enterprise zone tax abatement expires, the city will apply its portion of the hotel's property tax revenue toward that total as well.

So far, the incentives paid by the city are tracking fairly close to budget predictions, Rost said. The I Hotel was expected to generate $128,000 annually in hotel-motel tax receipts (about $10,000 a month), and $12,000 from the food and beverage tax.

Hotel tax receipts were above that mark last fall but dipped sharply in December and January with the grim economy and cold weather, Rost said. Since then, the numbers have rebounded, to $11,400 in February and a high of $14,680 in June, according to city figures. Food and beverage tax receipts, mostly from Houlihan's restaurant, peaked at $4,662 in December but since then have hovered between $700 and $1,000 a month.

In all, the city had paid $55,800 through December 2008, and owed Fox/Atkins about $86,200 through July of this year.

The developers' investment

Developer Peter Fox says he and partner Clint Atkins have invested $63.8 million in the park's buildings and infrastructure – and have yet to make any money.

Fox and Atkins split the proceeds when they sold two of the park's buildings for $20 million. But that money was reinvested in the park, to buy the former Motorola Building (for $12.7 million) and help fund the I Hotel, he said.

Fox said he's not sure they'll ever see a profit unless they sell more buildings or stop constructing new ones and fill up existing space. (The park is about 83 percent full right now.) Given the real-estate slump he doesn't expect to sell any buildings soon. And the development agreement requires Fox/Atkins to continue building new space to ensure park growth. Currently, rent from tenants only covers debt service and expenses, he said.

Fox said he'd initially planned to build one-story buildings and include residential and retail development in the park to generate income, but that didn't fit the university's vision.

"It's not like I don't want to make money," he said. "I don't want anyone to think we're making money and the university should be spending its money elsewhere. Or that Clint and I are making a penny out of this personally."

Neither of them depends on the park for income, Fox said.

"We're committed to doing this, we're committed to doing it right, even though the economics don't make sense," he said.

Fox/Atkins Development pays the UI more than $100,000 annually for land-leases, Fox said, a number he expects to climb as his firm assumes lease payments for the Gateway Building. And next July, Fox/Atkins will start paying the UI land rent for the I Hotel.

The land-lease income, coupled with property taxes, "add up to a pretty good figure that neither the university was receiving for the land, nor the city and schools were receiving in terms of property taxes" before the development, Fox said. The UI-owned land would have remained tax-exempt without the park, he said.

The city also benefited by having much of that land annexed – most recently the corner of First and Windsor, where a retail development is planned, he said.

And Fox said other UI projects have benefited from the installation of high-speed telecommunications and utility lines extended to that part of campus – notably the new Blue Waters petascale computing facility on St. Mary's Road.

The developers' investment also "enabled the university not to have to spend $64 million, and get the dual benefit of getting the property back eventually," he said.

UI officials said they can't speculate about what might happen when Fox/Atkins' ground lease expires in 2050 but emphasized the university will maintain ownership of the property "indefinitely." The UI could extend the lease or take possession of the buildings and the improvements, according to Mike Bass, senior associate vice president for capital programs and real estate.

Fox speculated that the buildings could be worth $100 million or more by then.

"In 40 years, all these things are going to be the university's for free," Fox said. "The university's going to have a hell of an asset.

"I feel pretty proud of what we've accomplished."

What's gone in ...

Fox/Atkins Development

Construction and infrastructure..........$64 million

State of Illinois

Illinois FIRST grant.........$750,000

Purchase of 'I' or Forbes building for scientific surveys.........$8.2 million

Additional survey building (under construction).........$6 million

EnterpriseWorks.........$8 million

Total.........$22.95 million

University of Illinois

Infrastructure (utilities, etc.).........$3.8 million

Program relocation (surveys, fish ponds).........$3.8 million

Conference center.........$11.6 million

Total.........$19.2 million*

*Does not include $41 million cost of relocating UI's agricultural research farms.

Local governments

I Hotel incentives.........up to $3 million ($142,000 to date)

High-tech business incentive.........up to $750,000 ($541,000 to date)

Tax abatements.........Est. $1 million over 20 years ($577,000 to date)

Total.........$4.75 million ($1.26 million to date)

TOTAL PUBLIC INVESTMENT.........$46.9 million

... What's come out

Federal small-business research grants (since 2004).........$20 million

Property tax revenue (through 2007 tax year).........$3.26 million

Conference center income (projected through fiscal 2010).........$281,778

Other/intangible

–  Economic multiplier effect in community – spinoff jobs, increased sales taxes, etc.

–  Estimated park payroll: $71.3 million annually

–  Faculty recruitment or retention

–  Support for UI researchers' spinoff businesses

–  Student internships

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