COUNCIL AGENDA: 6/16/15 ITEM: 4.1 CITY OF SAN IPSE CAPITAL OF SILICON VALLEY Memorandum TO: HONORABLE MAYOR AND CITY COUNCIL FROM: Kim Walesh SUBJECT: SEE BELOW DATE: Approved Date L>[5 COUNCIL DISTRICT: 4 SUBJECT: APPROVAL OF A CAPITAL EQUIPMENT ASSISTANCE AGREEMENT FOR THE ATTRACTION OF A FLEXIBLE HYBRID ELECTRONICS MANUFACTURING INNOVATION INSTITUTE TO SAN JOSE RECOMMENDATION 1) Conduct a Public Hearing regarding an economic subsidy in connection with a Capital Equipment Assistance Agreement with Bestronics Inc., pursuant to California Government Code Section 53083; and 2) Adopt a resolution authorizing the City Manager or his designee to execute the Capital Equipment Assistance Agreement with Bestronics Inc., in which the City will provide an amount not to exceed $400,000 for the acquisition of clean room equipment for manufacturing and research and development to be located at the proposed Flexible Hybrid Electronics Manufacturing Innovation Institute in San Jose. OUTCOME Approval of this Agreement will support the proposal submitted by FlexTech Alliance, Inc. to the Department of Defense in a national competition to create a Flexible Hybrid Electronics Manufacturing Innovation Institute (FHE-MII) in San Jose. FlexTech Alliance will propose to establish the FHE-MII headquarters in a 35,000 square foot facility located at 2245 Lundy Ave., San Jose, CA 95131 ("Premises") to be used exclusively for the proposed FHE-MII in San Jose. Bestronics is leasing the Premises that would house the FHE-MII. Bestronics will offer a subsidized sub-lease to FlexTech Alliance for establishing the FHE-MII. If successful, this proposal would result in. a first-of-its-kind institute in the United States and the investment of $75 million of federal grant funds, matched at a greater than one-to-one ratio by private industry, in emerging technology development that would support San Jose's manufacturing, wearable device, and "Internet of Things" industry sectors. The Capital Equipment Assistance Agreement
Page 2 with Bestronics would help offset the build out and outfitting of clean rooms necessary for the proposed FHE-MII which will provide a facility for flexible electronics that can be evaluated, designed, assembled, prototyped and commercialized. The proposed FHE-MII would also provide a hub for educational and workforce programs, as well as provide a regional location for innovation and commercialization of advanced technology. BACKGROUND On June 10, 2014, the City Council approved the creation of a $1 million incentive fund to support Goal # 3 of the Economic Strategy, "Preserve and Strengthen Manufacturing-Related Activity and Jobs", and to attract and retain manufacturing companies in San Jose. In his 2013 and 2014 State of the Union Addresses, President Obama called for the creation of a National Network for Manufacturing Innovation (NNMI) to scale up advanced manufacturing technologies and processes. He asked Congress to authorize federal investment to be matched by private and non-federal funds to create an initial network of up to 15 Institutes. The program is designed to tackle barriers to rapid and efficient development and commercialization of new advanced product and manufacturing-process innovations. The network and its individual Institutes enable companies to collaborate and access the capabilities of research universities and other science and technology organizations to support scaling up manufacturing and assembly processes. Five Institutes have been awarded to date to: 3D Printing in Youngstown, OH; Power Electronics in Raleigh, NC; Lightweight Metals in Detroit, MI; Digital Design and Manufacturing in Chicago, IL; and Composite Materials in Knoxville, TN. Based in San Jose, FlexTech Alliance is a 20 year old membership-based, not for profit organization that has considerable experience organizing and leading consortiums and partnerships with industry, academia, government and research organizations. Building on its nation-wide contacts in flexible printed electronics, FlexTech Alliance has developed a team of over 100 partners from industry, academia and government to respond to the Department of Defense (DOD) grant opportunity for the development of the proposed FHE MIL The DOD will fund one institute in the United States. The DOD competition is a two-part process that includes a concept paper and then an invitation to submit a full proposal. In March 2015, FlexTech Alliance submitted a concept paper detailing the development of a FHE-MII for flexible technologies in San Jose. The DOD approved the concept paper and invited FlexTech Alliance to submit a full proposal. At this time, staff is only aware of two proposals being submitted for the Institute; the other finalist is from a university in the Phoenix, Arizona area. Restrictions of the DOD grant funds are that they cannot be used to purchase real estate or construct a building. However, DOD grant funds can be used towards operating expenses of the FHE-MII, including utilities. In order to create the FHE-MII in San Jose, FlexTech Alliance engaged the City to help identify industry partners that could host the FHE-MII within existing facilities.
