CarteGraph Development Agreement for Job CreationMEMORANDUM
TO:The Honorable Mayor and City Council Members
FROM:Michael C. Van Milligen, City Manager
SUBJECT:Status Report on Job Creation Goals/CarteGraph Systems, Inc.
Recommended Action
April 15, 2003
Economic Development Director Bill Baum reports that CarteGraph Systems, Inc. is
short of job creation goals agreed to in a 1999 State of Iowa CEBA award and a
Development Agreement by and among the City, Hodzon Development Group, LLC
(property developer) and CarteGraph Systems, Inc. (employer).
Company President Scott Taylor cites numerous factors affecting business performance
including technology market slowdown following Y2K compliance investments, the
dot.corn meltdown and transition to an outbound sales model instead of an inbound
telesales model. Their revamped marketing strategy required fewer, more highly
compensated employees.
In correspondence and reporting, the company kept both the State and City abreast of
the failure to meet job creation goals. Informally, an extension period was granted to
see if job creation numbers would improve. In January, 2003, Mr. Taylor made a formal
request to the Iowa Department of Economic Development requesting a waiver on the
job creation requirements of the CEBA agreement. He noted the following:
· the company's business strategy had changed
· employees (now at 64 persons) averaged $23/hour instead of the
minimum $9.34/hour or $15.76/hour average, with payroll in excess of $3
million per year
· all other financial commitments to the project had been met
· required repayment would undermine the financial stability that had been
gained by the company
· required repayment would jeopardize any prospective hiring potential.
Economic Development Director Bill Baum recommends the following to assist
CarteGraph in meeting its CEBA and Development Agreement obligations:
1. Allow additional time extension to meet job creation goal to December 31, 2005;
2. Allow new jobs created by Integrate (currently 12 jobs) a new company that
sublets space from CarteGraph, to be counted as new jobs for the project;
3. Amend the Development Agreement to reflect the same number of jobs as
required in the CEBA documents. This would be a change from 200 jobs to 141
jobs, and most likely was the intent of the original agreement. The company is
currently at 64 employees;
4. If some repayment of the loan is required after the time extension, or penalty
imposed, reduce the interest rate to 3% from its current 6%, and negotiate a term
acceptable to the company.
I concur with the recommendation and respectfully request Mayor and City Council
approval.
Michael C. Van Milligen
MCVM/jh
Attachment
cc: Barry Lindahl, Corporation Counsel
Cindy Steinhauser, Assistant City Manager
William Baum, Economic Development Director
CITY OF DUBUQUE, IOWA
MEMORANDUM
TO:Michael Van Milligen, City Manager
FROM:William Baum, Economic Development Director
SUBJECT:Status Report on Job Creation Goals/CarteGraph Systems, Inc.
Recommended Action
April 14, 2003
INTRODUCTION
This memorandum provides for City Council review information on the status of
CarteGraph Systems, Inc.'s shortfall of job creation goals agreed to in a 1999 State of
Iowa CEBA award and a Development Agreement by and among the City, Horizon
Development Group, LLC (property developer) and CarteGraph Systems, Inc.
(employer) dated January 18, 1999. City Council concurrence is requested concerning
remedies to address the company's default.
BACKGROUND
Since the first Development Agreement with Advanced Data-Comm in 1998 for the sale
of property at the Dubuque Technology Park, the City has provided financial incentives
to encourage new investment and job creation in the community. Because the
industrial parks and part of the downtown are in urban renewal districts, specific
requirements for the disposition of land and the use of tax increment financing (TIF)
must be followed. A job creation requirement is tied to the offer of economic
development grants and loans to private companies by Iowa law.
The City has primarily used the following financial incentive tools to encourage new
development:
TIF -- in one of two forms:
1. Up-front TIF loan repaid by a TIF bond, or
2. TIF tax rebate that rebates the actual increase in the taxes
resulting from the new development
Land discount:
The actual per acre development cost of the new industrial parks - minus
any grants received - averaged $76-78,000 per acre. That amount is
high when compared to other industrial property for sale across the
region. In competitive marketing situations, industrial land is often "free"
in return for new jobs, new property value, etc. promised by a company.
The City has provided, in many cases, a 50% land discount to developers/
companies creating new jobs.
State programs such as CEBA and Enterprise Zone have also provided
financial incentives to companies creating jobs. With the State programs,
minimum wage and benefit requirements are stipulated to qualify for
financial assistance.
