UND research facility has struggled financially: Legislative committee to discuss building’s sale today
GRAND FORKS — As the Legislature continues to examine the $9.8 million sale of a University of North Dakota research facility, lawmakers and higher education officials agree that the building has struggled financially.
IRS forms filed by the UND Research Foundation, the former owner of the Research, Enterprise and Commercialization building on the UND campus, provide some details into the building’s struggles. Legislators will again question UND and other state higher education officials today during a committee hearing regarding UND’s purchase of the building from the Research Foundation last year.
REAC, which opened in 2009 as a place for growing companies to rent biological lab and office space, has struggled to attract tenants. UND President Robert Kelley told a legislative committee last month that only a little more than half of the 32,000 rentable square feet are occupied.
The Research Foundation’s 990 forms, which certain tax-exempt organizations have to file on an annual basis, show that the foundation received $254,000 in rental income in 2011, the latest year available. The foundation reported a nearly $800,000 deficit that year.
Organizations are required to make its three latest 990 forms available to the public. The foundation’s 2012 form hasn’t been completed.
Phyllis Johnson, UND’s vice president of research and economic development, said the original business plan for the building predicted that rental income and overhead from grants would pay for the building’s operations.
“At the time the (Centers of Excellence) award was made and throughout the construction, the REAC facility was projected to be near capacity,” said Justin Dever, manager of the office of innovation and entrepreneurship at the North Dakota Department of Commerce, during a 2011 legislative committee hearing. “However, many of the original tenants outgrew the facility and relocated to elsewhere in Grand Forks. The UND Research Foundation has had some difficulty in keeping the facility fully leased, which has hampered their ability to cash-flow operations.”
The Centers of Excellence is a state economic development program launched by then-Gov. John Hoeven that focuses on creating partnerships between universities and the private sector. The foundation received some COE money to help construct REAC.
UND had provided the foundation more than $2 million to support its operations since REAC opened in 2009, according to Kelley’s testimony to the Interim Government Finance Committee in February.
Also, two government grants ran out in 2011, bringing its reported contributions and grants down from $1.3 million in 2010 to just $500 in 2011, according to the 990 forms. One of those grants, a state Centers of Excellence grant, was designated to hire researchers and equip labs.
Johnson said the foundation made the decision not to accept federal grants after 2010 because it couldn’t meet the compliance requirements that came with them. At around the same time, federal earmarks were eliminated, she said.
Lawmakers and higher education officials have pointed to overly optimistic expectations and the onset of the recession as reasons the building has struggled.
“It has never been a financially successful operation,” North Dakota University System Interim Chancellor Larry Skogen said during a recent State Board of Higher Education meeting. “UND has provided lease payments for a portion of the building, and subsidized operations through other payments so the foundation could meet its financial obligations.”
Describing the foundation’s financials as being in “disarray,” Kelley told a legislative committee last month that he felt it was necessary for UND to purchase the REAC building. He said he worried that if the foundation went into bankruptcy and the building’s ownership reverted to the lender, the issue could play out in court.
UND sought legislative approval to buy the building last year. During the legislative session, lawmakers acknowledged that the building has struggled.
Sen. Ray Holmberg, R-Grand Forks, told fellow legislators that around the time REAC was being built there were “close to 500 and some other similar buildings being built around the country.”
“Then the economy kind of slumped and the building has just not lived up to its potential,” Holmberg said, according to testimony given by University System Chief of Staff Murray Sagsveen.
Higher education board President Kirsten Diederich told the Interim Government Finance Committee earlier this month that the building struggled partially because of “overoptimistic projections.”
The Legislature passed a law in May allowing the State Board of Higher Education to negotiate the building’s purchase. At issue, and what the legislative committee has questioned, is whether the state board was involved in the sale as written in law.
Skogen apologized in late February for how the sale was handled, and said it should have been conducted differently. He said he wasn’t aware the sale required “special handling” when he took office in late June.
UND took out a $9.8 million loan from Bremer Bank and bought the building from the foundation last September. The foundation had $9.6 million in debt, a majority of which was owed to Bremer Bank for the original construction of the building.
Kelley told legislators that the foundation no longer has any liabilities.
UND officials have said they paid a fair market price for the building, which was outlined in an appraisal.
Despite the struggles of the past few years, UND officials say they are working toward making REAC a success.
“UND continues to work towards full occupancy consistent with the original stated intent,” Kelley told lawmakers in mid-February.