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Developer Proposes 40K-Square Foot Lab-Flex Space as First Building at Minnesota's Elk Run Bio Park

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This is an updated version of a report first published Aug. 11, correcting the estimated cost of the building and the material submitted for review by Pine Island officials.

By Alex Philippidis

The developer of the BioBusiness Park at Elk Run, part of a planned multi-billion-dollar mixed-use community proposed for 2,325 acres in Pine Island, Minn., has submitted plans to city officials for the biocampus' first facility, a 40,000-square-foot building designed to house both light industrial as well as life sciences businesses.

Plans were submitted "within the last few days" for a plat map showing the location of the proposed building within its parcel. The building would be the first to rise within the 200 acres set for the BioBusiness Park, John Pierce, a senior vice president with Elk Run developer Tower Investments, told BioRegion News.

The building is projected to cost $6 million to build, based on an estimated construction expense to date of $150 per square foot. The "lab flex" building would include space configurable for either laboratory or light industrial use, designed for life-sci users that do not need the intensive use of utilities available in more traditional lab buildings.

"The tenants that we're talking to and which are looking at it would be biotech tenants," Pierce told BRN in a wide-ranging Aug. 6 interview about the Elk Run project. Their needs would be "probably not as intensive as [tenants of a biomanufacturing] building, but it will be built with enough flexibility into it that we can certainly provide lab space."

The building, he said, would be a small portion of the 2 million square feet capable of being developed at Elk Run for biotech and industrial businesses. The biotech portion is expected to account for most of that space, about 1.7 million square feet.

The proposed building, he said, differs from the 40,000-square-foot Biotechnology Center building that Tower marketed at the Biotechnology Industry Organization's 2009 International Convention, held in May in Atlanta [BRN, May 21]. That project would be designed to support "phase I clinical trials, product development and manufacturing," as well as phase II and III tests, and "development, quality, regulatory, CMC, and testing" services, according to a marketing flyer available at the Minnesota pavilion at BIO 2009.

The flyer also stated that the Biotechnology Center would include "20 ISO class production clean rooms, 40 total operational staff expected with technical/scientific/engineering focus," and "research program funding consultation," as well as space for supporting "cell/protein/tissue therapeutic platforms."

Pierce said the building that was marketed at BIO was initially planned as a biotech incubator, which, given its amenities, would be costlier to develop than the lab-flex building now proposed. But the cost of that building is less an obstacle to its development, he said, than the need of that incubator's tenants to secure investment financing in the current weak economy:

"The only thing that has changed about [the incubator building] is, if you're going to do something like that, you got to have venture capital. We had to kind of take a step back, and that's what really spurred us to sit down with the folks at Burrill & Company," the San Francisco firm run by biotech investor-analyst G. Steven Burrill that is investing in the project, Pierce told BRN.

Billion Dollar Investment

Elk Run has drawn attention nationwide following Tower's plans to team up with Burrill to identify and invest in many of the project's life-sci tenants through a new $1 billion fund. Burrill, who was unavailable for an interview last week and early this week, heads a family of venture capital funds that according to his firm has more than $950 million under management.

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Burrill told the Star-Tribune of Minneapolis last month that he will complete by year's end a $1 billion hybrid fund intended to finance the project. The fund would divide its assets evenly between real estate and venture capital [BRN, July 17].

Tower is among several partners the fund, Pierce said, though the developer will not disclose the size of its investment.

Once that fund is completed, he added, development of the BioBusiness Park is expected to shift toward construction of space designed for the 15 to 25 companies in which Burrill has said the fund would purchase $20 million in equity, for a total $500 million. The remaining $500 million will go toward the rest of the projects that would comprise Elk Run.

"There's a demand right now for the tenants that would be into [the proposed lab-flex] building, so we want to accommodate that demand while Burrill is finishing up what he's doing on the fund, and then we would be doing more of the build-to-suits, and so on. But you've got to have the fund in place and those tenants coming to you to do that," Pierce said

The fund's investments to companies "wouldn't be just in startups, but would be in established companies" in need of venture capital, Pierce explained: "That's one of the things that we see as an opportunity here, just because of where venture capital is today, and the economy as well. We wouldn’t be limited to just startups."

The 15 to 25 companies are expected to be joined by additional tenants. The decision to add established companies to the tenant mix is "something that probably has changed over the last year because of the economy," Pierce said.

"There would have been more of a drive for the startups. But because of the current economy, and the fact that people would like to find a location where they can operate at maybe 20 to 30 percent less occupancy and workforce costs, I think there's a real opportunity for established companies to come, as well as the fact that they also need venture capital," he added.