Horizon Development and CarteGraph were the recipients of TIF, land discount and
CEBA. Horizon received both the TIF and the land discount to assist the developer in
building a 30,000 square foot $2+ million project to house CarteGraph. CarteGraph
received a $240,000 CEBA award of which $60,000 was a 5-year 0% loan and
$180,000 was a forgivable loan subject to the creation of 80 new jobs with wages of at
least $9.34/hour. They were required to maintain 61 jobs. If the new jobs were not
created, the forgivable loan would revert to a 6% loan with some forgiveness per job
allowed if at least 50% of the job goal were reached.
DISCUSSION
State CEBA
At the time of CEBA Project Completion (September 30, 2001), CarteGraph employed
57 full-time persons -- less than prior to the CEBA award. Company President Scott
Taylor cited numerous factors affecting business performance including technology
market slowdown following Y2K compliance investments, the dot.com meltdown and
transition to an outbound sales model instead of an inbound telesales model. Their
revamped marketing strategy required fewer, more highly compensated employees.
In correspondence and reporting, the company kept both the State and City abreast of
the failure to meet job creation goals. Informally, an extension period was granted to
see if job creation numbers would improve. In January, 2003, Mr. Taylor made a formal
request to the Iowa Department of Economic Development (letter attached) requesting
a waiver on the job creation requirements of the CEBA agreement. He noted the
following:
· the company's business strategy had changed
· employees (now at 64 persons) averaged $23/hour instead of the
minimum $9.34/hour or $15.76/hour average, with payroll in excess of $3
million per year
· all other financial commitments to the project had been met
· required repayment would undermine the financial stability that had been
gained by the company
· required repayment would jeopardize any prospective hiring potential.
To date, he has not received a written response from IDED. The City is also party to
the CEBA agreement and will be required by IDED to sign off on any renegotiation of
CarteGraph's contract.
City Development Agreement
In addition, the City has its own Development Agreement with the company, along with
Horizon Development. And even though the financial incentives of TIF and land
discount went directly to Horizon, CarteGraph, as the employer and recipient of certain
beneficial lease terms and conditions from Horizon, was held responsible for job
creation performance in the Development Agreement. The new job goal was the same
as for the CEBA - 80 new full-time equivalent jobs. However, for reasons unclear at
this time or if by mistake, the Development Agreement states that 120 jobs would be
maintained along with the 80 new jobs for a total of 200 jobs.
The "penalty" for not meeting the job goal in the City's Development Agreement is as
follows:
"Employer shall employ two hundred (200) permanent full-time (2080
hours per year) (FTE) positions in Dubuque, Iowa, by January 1, 2002 and shall
maintain that number of positions through December 31, 2005. Employer
agrees to refund to City a portion of the acquisition grant made to Developer
equal to one thousand three hundred dollars ($1,300) for each permanent full-
time equivalent position not employed as required by this Agreement. The
refund shall be paid to City within sixty (60) days of written demand by City."
The acquisition grant (land discount) amount was $112,000. If that were the basis for
determining the penalty amount, 86 jobs would result from dividing the $112,000 by
$1,300. An undated TH newspaper article in the CarteGraph file quotes Scott Taylor as
saying the company would be hiring 86 people over the next 2 years. That number was
likely discussed during the Development Agreement negotiations and made its way into
the calculations. In any case, the penalty provision never anticipated that no jobs would
be created and, in fact, based the penalty on a total of 200 jobs.
The Horizon/CarteGraph Development Agreement was only the second agreement the
City had negotiated. [Later agreements have, hopefully, been clearer in establishing
the base number of jobs and the projection of new jobs. The later agreements have,
however, continued to base the monetary penalty on the value of the land discount
divided by the number of jobs to be created and/or maintained.] The first agreement,
with Advanced Data-Comm, did not have a penalty provision. Getting the first project
into the new Technology Park and the company's proposed $6 million investment were
considered sufficient. Advanced Data-Corem did not seek CEBA funding, so no State-
mandated new job requirement was part of that financial package. They did, however,
promise to create 51 new jobs and maintain 317 until December 1, 2002. They, like
CarteGraph, were unable to meet that new job creation goal due, in part, to the general
economic downturn.
Key Question
The question to be decided is: how does the City address defaults in job creation
obligations tied to financial incentives provided to private companies?
In considering the application of penalties, or possible remedies, it would be prudent to
consider that if a business is not performing in the job creation arena, its financial
situation may not be performing well either. Any penalty could cause further financial
burdens for the company. Nevertheless, companies should, on a case-by-case basis,
be prepared to prove their inability to meet promised job creation obligations.
