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These articles by Barbara Fox were published in U.S. 1 Newspaper on October 21, 1998. All rights reserved.
Life in the Fast Lane
Two unusual ways to use tax-free municipal bonds are being tried, one to sweeten the deal for Merrill Lynch to build its 3.5 million square-foot campus in Hopewell (see story below), the other for a nonprofit group to build a Marriott hotel and conference center in downtown Trenton.
Merrill Lynch's deal took advantage of a method used two years ago to encourage MSNBC to settle in New Jersey. In contrast, the tax law used to try to build a future Marriott has usually been available only for affordable housing projects and hospitals.
Merrill Lynch has firm plans to break ground in March, and though the Trenton hotel agreement is going through its due diligence phase now, it also hopes to break ground next spring. The $44 million project would replace Peace Street and a 300-car parking lot with a 195-room hotel and conference center and a 600-car garage linked directly to the War Memorial Auditorium. This would give Trenton its first hotel in decades, and it would also be the second major public conference center on the Route 1 corridor (the Forrestal Hotel and Conference Center, formerly Scanticon, was the pioneer).
Early this year Trenton's long-desired hotel project looked like it would fall through when the developer reported that private investors thought the project was too risky. The comeback story was "a fascinating collaborative effort," says Robert Powell of Arete Capital Advisors at 92 Nassau Street.
The hotel's advocates include importer Shelley Zeiger (a perpetual proponent for Trenton hotels who had piqued the interest of no less a personage than J. W. Marriott), David Ong of Acquest Realty Advisors (a Michigan-based developer experienced in public/private partnerships), Alan Mallach, (Trenton's development director), and Powell (formerly president of DKM, known for inner city development in Trenton and New Brunswick). Ford Farewell Mills & Gatsch and Johnson Jones are the joint venture architects, and Turner Construction has the construction contract.
Zeiger had met J. Willard Marriott when they were both board members of the American Russian Cultural Foundation and the U.S. Russia Business Council, and Marriott flew into Trenton in his private plane to work on a deal in 1993. "Sitting on a board with him helped, but it also pays to be persistent," says Zeiger now. "It was the last thing on his mind to have a hotel in Trenton."
Marriott recommended a developer, Acquest Realty Advisors, and through a competition Acquest won the contract to be owner, developer, and lead investor in the privately owned project. The city's role was to be sponsor and financial contributor.
"After Acquest had been in the market for a couple of months," says Powell, "they reported they did not believe there was sufficient appetite for private investors to invest $10 to $14 million in private debt. The returns they were looking to achieve were quite high, 15 to 16 percent." Based on an income of $3.4 to $3.5 million a year, "it would be really tight as to whether the investors could achieve those goals."
The city's mayor, Doug Palmer, refused to let the project stall. "He sent a whole bunch of people back to the drawing board," says Powell. "We had strong ingredients -- the Marriott commitment, the location, and good results from the feasibility study."
Based on a project that Acquest had just completed in Pittsburgh, everyone looked at the nonprofit alternative. "What was most dramatic is what it does to your cost of capital," says Powell. "You are taking what was $25 or $35 million private capital, which needed an average return of 12 to 14 percent, and cutting that in half."
Powell came up with a recommendation to hire an investment bank to find a way to turn the for-profit deal into a non-profit opportunity. He turned to Vince Patane, senior vice president at Ryan Beck & Co., a 55-year-old full-service Livingston-based investment banking and brokerage firm with a reputation for working with tax-exempt multiple issues.
Patane, in turn, found a nationally ranked money manager of mutual funds with a specialty in tax-exempt municipal bonds. Van Kampen, based in Connecticut and owned by Morgan Stanley Dean Witter Discover, has billions under management, and it needs products to buy for its bond-based funds. Van Kampen could be the lead purchaser of the $30 million bond issue, and probably one other institution would also invest in the bonds.
