July 29--Empty property takes a toll on the coffers of any landlord, and the Aberdeen Development Corp. isn't exempt to that basic business premise.
Two buildings owned by the development corporation that have lost or will soon be losing tenants have the potential to tax the agency's cash flow. As the Coventry Health Care and Verifications leases expire, the estimated loss of annual revenue to the development corporation is more than $500,000 a year. That's if no new businesses are found to fill them. But Chris Haar, director of operations for the development corporation, said he likes the group's odds of finding new tenants. And, he said, the agency's balance sheet can handle the potential lost revenue for the time being.
Coventry Health Care, a health insurance company, closed in Aberdeen in 2009, taking 73 jobs with it. Because of the terms of the lease, Coventry is paying building-associated costs of roughly $450,000 through the end of 2014, Haar told Brown County commissioners last week.
In 2007, the development corporation bought the 31,750-square-foot building on Milwaukee Avenue for $3.5 million for Coventry to use.
Verifications, a company that checks the backgrounds of potential employees for other businesses, has announced it will close in September. That means a loss of 77 jobs and mean the development corporation will take on roughly $100,000 a year in building-related expenses once the company finishes packing, cleaning and moving out, Haar said.
Verifications has been leasing half of the development corporation's two-story, 40,000-square-foot building formally called the Dakota Regional Commerce Center in the industrial park. Progressive Financial Services will continue to rent 20,000 square feet in the building after Verifications leaves, Haar said.
He shared with county commissioners the development corporation's projected 10-year cash flows. They show considerable negative balances in 2015, 2016 and 2017 as well as 2019, 2020, 2021 and 2022. The estimates range from $256,769 in 2017 to $516,195 in 2022.
The expiring Verifications and Coventry leases are the prime reasons for the negative cash flows, Haar said. Were local governments to trim their contributions to the development corporation, that would affect the numbers even more, he said.
Both the Verifications and Coventry buildings are designed primarily for office jobs, though work could be done to accommodate light manufacturing, Haar said.
Even though the economy remains sluggish, businesses have inquired about space in the buildings and have even visited town to look them over, Haar said. That's why he's optimistic that the development corporation can recruit a company to fill the spaces and replace the lost Coventry and Verifications jobs.
Deciding to build or buy buildings that can be leased to perspective businesses is always a risk, Haar said. The development corporation has enough money in its reserves to cover the costs resulting from the expiring Verifications and Coventry leases for five years or so, Haar said.
The worst case-scenario likely would be having to sell the Coventry building, but Haar said that seems like an unlikely option.
One thing to realize about the negative numbers, he said, is they're likely bigger than what they'll actually be. He said he liberally projects the development corporation's expenses and conservatively estimates revenue.
The Coventry and Verifications buildings aren't the only buildings owned by the development corporation. In all, it owns seven buildings assessed at more than $48 million. One of them, the Smart Center in the industrial park, is home to the corporation's offices. In it is what Haar calls incubation space, essentially a limited amount of office space that businesses can rent. Verifications and other businesses have used the incubation space while waiting for construction of or work on larger buildings that have become their homes to finish, Haar said.
In addition to the Verifications/Progressive building, three other corporation-owned buildings are rented out -- to Molded Fiber Glass, 3M and Four Star Plastics, Haar said.
The development center also has a 40,000-square-foot spec building in the industrial park that, for now, is only used for storage. The building shell, designed for manufacturing, was finished in 2002. Its interior is unfinished, but it can be built to suit a company's needs quickly, probably in a couple months' time, he said.
Having space for businesses to move into is a valuable tool for the development corporation in its dealings with those companies, and Haar said he's glad the corporation's board of directors has been bold in its decisions to build.
"Think of them as cars on the showroom floor," Haar said of the empty buildings the development corporation owns.
They get folks into the showroom or, in this case, into town to see what Aberdeen has to offer, he said.
It's not uncommon for development corporations to have spec buildings or incubation space, though how much they can handle depends on their finances, he said.
Without question, he said, the biggest risk the development corporation's board has taken was agreeing to build a facility and rent it to Molded Fiber Glass. It cost about $22 million to build the Molded Fiber Glass building, he said.
Eighteen sources of funding were used to build the Molded Fiber Glass building, one of which was tax increment financing, Haar said. Without the $3.8 million in TIF bonds, the blade plant never would have been built, he said.
With a TIF, a portion of the property taxes generated by new developments -- the increment, or new taxes created by construction -- are used to pay for certain improvements on that property for a period of no longer than 20 years. Normally, property taxes are divided among local county, city and school districts.
About $425,000 a year in property taxes goes to pay off the Molded Fiber Glass TIF bonds, Haar said. But if not for the TIF, that property tax money would not be coming in at all, he said.
At the current rate, the TIF will be paid off in 2022, six years sooner than the maximum allowed by law, Haar said.
Aberdeen's was likely the only development corporation in the state able to pull off the Molded Fiber Glass deal, Haar said. Having a healthy balance sheet was key, he said.
The development corporation also relies on a revolving loan fund when trying to attract business. In recent years, the Aberdeen City Council has contributed $100,000 to that fund annually. That's in addition to another $170,000 it gives the development corporation for general operations. This year, there's a proposal to give half the revolving loan fund contribution to a youth developmental center being built by the Aberdeen Family Y. That's a worthy cause, Haar said. But losing $50,000 would hinder the development corporation's ability to attract more big projects. And, he said, there will be more big projects.
As businesses seek cities in which to start or expand, they are always looking to eliminate potential locations, Haar said. The better deal a community or development corporation can offer, the better chance it has of being the last location on the list.
The Aberdeen Development Corp. has "touched" 31 businesses in town, Haar said. In some instances, that means it helped finance a business that no longer exists but the building is now used by a different business, he said. The 31 businesses account for 2,416 jobs, or 11.8 percent of the jobs in Brown County, according to the information presented to county commissioners. That's something the county and city can think about as they consider the development corporation during budget talks.
"I think it's an important and wise investment for our community," Haar said.
(c)2012 the American News (Aberdeen, S.D.)
Visit the American News (Aberdeen, S.D.) at www.aberdeennews.com
Distributed by MCT Information Services