Page 3 Bestronics, a local electronics manufacturing services provider in San Jose, has offered to sublease the Premises to house the FHE-MII. Bestronics' vision for "Built in the Valley" is in direct alignment with the goals of the FHE-MII, and therefore Bestronics has partnered with FlexTech Alliance in providing a facility for the FHE-MII. ANALYSIS The potential to win the national competition and locate a one-of-a-kind FHE-MII in San Jose represents a significant opportunity for the City's manufacturing ecosystem. San Jose's position in the broader Silicon Valley ecosystem has often revolved around new hardware and device development, which in turn feeds into the local manufacturing ecosystem. In order to maintain San Jose's position as a global leader in hardware development, especially in emerging technology areas including wearable devices and the Internet of Things, continual research and development opportunities that go beyond the operations of individual companies are required to drive these key local sectors. Federally funded national development centers have a history of driving this type of collaborative innovation, as well as providing significant direct and indirect economic benefits, much of which occurs in close proximity to the center. In the case of the FHE-MII, the majority of the $75 million in DOD grant funds for which FlexTech Alliance has applied would support development programs that would be matched by industry representatives and generate significant development in this emerging technology area. These programs are expected to lead to increased spending and employment from partner companies located in San Jose and the metro area. Working directly with the FlexTech Alliance in recruiting partners and fostering introductions, the Office of Economic Development is proposing to utilize the Manufacturing Incentive Fund to support the grant proposal by FlexTech Alliance through a Capital Equipment Assistance Grant to Bestronics, Inc. The proposed FHE-MII would provide access to low-volume production facilities, enabling development of a domestic manufacturing base including new manufacturing technologies, equipment, materials, and a highly educated and trained workforce. In addition, as new technologies are developed and commercialized, they are expected to result in increased activity across the local manufacturing service ecosystem. Local manufacturers will benefit by being located next to a nationally recognized development center for these emerging technologies, which will ultimately add to the region's competitiveness and support the growth of the local manufacturing sector. In addition to helping offset the cost of improving the facility, staffs analysis suggests that strong local support for this type of institute is important for the success of the application. City staff have worked closely with FlexTech to identify opportunities to add value to the application. In addition to the recommended assistance detailed below, the Office of Economic Development has worked closely with the Mayor's Office, the San Jose/Silicon Valley Chamber of Commerce, San Jose State University, and many of the City's local manufacturers and technology companies
Page 4 to help build the FHE Mil partnership. Early local companies to sign on included Qualcomm, Flextronics, Jabil, Applied Materials, Bestronics, SEMI and HP. The State of California, through the Governor's Office of Business and Economic Development (GO-Biz) has committed to expedited access to workforce training funds for advanced manufacturing. Recommended Assistance Capital Equipment Assistance Agreement The City will reimburse Bestronics for the acquisition of eligible capital equipment used exclusively for research and development and/or manufacturing at the Premises, up to an aggregate amount of $400,000. A city-wide Economic Development/Incentive Fund appropriation in the 2014-2015 Adopted Budget is available as a funding source for this purpose. Upon receipt by the City for a Request for Reimbursement together with confirmation that the equipment has been installed at the Premises, the City shall reimburse Bestronics up to $400,000. The City will not reimburse for any equipment purchased by Bestronics with other public funds, including DOD grant funds. If for whatever reason, Bestronics or the FHE-MII ceases operations at the Premises within the first year of occupancy, Bestronics must reimburse the City 90% of assistance provided to