The hotel's owner, a nonprofit called Lafayette Yard Community Development Corporation, has been created by the City of Trenton for the purpose of generating jobs and opportunities. Its $30 million loan will be secured by a first mortgage, but the interest income earned by the investors will be exempt from federal and state tax.
Thanks to a 1963 Internal Revenue Service Ruling, the Lafayette Yard group does not need to go through any other authority to issue its own bonds. "This ruling allows not-for-profit entities to borrow for a reduced rate of interest. If it is a successful project, which we all believe it will be, that will generate revenues for the city of Trenton," says Patane.
Because the principal and interest payments are not backed by any government entity with a taxing authority, but are supported by revenues, the prospective buyer must to do intensive homework and due diligence. Van Kampen is doing that now.
Powell is confident that the Lafayette Yard group will emerge victorious. The project is getting lots of input from Marriott Conference Center planning department, with which Acquest has worked before. "It's fair to say that this project distinguishes itself from most of the other developments that are underway or contemplated in this region," Powell claims, "primarily it will be a full-service, hotel/conference center." With breakout rooms, audio visual facilities, and large meeting spaces, it would compare as a full-service conference center to the Forrestal.
The irony in this arrangement is that if Trenton already had successful hotels, this tax-free bond arrangement would have been impossible. "In order to set up a nonprofit corporation the one thing you must have is city approval," says Powell. "In a thriving hotel market, such as Atlanta or New York, the hotel industry would scream bloody murder if a not-for-profit corporation tried to do this.
"Now that we have the lead financing institution lined up, we can turn our attention to the closing drill," says Powell.
It is a team effort, says Zeiger. "The governor is with me, the mayor is with me, and I am quite confident that Mr. Marriott will fly into the opening of this hotel," says Zeiger.
-- Barbara Figge Fox
On the Route 1 corridor from South Brunswick to Lawrence there are six full-service hotels, seven motels, and three extended stay hotels, plus the Nassau Inn in Princeton. Five more extended stay or suites hotels are planned (Courtyard by Marriott, Embassy Suites, Extended Stay America, Homegate, Homestead Village) and a sixth -- Starwood Suites -- is seeking approval to build on Princess Road.
Powell says the Lafayette Yard group is "not overly concerned" about this competition. "They tend to be extended stay and budget hotels with minimal conference and banquet capabilities and their price points are considerably lower and different." A true conference center has spatial relationships, "that you can't create with a hammer and screwdriver."
"You clearly have some competitive pressure with the two first class hotels in the corridor, but given the demand and the market today, and the location, positioned in the southern tier, this will draw from southern Mercer and Bucks County, and it clearly will have a substantial amount of activity generated from within the city of Trenton," says Powell.
New Jersey has turned itself inside out to keep Merrill Lynch's Scudder's Mill Road headquarters a permanent part of the Princeton scene and encourage the brokerage firm to build the new corporate campus and town center in Hopewell. Though headlines blared "State giving Merrill Lynch $150 million in incentives" the actual figure is much lower.
"We believe it is closer to the $20 million figure," says Harry Ferguson, first vice president of corporate real estate, based on College Road. But the confusion is understandable. Among the perks the state came up with was a $135 million bond issue that would save Merrill Lynch $8.1 million in sales tax. Some sources put the $135 million as a grant to Merrill Lynch, but it is not; it's a loan. The amount to count here is the $8.1 million that the state will fail to collect in sales tax.
The state recently offered two similar "big ticket" bond issues, one for MSNBC in Secaucus ($167.5 million in bonds in 1996) and $32 million for the Barnes & Noble warehouse at Exit 8A. Here's how it works: the New Jersey Economic Development Authority will float $135 million in tax free bonds to private investors. This money will purchase technology equipment to be used by Merrill Lynch. Merrill Lynch would lease it from the EDA, and when the lease expires, Merrill Lynch will have "bought" the equipment without paying millions in sales tax.
