Consideration of Grant Agreement and Acceptance of Grant Funding:  Innovation Mesa - Phase 2 Project 

Subsidiary Decisions Points: Acceptance of the Grant Agreement will permit the City to receive federal funds through the U.S. Department of Commerce Economic Development Administration in order to build a 25,000 square foot facility (Phase 2 - Business Accelerator) on McMillan Mesa.

Approval of the Grant Agreement will provide a federal share of $4,000,000 towards a total project cost of $7,762,500.  The recipient share of the project is $3,762,500 which will be funded by the following partners: $1,000,000 from the Arizona Commerce Authority, $100,000 from Northern Arizona University, and $2,662,500 from 2004 voter authorized City bond capacity repaid through tenent leases in the facility.

A sustainable community through economic vitality, environmental protection and social inclusion.
Effective governance.

No, however presentations of this project have been made to Council at a prior Work Session and during the FY 13 Budget Work Session.  Additionally, Council approved an Economic Development Administration grant in 2006 for the first phase (Business Incubator).  

Option A - Authorize the acceptance of funds. 
Option B - Do not authorize the acceptance of funds. 

The Science and Technology Park was conceived in 2003, and during the 2004 election bonds in the amount of $61.2 million were approved by the voters to advance the project.  The bonds are paid with revenue from the project and not property tax revenue.  McMillan Mesa was chosen as an ideal site due to the existing, nearby USGS Campus. Through investigation, a critical part of the science park would be a business incubator for entrepreneurs and business start-ups. An overall science park master plan was developed around 2005. 

The master plan included a remodeled USGS Campus, a 10,000 square foot business incubator, and a science park on nine acres of adjacent land. The business incubator (Phase 1) was constructed in 2008 through a U.S. Department of Commerce Economic Development Administration (EDA) grant and is currently operated by Northern Arizona Center for Entrepreneurship and Technology (NACET), a separate private non-profit.  
 
In 2009, a land lease and development agreement was signed with Plaza Company to develop the science park. The lease called for following the USGS master plan and constructing 120,000 feet of office/production space. The development would be built in 25,000 square foot increments as warranted by new tenants. The ground lease rent was $.28 per sq. ft. across the nine acre parcel, with a CPI increase every five years. Rent would be staggered until full build-out was completed. In addition Plaza Company would receive a rent abatement for any infrastructure (power, sewer, water, etc.) they completed to support the project. In late 2009, Plaza Company notified the City it was not in a position to move forward with the project due to the general economic conditions in the marketplace. Plaza Company searched for a company to take assignment of their lease/development agreement.  Loven Contracting, Inc., a local construction firm, accepted the Assignment of the Lease in early 2010 with approval by the City Council.  Loven ultimately renamed the project “Innovation Mesa”.
 
For the next two years, Loven proceeded with various aspects of the development, including reducing the overall “footprint” to a more reasonable three buildings totaling 75,000 square feet, completing design review and initial Planning and Zoning review, as well as general tenant prospecting.  However, in the spring of 2012, Loven notified the City that they were unable to proceed with the development in large part because of their inability to obtain creditworthy tenants. The demand for space by new companies remained strong, yet early stage companies do not have the credit worthiness needed for a private developer to secure independent financing for a project.  Therefore, on April 3, 2012, the City Council approved an Assignment and Release Agreement with Loven Contracting to terminate the Master Ground Lease.  In exchange for their release, Loven provided the City with all renderings and related documents that they created as part of Innovation Mesa.
 
Given the release of the now second private developer on this project, City staff began to investigate the merits of a Public-Private Partnership (P3) to continue progress on the project (now known as Innovation Mesa - Phase 2).  In the fall of 2011, the City along with several partners including the Economic Development Administration, Arizona Commerce Authority (ACA), Northern Arizona University, NACET, Economic Collaborative of Northern Arizona (ECoNA), and Northern Arizona Council of Governments (NACOG), began discussions to advance the Innovation Mesa - Phase 2 project. 

Innovation Mesa - Phase 2 is intended to be the first of three buildings located adjacent to the USGS Campus and the business incubator (Phase 1), and will include a 25,000 square foot building featuring wet and dry labs/office space (80%) and light manufacturing space (20%), a conference room/alternate secondary EOC, and server facilities.  The primary purpose of Phase 2 is to provide space for Tier 2 companies and graduates of NACET, as well as grow business startups and advance entrepreneurship and economic gardening programs within the region, and to retain and expand existing businesses through the creation of 300 jobs.  As noted above, the building will feature a secondary or alternate EOC (as part of the conference room) should disaster related circumstances arise and warrant the need by either City and/or County personnel.  It is not the City’s intent to develop the remaining 50,000 square feet of this campus.  Rather, upon completion of Phase 2, an evaluation will be done with Council to determine the disposition of the remaining development.

Innovation Mesa - Phase 2 project will provide "soft landing" space for Tier 2 companies and graduates exiting NACET’s incubation program, and allow new companies wishing to enter the program to have space in Phase 1.  This project is intended to create over 300 jobs and $20 million in private investment within the first three years of operation.  The addition of wet and dry laboratories in this next phase is critical to expand and grow existing companies in the region as there is no known existing lab space for them to locate to.  This project will allow our community to retain local businesses that may have otherwise left the region to seek these types of services and facilities.

Specifically, this project will benefit four groups: 

• High technology and bioscience startups will result from technology transfer and commercialization of research conducted by NAU faculty and students
• Local entrepreneurs will become more competitive in the global market through the technical and business advice from NACET staff and their statewide mentors group
• Existing firms and new firms will locate facilities in Northern Arizona to take advantage of the Innovation Mesa’s facilities and to be near growing industry clusters. However, this facility is unlikely to compete with existing commercial facilities due to small lease areas, non-traditional finance terms, and filling a lack of lab space.
• Native American culturally specific businesses will be encouraged to expand their service areas through guidance from and access to NACET staff and business leaders serving on NACET's Advisory Committee

Lastly, the purpose of the Economic Development Administration grant is twofold:   It will enable the City of Flagstaff to create an environment to recapture job losses resulting from emergency disasters by providing a secondary facility for incubator graduates to expand and grow their businesses.  Secondly, it provides other agencies an alternate secondary emergency operations center for first responders to efficiently deliver vital services to communities and tribal nations during natural disasters.  The facility helps build economic resiliency through long term economic stability in the community. 

Collaborate - This project is a shared vision with state, local, and private entities.  This collaborative partnership involves the City of Flagstaff, Arizona Commerce Authority, Northern Arizona University, Economic Collaborative of Northern Arizona, Northern Arizona Council of Governments, and Northern Arizona Center for Entrepreneurship and Technology. This collaborative partnership has already shown a proven ability to work together to advance the economic needs of the region. 

In addition, staff presented the project to the Northern Arizona Council of Governments in the spring and received full support of the project.  On August 30, 2012, staff conducted a public meeting as part of the Public Participation Plan associated with a Rezoning Application for Innovation Mesa - Phase 2.

Option A - Authorize the acceptance of funds.  This will provide the necessary funds to build the Innovation Mesa - Phase 2 facility.
Option B - Do not authorize the acceptance of funds.  The project will not advance and the facility will not be built.

11/06/2012 - EAB