the company. If Bestronics or the FHE-MII ceases operation at the Premises after the first year but before the second year, Bestronics must reimburse the City 80% of the assistance provided to the company. If Bestronics or the FHE-MII ceases operation at the Premises after the second year but before the third year, Bestronics must reimburse the City 60% of the assistance provided to the Company. If Bestronics or the FHE-MII ceases operation at the Premises after the third year but before the fourth year, Bestronics must reimburse the City 40% of the assistance provided to the Company. If Bestronics or the FHE-MII ceases operation at the Premises after the fourth year but before the fifth year, Bestronics must reimburse the City 20% of the assistance provided to the Company. If Bestronics and the FHE-MII remain in occupancy and maintain operations on or beyond the fifth (5 th ) anniversary of occupying the facility, Bestronics shall not be required to reimburse the City for any portion of the Capital Equipment Assistance incentive. Required Participation in Business Cooperation Program As additional consideration of the capital equipment assistance that the City of San Jose is offering to Bestronics as part of the FHE-MII, the City will require Bestronics and the FHE-MII (through FlexTech Alliance) to participate in the Business Cooperation Program (BCP) for the FHE-MII, also known as the Use Tax Incentive Program. Under this program, Bestronics and the FHE-MII will designate use tax from applicable equipment and materials purchases to San Jose, enabling the City to recoup use tax revenue that would otherwise be allocated to the county-wide pool. Bestronics will enforce this obligation on the FHE-MII through an appropriate lease provision.
June 3,2015 Page 5 Conditions to the City's Capital Equipment Assistance Grant The proposed Capital Equipment Assistance grant outlined in this memorandum will only become effective if all of the following conditions have been satisfied: (1) the DOD approves and funds FlexTech Alliance's Proposal; (2) FlexTech Alliance executes a lease for a minimum of five (5) years for the FHE-MII at the Premises; (3) Bestronics completes a building program to retrofit the Premises in an estimated amount of $7 million; and (4) the City has reviewed and the DOD's grant to FlexTech Alliance and determined that its terms are consistent with the City's Economic Development Strategy, this memorandum and the Capital Equipment Assistance Agreement. Benefits of Flexible Hybrid Electronics Manufacturing Innovation Institute As a charter city under its municipal and police powers the City may provide financial assistance to Bestronics to purchase capital equipment which will be of benefit to the residents of City. Improvements to the Premises will benefit San Jose by adding jobs, tax revenue and other benefits to the City. Should the DOD approve and fund FlexTech Alliance's FHE-MII, the Institute hosted by Bestronics is expected to result in increased secured and unsecured property tax revenue to the City of San Jose. Improvements to the Premises are estimated to be approximately $7,000,000. Based on these estimates, new secured and unsecured property tax revenue to the City of San Jose is estimated to be $7,000 annually starting in 2017. This amount is likely to increase over time, as Bestronics and FlexTech Alliance invests in new equipment. Over a five year period, the unsecured property tax revenue to the City of San Jose should exceed $35,000. Use tax from the one-time purchase of new capital equipment and construction materials should result in $20,000 to the City in 2016/2017. The annual direct economic impact of the FHE-MII is estimated to be $1,000,000. The spending by partners and collaborators in the FHE-MII is anticipated to generate an additional $500,000 annually indirect economic impact. Other Benefits National recognition as the only Flexible Hybrid Electronics Manufacturing Innovation Institute in the United States. Infusion of $75,000,000 of federal grant funds, matched at a greater than one-to-one ratio by private industry, into local research and development centers. High accessibility for San Jose companies resulting in strong local participation and industry development. Increased investment and employment from participating San Jose companies. Strengthening of the local manufacturing ecosystems competitiveness through access to a development center for emerging technologies.