Staff has reviewed possible penalties/remedies to address defaults in general, and
specifically, for CarteGraph. Options reviewed include:
· Automatic one-year time extension
· Additional time extensions
· Renegotiation of loan term and rate, if company has loan with the City
· Interest rate increase
For full term of loan
For remaining balance only
· Immediate repayment of outstanding balance
· Monetary penalty for each job not created
Pro-rated based on amount of land grant offered
Amount due immediately
Financed over some period of time
· Full or partial forgiveness/release from obligation
· Reduction or denial of TIF tax rebate, if provided
The City has been fortunate that very few defaults in actual loans have occurred over
the course of the last 20 years. Job creation numbers may not have always been met,
but the loans, which make up the majority of financial assistance offered to companies,
have been paid back. When defaults have occurred in payments, loan terms have
been renegotiated to provide additional time to repay the loan balance, tn several
situations where jobs goals were not met, the interest rate was adjusted upward in the
loan.
Recommended CarteGraph Remedies
CarteGraph has requested full forgiveness from the State for the CEBA forgivable loan.
The State has indicated that is unlikely. Staff would recommend several opportunities
to assist the company in meeting its CEBA and Development Agreement obligations:
1. Allow additional time extension to meet job creation goal to December
31, 2005, the significant date in the Development Agreement;
2. Allow new jobs created by Integrate (currently 12 jobs), a new
company that sublets space from CarteGraph to be counted as new
jobs for the project;
3. Amend the Development Agreement to reflect the same number of
jobs as required in the CEBA documents; and
4. If some repayment of the loan is required after the time extension, or
penalty imposed, reduce the interest rate to 3% from its current 6%,
and negotiate a term acceptable to the company.
If agreed, these recommendations should be sent to IDED from the City on behalf of
the company.
The action taken in response to CarteGraph's default will provide guidance should, in
the future, defaults in job creation obligations be encountered with other Development
Agreements.
ACTION STEP
The action step for the City Council is either to approve the recommendation, or provide
direction to staff, regarding CarteGraph's job creation shortfall related to a State of Iowa
CEBA contract and a Development Agreement by and among the City, Horizon
Development Group, LLC and CarteGraph Systems, Inc.
attachment
Prepared by:Pamela Myhre
Economic Development Planner
F:\USERS\Pmyhre\WPDOCS\LOANDOC\CARTEGRA\remedy. mem.doc
Cart Graph
January 23, 2003
Mr. Mike Fadey
Iowa Departmentof Economic Development
200 East Grand
Des Moines, lowa 50309
Re: CarteGraph CEBA Project #99-06
Dear Mr. Farley,
The purpose of this correspondence is to ask the Iowa Department of Economic Development for
consideration of relief from the job creation requirement contained in the above referenced CEBA
agreement.
Under the Job Attainment and Wage Obligation section of the CEBA agreement. CartaGraph was
responsible for the creation of 80 new jobs within two years of the CEBA award. Due to
unforeseen economic challenges in the technology industry and distribution strategy changes,
CartGraph has been unable to satisfy the jobs creation requirement.
As you review our request for relief, we ask that you consider the following factors:
The business strategy for CartaGraph has changed significantly ever the past few years
due to market factors and lessons learned along the way. The shift from a telesales
phone-based distribution model to a solutions-oriented face-to-face distribution model
has allowed CartaGraph to achieve financial stability, during adverse market conditions.
Under the new business model, CartGraph is able to deliver enterprise solutions with
much higher total value to our customers. The success of this model is connected with
our ability to attract and retain a higher quality workforce. While the total number of
employees is fewer under this model, the individual compensation is significantly greater.
The current company wages for employees greatly exceed the $9.34 per hour and
$15.75 per hour average required in the agreement. Currently, the houdy rates for our 64
employees average $231hour, resulting in an annual payroll in excess of $3,000,000.
The following financial commitments have all been met as specified in the project
agreement:
1. City of Dubuque TIF in the amount of S250,000.
2. City of Dubuque land buydown in the amount of S112,000.
3. EClA loan in the amount of $200,000.
4. Business working capital in the amount of S540,000.
5. Business equity in the amount of S336,000.
6. Community college job training in the amount of S400,000.
7. Developer building construction in the amount of $2,294,735.
8. Bank loan in the amount of $1;100,000:
fww..cartegraph.com
800.688.2656 563.556.8120 563.556.8149 (FAX)
Cart Graph
We respectfully request that the Iowa Department of Economic Development review the
investments that have been made and the quality of jobs that have been established and
maintained with the hope that you will agree to waive the job creation requirements of the CEBA
agreement. To require the company to repay the CEBA grant award would undermine the
financial stability that has been gained and jeopardize any prospective hiring potential.
Please contact me at (563)556-8120 to discuss this request. I am hopeful that we can come to
agreement regarding the closure of this CEBA project.
Sincerely,
Scott J. Taylor
President and CEO
CC: Rick Dickinson
Michael Van Milligan
Bill Baum
vw,cartesraph.com
800.688,2656 563,556.8120 563.556.8149 (FAX)