UND research facility purchase questioned by state legislators

BISMARCK - Lawmakers Wednesday questioned University of North Dakota and state higher education officials on the university’s purchase of a research facility from a university-affiliated foundation last fall.
UND purchased the struggling 5-year-old Research, Enterprise and Commercialization facility from the UND Research Foundation in September for $9.8 million - a sale that one legislator Wednesday referred to as a “bailout.” Members of the Interim Government Finance Committee discussed whether the State Board of Higher Education and UND followed the process for selling the facility set by the Legislature, as well as the REAC’s financing and occupancy.
REAC, which is on the UND campus, is advertised as a “technology accelerator,” where outside companies can rent lab and office space for research and development. Current occupants include Avianax, which develops therapeutic antibodies and vaccines, as well as the UND Medical School.
The committee will submit a final report on the sale to the state Legislative Management Committee by November.
Struggles
REAC’s origins date back to before UND President Robert Kelley took office, when former President Charles Kupchella “and others had a vision for a number of research and commercialization facilities on the UND campus,” according to State Board of Higher Education President Kirsten Diederich’s prepared remarks.
The nonprofit UND Research Foundation was created to generate enthusiasm, financial support and partners for the project, she stated.
In November 2006, UND signed an agreement to lease about 45,000 square feet of state-owned land to the Research Foundation. REAC opened in 2009 at a cost of $17.1 million, using federal, local and state sources, as well as a Bremer Bank loan.
“However, because of the nationwide economic downturn and, in retrospect, over-optimistic projections, the foundation experienced cash flow challenges,” Diederich told lawmakers.
Sen. Ray Holmberg, R-Grand Forks, who originally directed the committee to study the REAC sale, previously said there was a large need for the kind of research labs across the country that REAC would provide.
“Unfortunately, I believe there were close to 500 and some other similar buildings being built around the country at the same time,” he said early last year, according to meeting minutes provided in the testimony. “Then the economy kind of slumped and the building has just not lived up to its potential.”
According to Kelley, about 55 percent of the 32,000 rentable square feet in the building is currently occupied. UND has provided more than $2 million to the facility since 2009 to support its operations.
Purchase
Outside counsel advised UND that there was “no express contractual acceptance of liability (for REAC) by UND,” according to Kelley’s prepared remarks.
But, Kelley added: “If UND chose to do nothing, resulting in bankruptcy of (the UND Research Foundation) and the reversion of the building to the lender, we were advised there was a strong likelihood that this situation would end up being resolved in court.”
Weighing the potential legal costs, the building’s loss of productivity during legal proceedings and uncertainty of how long the issue would take to resolve, UND chose to pursue buying the building, Kelley said.
Kelley emailed former North Dakota University System Chancellor Hamid Shirvani in December 2012 notifying him that UND intended to seek legislative approval to buy the REAC facility from the Research Foundation. The State Board of Higher Education unanimously approved UND’s request to seek legislative authorization a month later.
The Legislature passed a law in May 2013 allowing the state board to enter into a purchase agreement for REAC.
A purchase and sale agreement for $9.8 million - a figure identified as market value by an appraisal - was signed in September 2013. As of December 2012, the Research Foundation had $9.6 million worth of debt.
“The UND Research Foundation has advised that it currently has no outstanding liabilities,” Kelley stated in prepared remarks. The foundation is now disbanded.
“The foundation’s financials were deteriorating,” Kelley told lawmakers regarding the university’s decision to buy the facility. “It was my judgment that we could not sustain this relationship.”
Inquiry
The committee explored how the sale process developed last year, and whether it followed the intent of a law the Legislature passed last year.
After UND sought legislative approval in early 2013 to buy the building, the Legislature passed a law in May allowing the state board to “enter a purchase and financing agreement or agreements with a private entity and do all things necessary and proper to authorize the purchase of the (REAC) building.”
Lawmakers were wary of the fact that UND officials sat on the research foundation’s board, a setup that they feared could initiate a conflict of interest during sale negotiations. But North Dakota University System Chief of Staff Murray Sagsveen said both UND and the foundation retained outside counsel.
“And these two law firms then negotiated the purchase and sale of the building,” he said. Sagsveen added that UND put out requests for proposals to 14 financial institutions for a $9.8 million loan to buy the building, and UND ultimately settled on Bremer Bank.
Larry Skogen, interim chancellor of the University System, authorized the purchase terms and financing agreement in late June, a few months before the deal was finalized.
“The issue is really the fact that the board did not negotiate the agreement,” said Sen. Rich Wardner, R-Dickinson.
Diederich said she wasn’t aware the board was supposed to negotiate the sale until she was approached by fellow board member and past president Duaine Espegard at a higher education conference.
“(He) informed me that he would like to start negotiating on this building. And it had already been completed at that time,” Diederich said. Kelley said he “had not heard it was intended to go back to the state board.”
“(I) felt that I was authorized to proceed, and the university did,” he said.
Sagsveen said the sale was handled in a “relatively routine manner by the board of higher education.”
“The board of higher education didn’t approve the proposed financing arrangement, but basically the board had delegated that through the chancellor to do that,” Sagsveen said.
Wardner said there are a number of things that are “getting under (legislators’) skin,” including the fact that the same bank giving the original loan to help construct the REAC facility is now giving UND a loan to buy the building, and the seemingly high interest rate on the loan.
“We’re concerned about the taxpayer. We’re concerned about the students having to pay this,” Wardner said.