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KUD-Rain Forest "Understanding" Retains, