Incubator marks fifth year

Published 8:22 am Wednesday, March 31, 2010

■ Sixth in a series

FRANKLIN—When Franklin-Southampton Economic Development Inc. was created in 2005, its mission was twofold: Lure businesses and jobs to the two localities it serves, and offer assistance to businesses already here.

But shortly after its founding, FSEDI was given another task: Run the Franklin Business Incubator — a former buggy factory the city spent $1.25 million renovating into an office building — for the city.

Now five years in, four businesses have graduated from the incubator and set up shop in the community. Meanwhile, the city continues to spend thousands of dollars a year on the incubator, both on debt service and operating expenses.

What the incubator is

The Incubator, located at 601 N. Mechanic St., was constructed around 1907. Partial renovation work began in 2004 and was completed in 2005. Today, the building houses 26 businesses — and FSEDI’s office — that collectively employ 120 people, both full- and part-time.

“It’s a mixed-use business incubator,” FSEDI President and CEO John Smolak said. “We don’t concentrate on one type of business, like some incubators do that are in university settings. Some of those tend to focus on technology. There are a variety of different businesses here.”

Among the tenants are companies that specialize in pest control, timber, mortgages, insurance, software and janitorial services. There are also mentoring programs, a print and electronic media studio, a private investigator and a taxi service.

Prospective incubator tenants “can be a variety of things,” Smolak said. “They can be companies that have been working out of their home for awhile, or small one- or two-person operations that need a nicer presence for their business. They’re entrepreneurs and they’re small and growing.”

Envisioned after the devastating flood of 1999, the city wanted the incubator to be a place where those small and growing businesses could get a good start. To help foster growth, floor space at the facility is rented on a scale, Smolak said.

For the first six months the rent is $6.50 per square foot. The price becomes $7.50 per square foot for the second six months and increases by one dollar every year up to $10.50 per square foot in the fifth year.

“In many cases, that’s more than some spaces that we have found downtown,” Smolak said. “It may be cheaper somewhere else. In fact, if they don’t really need to be here, we encourage them to talk to (Downtown Manager) Dan Howe and the Downtown Franklin Association so that they can look at other space that’s already available downtown.”

Smolak said the incubator is designed to house a business for three to five years.

“So at the fifth year, we would hope that they would have grown enough and had gotten their legs going enough to be able to go out into the community, rent their own space and get things moving in a bigger fashion.”

Smolak added: “We know that that doesn’t always happen. Some fall short of that and decide to close their business. You have to be flexible. When you start drawing hard lines, you tend to stifle growth. If we have somebody that’s at their fifth year and they’re not quite ready to graduate, we’re going to work with them so we can try to get them out in the community. We’re not going to say, ‘Sorry, your lease is up, Bye.’ We’re going to work with them and make sure we have a good transition for them to exit the incubator.”

On the current tenants, Smolak said, “We have a lot companies that are in different stages of when they came in here. They didn’t all come in 2005 or 2006.”

Graduated businesses

The incubator officially lists four businesses as “graduates.” Those businesses are Agape Counseling & Therapeutic Services Inc., Bradshaw-Kimbrel Technology Group LLC, Star Investigations & Security, and United Medical Supplies Inc.

“The incubator was a huge asset for us,” said Melvin Wright, coordinator for Agape. “We were able to come in and get organized, and they gave us a chance to structure ourselves, hire and train people and get the area staffed. It was exactly what we needed. It was where we needed to be. I have nothing but praise for what they did for us.”

Wright said Agape, now located at 106 Fifth Ave. in downtown Franklin, was at the incubator for about a year.

“We moved out pretty quickly,” Wright said. “We met our benchmarks. We put things in place and made a strategic move to go out and keep going.”

Wright said he would “most definitely” recommend the incubator to other companies looking to grow their business.

“Most companies don’t have that huge start-up capital to pay for utilities and fees,” he said. “If you’re a start-up company, that’s the place to start.”

Paulette Jackson, a respiratory therapist for United Medical Supplies, said her experience with the incubator was positive but that her business needed more exposure than the facility could provide. After being a tenant for about a year, Jackson moved her business downtown to 201 Fourth Ave. in 2007.

“It was a good starter project,” Jackson said of the incubator. “It was fantastic. But being in medical equipment is more of a visual business. We didn’t get a lot of business because we weren’t really shown. Other businesses, like computers, may be better for there. It was OK for us, but it was best that we came out.”

Nancy Parrish, manager of the Franklin Business Incubator, said there have been at least three other companies to graduate, but they are not referenced on the facility’s literature because they left the area.

“This has been a source of controversy for some people, especially some city taxpayers,” Parrish said Friday. “They ask why their tax dollars should fund a building that benefits businesses who then go someplace else, even to Southampton County. But we as FSEDI have to think about both Franklin and Southampton. We have to be open to growing businesses for both.”

Parrish added, “There’s no way any economic development department in the state can only think about themselves. You can’t ask a business to come here but promise that they will stay here once they graduate. This is not just something Franklin is dealing with; a lot of incubators are. You spend a lot of time, effort and resources to grow a business. But there’s no guarantee they’re going to stay right where you are when they finish.”

According to Parrish, one of the businesses that left went to York County and another went to Norfolk. A couple of businesses were also absorbed by churches and continue to operate.

“I don’t recognize them in our brochures; I don’t continue to track them and advertise for them,” Parrish said. “When I do programs and presentations, I acknowledge those people who have graduated but only those who have stayed in Franklin and Southampton. We’ve had just as many stay as those who have not stayed. That might be a sad commentary, but it’s just the truth.”

Cost to the city

Another truth: Having a designated place to foster the growth of small or beginning businesses has a price tag.