Tower expects at least some tenants for the BioBusiness Park to relocate to Minnesota from both of the nation's largest bioclusters, the San Francisco Bay Area, and Boston/Cambridge, Mass., as well as from other Midwestern cities.

"Some of the tenant interest that we have received has been from adjacent states. There have certainly been a number of companies that have expressed a desire to both move to Elk Run and to receive venture capital [from the fund]. We have a number of tenants that we have spoken to, but it's largely dependent on what Burrill's doing," Pierce told BRN.

No leases have been signed, and Tower is not identifying prospective tenants.

"With the fund in place, there's such a need for venture capital that that's going to make Elk Run competitive. And we'll have the venture capital available, and we'll have a lower cost for both the building and workforce, that we'll be able to get companies from the coasts. We actually see the current economy as being a help to us, in getting that first 15 to 25 companies in there," Pierce said during the interview.

With the economic slump of recent months resulting in fewer startups, he added, the BioBusiness Park needed to ensure that the startups within the project were strong enough to blossom into mature businesses, hence the partnership with Burrill: "He has the scientific expertise to really evaluate [startups] that we don't," Pierce said.

He said Tower executives were introduced to Burrill through contacts at the Mayo Clinic in nearby Rochester, Minn.

Wellness Ethos

The BioBusiness Park, as with other elements of Elk Run, will be designed to reflect what Burrill has articulated as the life sciences' evolving paradigm beyond facilitating cures for diseases, into a series of technologies that also maintain human wellness.

"We anticipate having 20,000 to 25,000 people working there in an industrial park, a wellness community, a retirement community," Burrill told Minnesota Public Radio in April.

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The wellness paradigm will also be "a very important part of our overall plan" at Elk Run, Pierce said, as reflected by three miles of pedestrian walking trails along the Zumbro River, and bicycle paths, both linking the BioBusiness Park to residential sections of the community. Other wellness amenities will include access to the Douglas Trail that would link Elk Run to a nearby IBM campus and into downtown Rochester, parks and undeveloped "open" spaces, baseball and soccer fields, an ice hockey rink, a medical spa, a fitness center, and health/wellness instruction programs.

"With the amenities and the facilities at the wellness community, we're creating really just a high quality of life so that the people who would be working at the BioBusiness Park would have, in very close proximity to where they live, a very nice community that's focused on wellness," Pierce said. "We look at the wellness community as being an amenity to the BioBusiness Park, because we're going to create a very green, sustainable community."

In addition to the rec amenities and the BioBusiness Park, Elk Run plans also call for:

• A new public school sought by Pine Island;

• Up to 4,000 units of housing in a variety of types, from multi-family attached condos and townhouses, to single-family houses and custom-built estates, on lots ranging from 7,000 square feet to 2 acres; and

• An as-yet-undetermined amount of commercial space — ranging from corporate office space; to neighborhood stores and businesses oriented to promoting wellness, such as medical clinics and fitness centers; as well as larger stores with regional appeal, restaurants, and a hotel, and housing for seniors of varying abilities. The larger commercial uses would occupy portions of 500 acres south of the interchange on land between US 52 and the access road leading to Elk Run. The retail space would be built during later phases of the mega-project, by which time the economy is expected to improve: "We'll have the ability to pursue it if the tenant demand is there. But we're not relying upon that demand in the next few years," Pierce said.

The development of the commercial space, he said, would hinge on creating a critical mass of users at the mixed-use community, "and we feel that will start with the biotech," since as biotech tenants grow, some are expected to need spillover office space beyond the life-sci space within the BioBusiness Park.

"But then as the interchange gets developed, and especially once residential gets going, your general commercial office, hospitality, and retail will all drive to that," Pierce added.

Tower would join with developers specializing in residential and retail space to build those portions of Elk Run.

The Elk Run site has already been rezoned, and about half the land annexed by Pine Island last year, though city officials still have to approve site plans for the individual plats and buildings that will comprise the mixed-use, master planned community.

'Grading the Roads'

As for the lab-flex building, Pierce said construction is expected to begin some time later this year, once work is completed on infrastructure improvements now being carried out. To facilitate location of utility lines and other improvements, Tower annexed 27 acres on the west side of US 52.

"On the site right now, there's a sewer and water project that was done last year. There's a second phase of the sewer and water under construction right now. So the site basically has sewer and water, either in place or under construction. The road for the new first bioscience building is all graded in already," Terry Ward, a project manager with MnDOT, told BRN on Monday. "We're grading out the roads and putting in the utilities now."

To date, Tower has already funded $2.2 million for site improvements intended to facilitate Elk Run, with Minnesota's Department of Employment and Economic Development awarding the city of Pine Island another $1.5 million for onsite infrastructure.

"Within the next couple of months, all of that infrastructure work is going to be done," Pierce said.

