High-tech incubator that the city and county purchased for $3M in 2010 now ‘bleeding cash’
Local governments made a nearly $3 million investment into a high-tech incubator space in northwest Lawrence that city leaders now say is losing more than $400,000 per year.
In 2010, Lawrence and Douglas County spent $2.9 million to purchase and renovate the former Oread Labs building, 4950 Bob Billings Parkway. The University of Kansas Bioscience and Technology Business Center operates the building’s lab and office space as an expansion facility to its main building on west campus, but BTBC leaders say the facility is struggling financially and needs more money from the city and county.
The city and county made the unusual deal to purchase the building in 2010 with the idea that it would retain CritiTech, a Lawrence-based pharmaceutical company that local leaders feared would leave the community without the lab space, the Journal-World reported at the time. CritiTech remains in Lawrence but left the BTBC expansion facility about five years ago.
The Lawrence City Commission voted unanimously at its meeting Tuesday to cover half of the BTBC’s bond debt service for 2019, which would cost the city about $116,000. City Manager Tom Markus, who began his position with the city in 2016, said that though the deal to purchase the building has ended up costing the city, he was recommending that the city provide the money because of the approximately 50 jobs currently housed in the building’s lab space.
“There isn’t a whole lot of value to this (building), but it’s bleeding a lot of cash every year, and both the city and the county are paying for that,” said Markus, noting that there are some startup businesses in the building that he thinks the community would like to keep. “So there’s one Catch-22 here after another.”
The 2010 deal was unusual in Lawrence economic development circles because of the amount of upfront money the city and county were asked to provide, but at the time of the purchase, financial projections were that the deal largely would pay for itself over a 25-year period. Markus said it’s estimated that, between the city, county and BTBC, the loss is more than $400,000 in operating costs per year. He also said that the city has done appraisals of the building, and it “does not appraise well.”
BTBC vice president of finance Adam Courtney told commissioners it is recommending that the city and county “divest” from the building in two years, as the BTBC plans to build new lab space on west campus that will open at that time. Regarding the initial projections, Courtney said that CritiTech originally signed a five-year lease but that after three years the company had an out and chose to move to its own facility elsewhere in Lawrence.
Courtney said that had the building continued as single-tenant space, as the model initially projected, then it would be financially viable. Since then, though, BTBC has had to lease it to multiple tenants. He said the BTBC has not been able to lease out the entire building, which contains both wet lab and office space.
“We’ve done the best we can putting multiple tenants in there,” Courtney said. “It’s just not designed for multiple tenants, so the financial model, when you include multiple tenants, just does not work.”
Courtney said 11 companies are currently using the expansion facility, representing 50 jobs and about $3 million in annual payroll. He said the new lab space that BTBC plans to build would enable the companies in the expansion facility to move to the new building once it’s complete.
Essentially, the BTBC would like the city to continue to cover the bond payments until the new lab space is built on west campus. Markus said that the BTBC originally requested that the city cover the BTBC’s bond debt service for 2019 and 2020 but that he wanted that decision to be made year by year.
Commissioner Matthew Herbert said that he saw the situation with the building itself as an example of the sunk cost fallacy, in which money continues to be invested into a failing enterprise because so much has already been spent. However, Herbert and the rest of the commission said they were concerned about losing the jobs housed in the building.