According to budget information from the City of Franklin, incubator operating expenses totaled $132,088 for the current fiscal year. Revenue from rent covered $75,000 of that cost, and the city transferred $57,088 from its general fund to cover the rest.

During the previous fiscal year, incubator operating expenses totaled $123,473, which means that operating costs grew by $8,615, or 6.9 percent. Revenue from rent covered $63,000 of that cost and the city spent another $60,473 from the general fund to make up the difference. Compared to the current fiscal year, that means rental revenue increased by $12,000 — or 19 percent — while the city’s general fund contribution was $3,385 less — or 5.6 percent — than the previous year.

The city spent an additional $19,588 to cover personnel expenditures at the incubator during the current fiscal year. Most of that amount, $16,772, went toward part-time wages for janitorial services. Another $2,490 was spent on payroll taxes and $326 was spent on workers-compensation insurance. The personnel expenditures were $1,486 — or 8.2 percent — higher than the previous year.

The city is also continuing to pay for the renovation of the incubator building, in the form of general obligation bonds that were issued in 2001 and 2003. The portion of those bonds related to the renovation of the incubator total $1.25 million. During the current fiscal year the city made principal payments totaling $43,951 and interest payments of $68,397 on the incubator portion of the bonds, which now total $1,011,276.

‘Not seeing any benefits’

Some elected officials say they aren’t pleased with how the incubator experiment has fared so far, although they acknowledge the bad economy is also to blame.

“They’re doing OK, but there is still a lot of work that needs to be done,” City Councilman Rosa Lawrence, who represents Ward 3, said Tuesday of the incubator. “They’ve been doing a good job trying to reach out and get new business. But we are still in dire need. We need some type of industrial business to come through here, especially with International Paper going out.”

Asked if the money the city has spent so far on the incubator was well spent, Lawrence said: “I’m not going to say it’s been well spent. I’m not really seeing any benefits coming from what we have invested, no more than repairing the building itself. I’m just seeing a repeat of the same figures. It’s the same work being done, but nothing that’s really enhancing (the city).”

When asked if she thought there should be changes to how much money is given to the Incubator by the city, or if the way the money is spent should be changed, Lawrence said, “If changing around could (improve things), I would say yes. But right now we need to stay focused and look at it a little bit better. I haven’t seen any progress. To me, the progress is not there.”

Vice Mayor Raystine Johnson, who represents Ward 4, echoed that sentiment.

“We get more detailed reports now that (Ward 2 Councilman) Benny Burgess sits on the incubator board, so my comfort level is a little bit better,” Johnson said Tuesday. “I’m not sure (the status quo) is due to how the incubator is actually run. But there are some things that are on the agenda for the City Council to evaluate as we go through the (funding) process of (FSEDI).”

Businesses leaving the incubator and the community are another concern.

The City Council “has had conversations as it relates to that,” Johnson said. “I think they are always going over ways to improve the recruiting and the graduating processes.”

Johnson said the difficult economy must be considered when evaluating the incubator.

“With a suffering economy, you can’t look back and pinpoint redoing something,” Johnson said. “I think you learn as you go forward. It’s hard to judge how it would be now in an economy that is prosperous and flourishing.”

Competition with downtown

Although Smolak asserts that there are cheaper properties available for rent downtown than in the incubator, Stan Rich, who owns a building on Main Street downtown and runs Southampton Antiques, says that assertion misses the point.

“In some ways I think the incubator is a good thing,” Rich said Tuesday. “It has its good points. But people have property for rent, they’re paying taxes to the city, (it goes to the incubator), and then they’re competing against the city. It’s not right that you have to compete against the city when you’re the one paying the taxes. You’re competing against yourself.”

Howe, who sits on the incubator’s advisory board, said he is optimistic about the incubator’s effect on downtown.

“I would say it helps downtown most of the time,” Howe said Tuesday. “We’ve already seen several businesses come downtown. There just haven’t been that many graduates. Obviously, the quicker businesses reach maturity, the less effect it would have on downtown. In fact, it would help downtown. If they were ready to graduate sooner, you would prefer them to get out into the regular world and make room for more little businesses.”

The Franklin Business Incubator Advisory Board has 13 members, including Howe, Parrish, Burgess, City Manager June Fleming, Southampton County Supervisor Anita Felts, Franklin-Southampton Area Chamber of Commerce Executive Director Teresa Beale, Randy Betz, Lauren Harper, E. Warren Beale, Wallace Brittle, Mac Coker, Bill Peak and Kathy Worrell.

Howe said the advisory board has several duties, including reviewing businesses that are candidates to lease space at the incubator and monitoring those businesses’ progress toward graduation.

Johnson said she sees the incubator as a boost for downtown rather than a competitor.

“The purpose of the incubator is to get (businesses) to graduate and become tenants of the downtown property owners,” Johnson said. “So I hope it would not be a conflict.”

She added, “As far as the concept of the incubator itself, if people have ideas and they want to own a business, and they need some help, then I think that’s the model concept. I would hope that when the businesses graduate that they would go into the downtown.”

Expansion on the horizon

Although the incubator was awarded two grants to complete the building last year, major construction has not started.

“I’ve been told that the contract could be signed this week or next week,” Parrish said.

The incubator received a $150,000 grant from the U.S. Department of Agriculture in August and a $536,466 grant from Community Development Block Grant–Recovery program. CDBG–R is funded by the American Recovery and Reinvestment Act and is administered by the Virginia Department of Housing and Community Development.

“I’ve see a little bit of activity,” Parrish said. “Some prep work has been done.”

The project — originally scheduled to start on Jan. 4 but delayed several times — will include renovation of cubicles on the second and third floors of the four-story building, finishing a build-out of 20 percent of the third floor and performing a complete build-out of the fourth floor, which is currently vacant.