Greenwood initially pledged $8.5 million in taxpayer money to help entrepreneurial scientists start a pharmaceutical company in the city that could eventually lead to a science campus.
But about $4 million more has been spent along the way — first to pay for engineering and other costs as the company’s building plans came together, then legal and accounting fees when the company became unable to pay its bills and closed its doors. No new jobs were created.
The owners of Elona Biotechnologies had agreed to build a facility and locate it in Greenwood if the city would financially back construction and offer other funding. The city borrowed $6.5 million to lend to Elona and offered a $500,000 cash grant paid out of special taxing districts known as tax-increment financing, or TIF, districts and a $1.5 million no-interest, forgivable loan through the redevelopment commission.
Money in TIF districts is captured from property taxes on new development and increased property values in a designated geographic area. The redevelopment commission oversees the city’s TIF funds and channels the money into road and other infrastructure projects in the area where its collected with a goal of attracting development.
Elona owners Ron and Donna Zimmerman promised to create a minimum of 70 jobs with $55,000 average salaries. They told the city they expected their company would have a $59.5 million annual economic impact on Greenwood by 2014.
But the Food and Drug Administration approval process was long and expensive, and Elona couldn’t find the private investors it needed to keep pursuing FDA approval of the generic insulin it planned to make. The company ran out of money this year.
The total of $8.5 million the city loaned and gave Elona is the largest business incentive the city has ever given. The amount and the way the city gave it diverged from how Greenwood typically gives money to companies to entice them into expanding in or relocating to the city. Usually, the city offers property tax breaks.
In the end, Greenwood will have spent more than $12 million on loans, attorneys’ fees, building maintenance and other costs connected with giving and loaning money to Elona and dealing with the company’s collapse, according to city records. The city recouped $2.2 million from selling Elona’s building and generic insulin patents at auction last month, for a net loss of about $10 million.
“I’m very sad for the city that we lost that kind of money,” city council member Bruce Armstrong said. “It’s a shame that the opportunity they said they would provide the workforce never materialized.”
Greenwood gave the company the $6.5 million loan to pay for construction of a 46,480-square-foot building, to be repaid over 17 years. The $1.5 million loan was given to fund Elona’s efforts to get its drug FDA-approved. Forgiveness of the smaller loan was contingent on the company hiring as many employees as promised, paying the high salaries and buying as much equipment as committed. The $500,000 in TIF money was given to buy equipment and pay for some construction costs.
Elona used its building and patents as collateral for the loans. The company also agreed to give the city regular updates on the construction of their building and committed to investing $25.7 million on equipment.
When the company failed, Greenwood attempted to regain some of the money it invested by selling Elona’s assets. But the patents, new building, office furniture and laboratory equipment sold at a September auction for $2.174 million, or less than 17 percent of what the city will have spent on the company after the bonds are paid off.
The city needs to investigate companies better before funding them, Armstrong said. He was the single city council member who voted against investing in Elona in 2010. The lack of FDA approval was a problem with Elona’s promises to the city, because the FDA has never approved a generic insulin and the company’s confidence about getting the approval quickly seemed unrealistic from the start, he said.
The city hasn’t committed to not giving incentives similar to what Elona got, city attorney Krista Taggart said. Unlike with the Elona project, in the future the city won’t promise public funding before a company finds private funding, she said.
The city will analyze the loan collateral better, making sure a building isn’t as specialized as the Elona building, so it can be repurposed more easily. The city also will verify the value of a company’s assets before providing loans and check with business placement companies to see if the incentives offered are comparable to what other cities are doing, she said.
Taggart declined to talk more specifically about possible mistakes the city made in investing in Elona and said advisers, such as attorney Steve Watson and financial consulting firm O.W. Krohn & Associates, did what they were told.
“The advisers that the city and commission relied upon at that time, if you read the reports, answered the questions they were asked to answer,” she said.
The incentives for Elona got approvals from three boards with a total of 17 members and were discussed at public meetings for at least three months. Prior to that, about six months of research and negotiating with the company was done, according to redevelopment commission meeting minutes.
“Obviously, there’s some great caution that needs to be exerted in the future,” council and redevelopment commission member Mike Campbell said. “It would seem that either the due diligence was not sufficient or there was just stuff we didn’t know.”
He was not a member of the council or the redevelopment commission at the time.
The city council wasn’t involved in the planning of the Elona agreement and didn’t have the opportunity to ask questions about it early on, council member Brent Corey said.
At the time, the city council didn’t have one of its members serving on the redevelopment commission, which is the group that came up with the plan to invest in Elona. Campbell’s presence on the commission should help in the future, Corey said.
“They’re in charge of a huge chunk of the city budget. I think we need to have a working knowledge of what they’re doing. I think for so long they were operating as such a separate entity,” he said.
Follow the money
Three city boards had to approve the package of financial incentives given to Elona Biotechnologies, a pharmaceutical company that failed this year. The following describes each group that approved incentives and the path to final approval of each incentive.
The then-seven members of the Greenwood City Council were elected officials. The redevelopment commission has five members, two appointed by the city council and three appointed by the mayor. The economic development commission has five members, three appointed by the mayor, one appointed by the city council and one appointed by the county council. Some of the board members have changed since the approvals.
March 4, 2010
Economic development commission approves $6.5 million in American Recovery & Reinvestment Act bonds for Elona and recommends that the city council give them final approval.
March 9, 2010
The redevelopment commission votes to include the Elona property in the eastside tax-increment-financing, or TIF, district.
The redevelopment commission also commits TIF funds toward repaying the $6.5 million bonds, if necessary, and approves the project agreement with Elona.
The redevelopment commission approves two additional incentives, to be paid for with TIF funds: $500,000 in cash for equipment and construction costs and a $1.5 million loan to cover expenses related to pursuing Food & Drug Administration approval for generic insulin.
March 15, 2010
City council approves issuance of the $6.5 million in bonds.
March 29, 2010
Then-Mayor Charles Henderson and city Clerk-Treasurer Jeannine Myers, redevelopment commission president Lee Money and secretary-treasurer John Mulvey and Elona Biotechnologies president Ron Zimmerman sign the final project agreement, which includes all three financial incentives totaling $8.5 million.