Other state incentives included in the $20 million total are $8.3 million to create 1,400 new jobs and $3 million for training the new employees in computer skills. The first phase will accommodate 3,500 jobs and the site could expand to 5,000 jobs. "The jobs will come from everywhere we have a leased facility -- in Princeton, Somerset, and Pennsylvania," says Ferguson.
All this was announced at the same time Merrill Lynch says it will cut its work force by five percent, including 500 layoffs at five New Jersey sites, including Scudders Mill Road.
No employee at the brokerage offices on Nassau Street and Franklin Corner Road has received a layoff notice, but the company declines to say whether the 500 cuts will be made from the headquarters on Scudders Mill Road or from the four other sites: Somerset, Franklin, Jersey City, or Piscataway.
The layoffs will not halt the expansion plans; Huber Hunt Nichols will start construction next March in Hopewell, and the target for completion of the first phase is 2000.
But will the layoffs foul up the tax incentives? In addition to the $20 million that New Jersey is offering for 1,400 new jobs, Merrill Lynch is supposed to receive $28 million from New York State for 2,000 new workers. Not to worry, says Ferguson. "We believe we will reach the goals; we have until the year 2002 to do so."
Merrill Lynch is expanding in another way, on the Internet. Although Vice Chairman John "Launny" Steffens is downplaying the announcement, Merrill Lynch Online (http://www.askmerrill.com) has just opened its doors to the general public. Before, only 375,000 Merrill Lynch clients could access the research. Now it will be offered for free for four months, says Randal C. Langdon, Merrill's director of strategic technologies, at the Princeton campus.
Those who sign up from the service must surrender their name, E-mail address, and phone number, and they also are told that a broker may contact them, and that they may receive E-mail messages. The trial is scheduled to run from November 2 to February 28 but may start sooner.
"Our research is our crown jewel," says spokesperson Selena Morris, "and we are interested in showing potential clients the depth of it. It's pretty amazing."
-- Barbara Fox
Early Stage Enterprises LP, one of the state's newest private venture capital funds, has expanded. It started out with $4 million in seed capital from the New Jersey Commission on Science and Technology (NJCST) to invest in high tech start-ups but now has 10 times that amount. It has moved from 221 Nassau Street to 1,900 square feet in the Amboy National Bank building at Routes 518 and 206.
Early Stage Enterprises resulted, in part, from the restructuring of another venture capital firm, DSV Partners, founded by Mort Collins, one of Princeton's earliest VCs. When Collins retired, Jim Millar of DSV joined Ron Hahn to form Early Stage. Meanwhile John Clarke and John Park, both of DSV, founded Cardinal Life Sciences to fund health care focused companies on a national basis. Both firms had their offices at the DSV space at 221 Nassau Street, and both Hahn and Park will speak at the New Jersey Entrepreneurial Association on Wednesday, November 4, at noon at Forrestal. Cost: $35. Call 609-279-0010.
"We were both more successful than we had thought we would be," says Hahn. "We have a total capital of $44 million, have completed our eighth investment, and expect at the end of the week to have a commitment for our 10th deal. But John Clarke had first rights to the space" and he elected to stay put. The proverbial "sticker shock" for rents elsewhere on Nassau Street motivated Hahn's move to Skillman.
ESE has hired a full-time comptroller, partly to do the paperwork that it needs to do as a licensed Small Business Investment Company (SBIC). Under this Small Business Administration plan, the partnership leverages its own money on a two-to-one basis to get investment capital without making current interest payments. In lieu of current payments the SBA gets a percentage of profits over time. "They become a limited partner and have a priority position," says Hahn.
The firm has also hired a full time executive assistant and part-time analyst. "Jim and I need to focus on making investments and working with existing portfolio members," says Hahn. He went to Occidental College, Class of '66, has a finance MBA from UCLA, and is an alumnus of Commodities Corporation on Mount Lucas Road. Millar was an engineer at Yale, Class of 1980, and has a Wharton MBA.
