DeWitt, N.Y. — In 2014, the development arm of SUNY Polytechnic Institute agreed to build, with $90 million in state money, a factory in DeWitt for an LED light bulb manufacturer.

The company, California-based Soraa, agreed to create 250 full-time, high-tech jobs at Collamer Crossing Business Park and to encourage Soraa contractors and suppliers to create another 170 jobs in Central New York.

In return, the company would be allowed to lease the factory for $1 a month for 10 years.

But the deal with SUNY Poly’s Fort Schuyler Management Corp. did not require Soraa to spend any of its own money to build or equip the factory. And it contained no penalties if the company did not occupy the building or create the promised jobs. The company never even signed a lease.

So when Soraa recently said it no longer needed the factory and pulled out of the deal just as the state was completing construction of the 82,000-square-foot building, there was nothing the state could do about it.

The state was left with a factory, nearly fully equipped, but no company to use it.

One expert said using state money to custom-build a factory for a specific tenant is bad policy.

 

 

 

“You have a situation where the state could potentially wind up with a white elephant,” said John Bacheller, former head of policy and research for the state’s economic development office, Empire State Development. “I think it’s too much risk. When you provide a grant, the risk is limited to the amount of the grant.”

 

The state has found another company, but taxpayers will have to spend up to another $15 million to properly equip the building for the new company.

This time, state officials say they won’t repeat the mistake made in DeWitt again.

Empire State Development, a state economic development agency,  took over the project from SUNY Poly a year ago after the college’s president, Alain Kaloyeros, was arrested on corruption charges and resigned from the university. ESD said a deal with a new tenant will include financial penalties if the company fails to meet its job commitments.

 

Jason Conwall, a spokesman for ESD, said the penalties, or “clawbacks,” will be included in a grant disbursement agreement with NexGen Power Systems, a California start-up. ESD’s board of directors voted Dec. 21 to approve a grant of up to $15 million to NexGen for tooling and equipment for the factory.

In return, the company has pledged to create 290 full-time, high-tech jobs for the production of semiconductors at the facility and agreed to invest $40 million of its own money into the building. It will pay rent of $1 the first year and increasing amounts up to full market value in the 10th year, ESD officials said.

Conwall said the grant will be contingent on the company meeting its job commitments. Details of the grant’s terms will not be available until the grant disbursement agreement is executed later this month, but they will follow ESD’s standard practice of requiring companies to return a grant, or portions of it, if they fail to meet hiring milestones, he said.

ESD’s agreements generally require a company to meet a certain minimum amount of their job commitments within a specified period or be required to return a grant. In some cases, a company is required to return only a portion of the money if it falls just a little short of its hiring commitments.

ESD officials said no such “clawbacks” were put into SUNY Poly’s deal with Soraa because none of the $90 million in state grants used to build the factory went directly to Soraa. All of the money went into the building, which is still owned by the state, so there was no money to take back from the company, they said.

Former state budget director Robert Megna, who was appointed president of the non-profit Fort Schuyler Management Corp. in February 2017 following Kaloyeros’s departure, said the fact that Fort Schuyler retained ownership of the building was a good thing.

“While we can’t speak to the reasoning behind all the terms of the agreement with Soraa, which were made by the previous leadership, the facility was constructed to accommodate Soraa’s gallium nitride lighting business and no funding was provided to Soraa,” he said in a statement.

“All state funds were provided to the not-for-profit Fort Schuyler Management Corporation, and the building and the equipment are all owned by FSMC on behalf of New York State,” he said. “This model enabled the state to quickly adjust to changes in a very dynamic industry and make the facility available to NexGen for its production of gallium nitride semiconductor devices, modules and systems.”

Conwall said Empire State Development takes a much different approach. It provides grants to assist companies with the cost of building facilities in the state, but it does not go the riskier route of building entire factories for them, he said.

He said ESD was fortunate to have found a new tenant to go into the DeWitt building. NexGen plans to make semiconductor power devices from gallium nitride, the same material that Soraa uses to make LED lighting. That means that NexGen can use much of the equipment already installed in the factory.

“It worked out because we owned the facility and found another tenant quickly that aligned really well,” the ESD spokesman said.

Though ESD has agreed to provide up to $15 million to NexGen for the purchase of tools and equipment, some of the $7 million not yet spent from the original $90 million in grants for the building could be used toward that $15 million commitment, he said. (The state had spent about $83 million of the $90 million on the factory and equipment by the time Soraa pulled out, officials said.)

NexGen was formed in California last year to make semiconductors for the electronics industry. It does not yet manufacture anything. The DeWitt facility will be its first manufacturing operation.

Dinesh Ramanathan, NexGen’s president and CEO and one of its founders, also was CEO of Avogy Inc., a Silicon Valley start-up that planned to make power sources for electronic devices such as computers.

Gov. Andrew Cuomo announced in 2016 that Avogy had committed to moving from California to a state-owned cleanroom facility in Rochester that the state agreed to upgrade with a $35 million investment of state money. The state never made the investment, however, and Avogy never made the move.

Avogy went out of business later in 2016. NexGen bought its technology and is starting up with new money from investors, according to Ramanathan.

NexGen has not publicly disclosed who its investors are.

Prior to Avogy, Ramanathan served as the executive vice president at Cypress Semiconductor for almost nine years, where he managed the company’s Programmable Systems Division and its Data Communications Division, according to NexGen’s website.

Prior to joining Cypress, Ramanathan held senior marketing and engineering positions at Raza Microelectronics; Raza Foundries, described as an “incubating venture capital company”; and Forte Design Systems, an electronic design automation company, according to the website.

ESD officials said they are confident that NexGen will succeed in DeWitt.

“NexGen is led by a management team and investors with a proven record and decades of combined experience building and operating high-tech businesses,” Empire State Development President, CEO and Commissioner Howard Zemsky said in a statement. “This gives us the confidence that the company will meet its commitment to bring hundreds of new, good-paying jobs to Central New York.”

The state may be fortunate in this case if NexGen is able to use the factory constructed for Soraa. But custom-built factories can be hard to sell or lease if a tenant walks away, Bacheller said.

The state should always require companies to invest more money into a project than the state does so they have a strong motivation to stick around and make the development work, he said.

“You always want the company to have skin in the game,” he said.

He said SUNY Poly may also have made a mistake constructing a factory for an LED light bulb maker, given the fact that LED light bulb production is increasingly dominated by low-cost Chinese manufacturers who have brought the price of LED bulbs almost down to that of incandescents.

“Unless you’re in a niche that the Chinese aren’t in, it’s the kind of business that is very risky,” he said.

NexGen says its semiconductor devices can be used in a wide array of applications such as LED power supplies, solar inverters, data centers and automotive applications.

The company will be getting the use of a building with up to $105 million in state money invested in it. NexGen’s capital investment will be far less by comparison – $40 million.

Bacheller said the state appears to be taking a substantial risk with NexGen, given that the company is a start-up with no manufacturing or sales track record of its own.  However, he said Empire State Development may be making the best deal it could after inheriting a bad situation from SUNY Poly.

“They’ve already got a building up and they’re stuck with it,” he said.

 

 

http://www.syracuse.com/business-news/index.ssf/2018/01/ny_taxpayers_built_90m_factory_in_dewitt_for_firm_that_walked_away_didnt_create.html