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HomeMy WebLinkAboutMemo - Mail Packet - 1/16/2024 - Memorandum From Josh Birks Re: Council Request: Overview Of Innosphere Project And Public FinancingSustainability Services 222 LaPorte Ave. PO Box 580, Fort Collins, CO 80522 970-416-2170 jbirks@fcgov.com Page 1 of 4 MEMORANDUM Date: January 11, 2024 To: Mayor and City Councilmembers Through: Kelly DiMartino, City Manager Tyler Marr, Deputy City Manager Travis Storin, Chief Financial Officer Jacob Castillo, Chief Sustainability Officer From: Josh Birks, Deputy Director, Sustainability Services Subject: COUNCIL REQUEST: Overview of Innosphere Project and Public Financing This memorandum responds to a request from a Councilmember to provide an overview and primer of the public financing that supported the development of Innosphere’s building at 320 East Vine Drive. The public financing combined New Market Tax Credits (NMTC) with Tax Increment Financing (TIF) to construct a 31,000 square foot LEED Gold-certified business incubator facility. BOTTOM-LINE: The public financing for the Innosphere building at 320 East Vine Drive was completed as planned with a refinancing of the URA loan in February of 2017. Innosphere complied with the requirements of its agreement with the URA to receive all $2.8 million of pledged Tax Increment Financing (TIF) assistance, which was credited to their loan amount. The City and URA’s relationship with Innosphere for the funding of the property has terminated – the URA is paying off the remaining principal and interest on the loan from the City which facilitated the transaction. DISCUSSION BACKGROUND Innosphere Ventures – formerly known as Innosphere and Rocky Mountain Innovation Initiative (RMI2) – began as the Fort Collins Virtual Incubator in 1998, supported by the City of Fort Collins with General Fund dollars. Over the years, the program grew to include entrepreneurial support services , subsidized office space, and advisors in residence. Today, Innosphere Ventures provides a wide array of services to start-up companies in Fort Collins, including physical office space and wet lab space at the campus located on East Vine Drive. DocuSign Envelope ID: 9BC77EB2-380A-4189-BD17-D798AC0166A5 Page 2 of 4 Innosphere began planning for a new facility in 2008 when it partnered w ith the Northern Colorado Economic Development Corporation (NCEDC) to evaluate available buildings for expansion. The initial search identified an existing building; unfortunately, the property was purchased by a third-party before Innosphere could act. Efforts then shifted to construction of a new facility. Initially, the City of Fort Collins had considered lending all the funds necessary to support the project to Innosphere directly. However, the approach shifted to using the New Market Tax Credits program (NMTC Program) when the Colorado Housing and Finance Authority (CHFA) approached the working group supporting the project. The NMTC Program was established by Congress in 2000 to spur new or increased investments in operating businesses and real estate projects located in low-income communities. The proposed site of the new facility was in a qualified Census Tract according to NMTC criteria. The City considers leveraging the NMTC Program beneficial, in part, because it would reduce the overall size of the potential loan to RMI2 Properties LLC (“RMI2 Properties”; owner of the building located at 320 E. Vine Drive) – the entity established to own and operate the new facility. As a result, the project leveraged an equity investment from U.S. Bancorp Community Development Corporation (US Band CDC; a subsidiary of U.S. Bancorp Corporation d/b/a US Bank) a private for -profit partner in exchange for the tax credits developed through the NMTC Program. THE FINANCIAL TRANSACTION The NMTC Program resembles several other Federal tax credit programs, including Low Income Housing Tax Credits, Historic Preservation Tax Credits, and Renewable Energy Tax Credits. The program allows for a private for-profit entity to receive a tax credit against its federal income tax return in exchange for making equity investments in specialized financial institutions called Community Development Entities (“CDEs”). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years (five percent for each of the first three years, and six percent for each of the remaining four years). The CDE must, in turn, use the funds to make Qualified Low Income Community Investments (“Qualified Investments”) according to the program criteria. The construction of the new facility for the purpose of operating a privately owned, nonprofit business incubator qualifie d under the terms of the NMTC Program as a Qualified Investment. A NMTC Program financial transaction involves a variety of entities. The flow of funds through these entities can be complex. To simplify, the City of Fort Collins (City) and/or the Fort Collins Urban Renewal Authority (URA) made three major contributions to the financing of the new Innosphere building. These contributions include: 1. City: $5.3 million loan to the URA. Terms – 20 years, 2.5% interest with principal repayment staggered to follow tax increment availability and the NMTC Program. DocuSign Envelope ID: 9BC77EB2-380A-4189-BD17-D798AC0166A5 Page 3 of 4 2. URA: $5.3 million loan to the NMTC Program investor fund. Terms – 20 years, 1.5% interest only. The Redevelopment Agreement with Innosphere requires a refinance event to occur in the eighth year to receive Tax Increment Financing (TIF) assistance. 