In addition to NJCST, Early Stage Enterprise's investors include Public Service Resource Corporation, Hoechst Celanese Corporation, MBNA America, Graystone Venture Fund, and these banks: First Union, PNC, Silicon Valley, and CoreStates.
ESE targets technology companies ranging from start-ups to those with less than $3 million in revenue, and which need from $50,000 to $1.5 million to finish a business plan, refine a prototype, or begin to expand "from a modest base of sales."
Among its eight investments are one company from Princeton and two others in New Jersey: a software firm, a drug discovery firm, and a biotech company. Nettech Systems Inc., a fast-growing software firm at 600 Alexander Road, provides advanced middleware for the mobile data industry.
Metacrine Sciences Inc. at Cook College in New Brunswick is trying to develop therapeutic drugs to affect hormone production in humans, possibly to treat the symptoms of aging and/or some of the health problems that go with insulin dependent diabetes. Patient Comfort LLC, based in Chatham, has a prototype instrument that measures small voltages at specific muscles of facial expression. This has potential applications for patients undergoing general anesthesia, in intensive care units, and in nursing homes.
The other investments include software firms: Customer Insites Inc. in College Park, Maryland, to test the effectiveness of Web sites; HR Technologies Inc. in Radnor, Pennsylvania, to provide work force management tools; and Patient Education Systems Inc. in New Canaan, Connecticut, to publish patient education documents for a health-care provider.
In the healthcare area, Early Stage Enterprises has invested in Highway to Health Inc., in Radnor, to develop networks of healthcare providers for travelers outside their home region. Another company is Quality Packaging Systems Inc., based in Colonial Heights, Virginia, which provides contract packaging services to the pharmaceutical industry.
Ten down, 20 companies to go. Says Hahn: "We are going to make 30 investments in this partnership."
This investment bank has been hired to find a buyer for Base Ten System's medical imaging software subsidiary, Health Imaging Development Co. Selling a majority stake in HIDC would raise funds to market the software that helps hospitals digitize diagnostic medical images.
Gillespie has signed a contract with Justballs, the Kingston-based Internet retail store specializing in balls (U.S. 1, August 12). Gillespie will brand the site and support it with what is billed as "a fully integrated campaign representing potential billings of over $1 million for the agency."
"Our approach is to think globally, but act locally," says Jim Medalia, CEO and president of Justballs. "We want to work with local suppliers."
Gillespie also announced a contract for a $3 million advertising campaign for Cushman & Wakefield, the commercial real estate firm. It breaks with the November 2 issue of Forbes and will build on the firm's merger with Healey & Baker of London. Ads will also be in Fortune, Business Week, the Wall Street Journal, and the New York Times.
In September Gynetics, the new emergency contraception firm, successfully completed a private placement offering of 3.7 million common shares worth $11.5 million, and it has now raised a gross total of $20.5 million.
Also last month Gynetics made a third strategic alliance with Barr Laboratories, this time to develop a new oral contraceptive product targeted for reaching the marketplace by 2001. Barr has made a strategic equity investment of $2.25 million in Gynetics.
Sensors Unlimited, a designer and manufacturer of advanced near infrared products, has just announced a contract from the federal commerce department to double the size of indium phosphide wafers that it is now producing. It hopes to develop wafers that are twice the size of those currently made, so that up to six times as many chips can be produced from each wafer. The National Institute of Standards and Technology's Advanced Technology Program will contribute $1.8 million to the three-year program, worth $3.1 million.
When Standard Register bought UARCO Impressions -- a print and distribution fulfillment center -- last December, it aimed to consolidate. By this December all 50 employees will have moved out, says Arnold Carmichael, office administrator. The short-run color and electronic distribution equipment has been moved to three locations that Standard Register already owned -- Somerset, Secaucus, and Moorestown. Nearly all of the former UARCO workers will have a job at one of those locations. Only 14 people remain at Exit 8A.
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