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Reprinted from REJournals.com Monday January 20 2003

Dinkytown incubator hatches a pair of success stories
UTEC HOUSES COMPANIES BOTH NEW AND SMALL

Contributing Writer David Jasper tracks the success of each business that moves into University Technology Enterprise Center, his Dinkytown incubator. Since 1986, the failure rate is 7 percent, meaning most of his tenants either remain in the building or leave to find expansion space.

Two of the building's largest tenants outgrew the incubator in recent months. But while empty space always is a concern, senior property manager Douglas Walker says he is not particularly worried about the vacancies.

"We've had a problem in the past few years because we haven't had enough space for tenants to expand," he says. "Also, in this economy people lose jobs and go out and start businesses, and that's when they come to us. We don't follow the same patterns as other parts of the real estate market."

In October, New Boundary Technologies Inc. vacated 7,000 square feet in the 185,000 square foot building and The Nature Conservancy plans to leave in March, emptying 12,000 square feet. All but 500 square feet of the New Boundary space already is leased, Walker says.

UTEC, as the owners call it, is located at 1313 Fifth St. S.E., in the old John Marshall High School, adjacent to the University of Minnesota. Until recently, the occupancy rate was close to 95 percent, says Walker. It now hovers around 83 percent.

"We needed Class A space with our own image and identity, and that is not within the mission of an incubator," says Kim Pearson, founder and CEO of software developer New Boundary. The company moved to an 11,000 square foot office in Broadway Place West, near Interstate 35W and Industrial Boulevard in Minneapolis.

The Nature Conservancy's Minnesota chapter has lived in UTEC since the building opened, and has grown from 20 employees to about 80, spokeswoman Ann Mulholland says. The nonprofit has leased 20,899 square feet at River Parkway Place, at 11th Ave. S. and West River Parkway in Minneapolis. UTEC is a great place for a growing company, Pearson says. And Mulholland agrees it will be difficult for her and her coworkers to leave a building with such easy access to restaurants, bus lines and bike routes.

"Our company doubled every two to five years and space obviously was an issue. We added to our lease at least once every year," Pearson says. New Boundary started with just 200 square feet in 1987. "That's where, I think, you get one of the biggest advantages of UTEC. You're not in a five-year commitment and you can add space where you need it. In a half an hour you can be in new space."

Jasper founded the University Technology Centers Inc. after he struggled to find a small office for his own startup film distribution company.

"I found a few commercially available spaces but they weren't really well set-up," Jasper says. "I sublet from an architect and then from a lawyer to get a small office with support services and I knew there was a real need for that."

At first, he and partner Pat Gorman started a consulting business to guide the creation of business incubators.

"We realized we were helping others be successful and we decided to try it ourselves," Jasper says.

They bought the high school, which was built in 1924 and closed in 1982. Jasper says he spent between $3 million and $4 million to acquire the school and complete the first stage of renovations.

Today, just over 100 businesses lease space in the building, Walker says. About one-fifth are computer or software-related, but tenants range from massage therapists to biotechnology labs to nonprofits. Some stay long-term and others for a short time.

"We run the whole gamut, and that adds to the building's energy," Walker says.

Discounting the largest occupant, the soon-to-be-moving Minnesota offices of The Nature Conservancy, the average tenant occupies between 500 and 750 square feet. Spaces run as small as 90 square feet and gross rental rates range from 85 cents to $1.85 per foot per month.

"We can hit anybody's budget," Walker says. He labels the space Class B, but it is difficult to compare rates with other Class B space because the building is not in a central business district.

Flexibility is a key advantage to leasing space in UTEC. One- and two-person businesses can rent small spaces and expand when necessary, and Walker maintains a wait-list when space is tight. Leases often are short-term and flexible to accommodate growing, and sometimes shrinking, businesses.

Elements of the Jazz-Age era high school remain: wide staircases, old-fashioned, glassed-in doors and wood-trimmed blackboards in some of the offices. The former auditorium retains its original molded ceiling, but the owners added a parquet floor and tenants or community members can rent the space for graduations, receptions and other events. Front-hall trophy cases now display advertisements for a violin maker and a school of homeopathic medicine.

Jasper and his partners narrowed the hallways and built small, one-person offices into the extra space. Other tenants have knocked down old walls to expand their space.

That flexibility encouraged Joel Hernandez and his coworkers to remain in UTEC after a business shakeup. The company, formerly called Archemedia, sold its group insurance industry software to Benefit Resource Inc. and reduced its workforce, but kept its 2,200 square feet.

As a software developer, Hernandez also appreciated another feature of the building; one of the tenants, Professional Network Services, is an Internet service provider (ISP).

"We share a 10 megabyte connection to the Internet with some of the other tenants at a price that would barely get us business-class DSL," Hernandez says.

The broad range of businesses in the building does not allow for a lot of networking possibilities, but Hernandez describes the atmosphere as "collegial."

"It's part of the charm of the place, but there's not a lot of cross-pollination between a violin maker and a Web-based portal for the insurance industry," he says.

Location also was a factor for both Hernandez and Pearson. UTEC is near downtown Minneapolis, but not near enough to offer Class A space or Class A prices. Also, the location meant it was easy for Pearson to find and hire student workers.

A final perk is the opportunity to share services."Back in the '80s, that meant a fax machine," Pearson recalls. "That was pretty high-tech and expensive and you had to have it."

In those days, UTEC offered a shared fax number and charged per fax. Today, optional services include shared copy machines, conference rooms and classrooms, postage and bulk mailings, even coffee.

"If we provide these services, it allows our tenants to focus more on running their businesses," Jasper says.

Jasper, Gorman and a third partner, Loren Schultz, also own University Technology Center East at the intersection of University and Washington avenues in Stadium Village. The site consists of two smaller buildings totaling 55,000 square feet and tenants include The Minnesota Daily newspaper.

Incubators and their tenants are "a funny part of the market," Jasper says. "They are small and no one can afford to pay commissions, and startup businesses often have zero credit ratings. Not many people want to help those people find space."

But bad debt among UTEC tenants is less than 3 percent, and Jasper likes watching entrepreneurs start new ventures.

"I get to see them doing what they want to do," he says.

Jessica Griffith is a St. Paul based freelance writer.
Reprinted from REJournals.com

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