3. URA: $2.8 million pledge of TIF assistance for specific reimbursable costs. Innosphere did not receive credit for this assistance until the eighth year and only after it successfully refinanced the outstanding $5.3 million loan between the URA and the NMTC Program investor fund. FINANCIAL TRANSACTION STATUS In February of 2017, Innosphere met its obligations by documenting all eligible expenses making it eligible to receive the full $2.8 million of pledged TIF assistance (Item 3 above). As a result, Innosphere refinanced the outstanding $5.3 million dollar loan with the URA (Item 2 above) – less the $2.8 million TIF pledge as a credit against the loan balance (the intended manner for Innosphere to realize the promised TIF). The URA then used the proceeds of the refinancing to repay $2.5 million of its outstanding loan with the City (Item 1 above). The URA continues to make payments on the remaining balance of the loan according to the original terms and interest (Item 1 above). The NMTC Program and TIF assistance pledge worked exactly as intended when the City, URA, and Innosphere entered into the arrangement in 2009. Innosphere is successfully operating the facility as a business incubator reporting that their most recent client companies raised $220 million in total capital, generated $63 million in revenue, created over 1,400 jobs, and 52 companies graduated from the program. RMI2 PROPERTIES, LLC OWNERSHIP STRUCTURE A year after the completion of the financing arrangement Mike Freeman, the City’s former Chief Financial Officer took employment with Innosphere. At that time, the integrity of the City process of making the financial arrangement was called into question by a citizen. This same citizen alleged that Mr. Freeman recommended the City and the URA provide financial assistance for the Innosphere facility for personal reasons, rather than in the public interest. The allegation was based upon the fact that Mr. Freeman, having accepted employment with Innosphere might be asked to accept a one-percent membership interest in RMI2 Properties, LLC. The City’s disagreement with that contention is well documented in a memorandum to City Council dated February 2, 2012, titled Rocky Mountain Innosphere – New Market Tax Credit Financing (available upon request). To simplify it here, the city disagreed because: 1. Conversations between Mr. Freeman and Innosphere about the possibility of employment did not occur until more than a year after the completion of the financing arrangement. DocuSign Envelope ID: 9BC77EB2-380A-4189-BD17-D798AC0166A5 Page 4 of 4 2. State law establishes a standard “waiting period” for government employees who leave to go to work for an entity that is then “contracting” with the government employer. It was questionable if the waiting period applied to Mr. Freeman; however, he complied with the period. 3. Any membership interest acquired by Mr. Freeman in RMI2 Properties, LLC would not realize any financial return or other personal benefit from that interest. This separate membership inter est in RMI2 Properties, LLC held by the executive director of Innosphere was created solely for the purpose of ensuring that the LLC complied with the structure requirements applicable under the NMTC Program. 4. To guard against any appearance of impropriety, the Innosphere non-profit set up another entity to hold the one-percent membership interest rather than the executive director. This step further isolated Mr. Freeman from any potential financial gain from the operation or sale of the property held by RMI2 Properties, LLC. In 2017, when Innosphere refinanced the loan between it and the URA the membership interest was no longer needed to comply with the requirements of the NMTC Program. The membership interest was dissolved with Mr. Freeman having received no financial gain from the project. Recently, Innosphere constructed another lab facility on the property using the NMTC Program. The City and the URA did not participate in this transaction. Additionally, the NMTC Program no longer requires a one-percent membership interest. Therefore, Mr. Freeman does not have any interest in the building at 320 East Vine Drive. OWNERSHIP STRUCTURE OF INNOSPHERE RELATED ENTITIES Since completion of the financial transaction during operations, Innosphere has created additional related entities – primarily for the purpose of making investments in client companies. Mr. Freeman may have an interest in these entities that may or may not generate a financial return. However, these entities do not fall under the purview of the original allegation because:  These entities have all been formed without any public assistance from the City of the URA.  These entities were all formed several years after the completion of the City and URA financial transaction.  These entities have no ownership interest in RMI2 Properties, LLC, which owns the building located at 320 East Vine Drive and was the subject of the financial agreement between the City, URA and Innosphere. DocuSign Envelope ID: 9BC77EB2-380A-4189-BD17-D798AC0166A5