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Next year "at the earliest," Ward said, construction is set to begin on a $35.6 million interchange linking US Hwy. 52 to Olmsted County Hwy. 12, which will link to the BioBusiness Park.

For MnDOT to move forward and "let" the interchange project by soliciting bids from contractors, Ward said, "we're looking for [Tower] to have their first building platted, and to have their first building under construction, and to have raised the $1 billion capital fund that Steven Burrill is working with them on. Those are some of the triggers that we're looking at before we actually will let our interchange project."

The assumption that interchange construction will start next year hinges on MnDOT going to a speedier procurement method in which contractors would design, then build the interchange directly, rather than build an interchange designed by the agency.

"We're leaning [toward] design-build, as long as the city and the developer continue on with the aggressive pace that they have been using," Ward told BRN.

The interchange will be built between the sites eyed for two proposed interchanges appearing in earlier conceptual renderings of the project. Pierce said a second interchange may yet be built in a few years.

"The agreement with [MnDOT] is [that] we're going to take a look at where we are in 2012, and there may be a second interchange to the south that services our property, depending on the commercial needs and the amount of traffic at that time," Pierce said.

The US 52/Hwy. 12 interchange is required in order for Elk Run to be developed as densely as Tower is planning. Without the interchange, the developer is limited to building 100,000 square feet of space.

Construction of the interchange "is a big step forward for us. We needed to get that going," Pierce said.

The cost of the interchange will be shared by MnDOT, the city of Pine Island, Olmsted County, and Tower.

$20M Commitment

A MnDOT regional spokeswoman, Kristine Hernandez, told BRN her agency has committed to funding the full $20 million sought from it by Tower. That total includes the $14.56 million grant trumpeted last month by the developer and MnDOT, one of three grants totaling $30 million approved for projects statewide under the Greater Minnesota Business Development Public Infrastructure grant program, intended to fund highway interchange projects.

Hernandez said MnDOT will make up the remaining roughly $5.5 million by shifting funds from one or more other programs as yet undetermined by the agency: "Some of it is probably going to be district funds. Some of it is probably going to be [from the] Statewide Bridge and Corridor Fund."

MnDOT's money for the interchange, she added, will not come from sources outside the agency, including the $787 billion American Recovery and Reinvestment Act, the stimulus measure enacted in February by President Obama. That would not preclude the use of ARRA funds secured by Tower, Burrill, and/or the city of Pine Island, she added.

Burrill told the Star-Tribune last month that he and other principals in the BioBusiness Park were pursuing stimulus funding for improvements tied to development of Elk Run.

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The decision, first announced at an Aug. 3 public forum on Elk Run, appears to address a public objection voiced to the grant by the neighboring city of Cannon Falls. After his city and neighboring Goodhue County were rejected for a $20 million grant for an interchange it wants to build at US 52 and Olmsted County Hwy. 24, Cannon Falls City Manager Aaron Reeves questioned MnDOT's approval of the Elk Run interchange grant, noting that it contradicted the agency's rule that projects approved for grants have all other needed funding in place [BRN, July 31]. MnDOT and State Sen. Steve Murphy (DFL-Red Wing), who worked to secure the grant, defended the decision, saying funding for the grant program was very competitive since the agency received 13 applications for a total $154 million in funding.

The funding by MnDOT and DEED reflect state support for the Elk Run BioBusiness Park by Gov. Tim Pawlenty, who is leaving office in 2010 — reportedly to pursue the 2012 Republican presidential nomination, though he has not publicly discussed doing so — as well as other Minnesota officials, who view the project as a vehicle for growing a life sciences industry that is broader than the state's longstanding cluster of medical device developers and drug discoverers.

That broadening has been recommended in a series of 13 reports completed earlier this year for the state's life-sci job attraction organization, the public-private BioBusiness Alliance of Minnesota. Destination 2025 recommended that Minnesota expand its life-sciences focus over the next decade and a half with clusters in animal health, food, biofuel/renewable energy, and renewable materials capable of competing with other states [BRN, March 2].

Tower is positioning the BioBusiness Park in part as a venue for spinouts from the Mayo Clinic and University of Minnesota in nearby Rochester, Minn., about a 15-minute drive south of Elk Run.

"I'm also focusing, in addition to that, though, on other companies that do business with the Mayo Clinic, as an example," Pierce said.. "This could be engineering companies that work for, or work with, the Mayo Clinic to develop medical devices, or whatever the innovation happens to be, that it makes sense for them to locate close to the Mayo Clinic."

Pierce added that these companies could also include suppliers or vendors that work with Mayo. "There's really no space available for people like that," he said. "We think there are a lot of opportunities for businesses that would like to locate close to Rochester."

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