June 3,2015 Page 6 Opportunities for residents to receive training in advanced manufacturing. Opportunity to engage over 100 academia, industry and government entities on developing the future generation of flexible electronics. Provide an educational venue for the public to learn about the next generation of hybrid electronics, including wearable electronics and other Internet of Things (IoT) devices. The table below addresses the requirements set forth in the recently adopted State of California AB 562 (Government Code 53083) for publication of information related to an economic development subsidy and a public hearing. i. Name/address of beneficiary of the subsidy Bestronics Inc. 2090 Fortune Drive, San Jose, CA 95131 ii. Start and end dates, and schedule, for the The subsidy will start only when the following subsidy conditions have been satisfied: the FlexTech Alliance proposal is accepted by the DOD; DOD disburses grant funds to FlexTech Alliance; FlexTech Alliance executes a lease for a minimum of 5 years at the Premises for the FHE- Mil; Bestronics completes a building program of an estimated $7 million and occupies the Premises; and the City has reviewed the DOD's grant to FlexTech Alliance and determined that its terms are consistent with the City's Economic Development Strategy, this memorandum and the Capital Equipment Assistance Agreement. Notice of the DOD award is anticipated by September 2015. The subsidy will start no earlier than the first date of Bestronics' occupancy of the Premises to be used for the FHE-MII in San Jose. The subsidy will end no later than the fifth anniversary of Bestronics' occupancy of the Premises. If Bestronics does not occupy the Premises on or before the second anniversary of the date on which it first received notice of the DOD grant award, the City will have no iii. Description of the subsidy, estimated total amount of expenditure of public funds or revenue lost obligation to provide the subsidy. The City shall reimburse Bestronics for up to $400,000 for eligible capital equipment exclusively for clean room uses for the FHE-MH. iv. Statement of public purpose If Bestronics or the FHE-MII cease to operate at the Premises at any time prior to the fifth year of occupancy, Bestronics shall be required to repay the amount specified in the Capital Equipment Assistance Agreement. To preserve and strengthen manufacturing-related activity by locating the only Flexible Hybrid Technology Manufacturing Institute in the nation
Page 7 will bring exposure and investment into San Jose via research and development teams proto-typing the next generation of products. v. Projected tax revenue The improvements and capital equipment purchases made by Bestronics and the FHE-MII are estimated to result in an additional $7,000 in secured and unsecured property tax revenue to the City of San Jose starting in 2017, amounting to $35,000 over a five year period. Use tax from the purchase of new capital equipment should result in $20,000 to the City during the first five years of the FHE-MII's occupancy. vi. Estimated number of jobs created, broken down by full time, part-time and temporary positions The FHE-MII is expected to generate approximately 10 full time staff. More broadly, additional industry and academic assignees will locate employees in the FHE-MII as their projects begin to commercialize. This may represent an additional 25 to 35 employees operating on site. EVALUATION AND FOLLOW-UP City staff will monitor the economic incentives and provide updates to the Community and Economic Development Committee and as required by Government Code 53083. PUBLIC OUTREACH This memorandum will be posted on the City's website for the June 16, 2015 City Council agenda. COORDINATION This memorandum has been coordinated with the City Attorney's Office and the City Manager's Budget Office. FISCAL/POLICY ALIGNMENT The project aligns with the City's Economic Development Strategy #3 "Preserve and Strengthen Manufacturing-Related Activity and Jobs."
Page 8 BUDGET REFERENCE The table below identifies the fund and appropriation proposed to fund the agreement recommended as part of this memorandum. Fund # Appn # Appn. Name 001 3535 Economic Development/ Incentive Fund 2014-2015 Adopted Budget (Page) Last Budget Action (Date, Ord. No.) Total Appn Amt. for Contract $1,390,000 $400,000 K-20 6/17/2014, #29431 CEOA Public Project, File No. PP10-066(a), Equipment Acquisition. /s/ KIM WALESH Deputy City Manager Director of Economic Development For questions please contact John Lang, Chief Economist at (408) 535-8178.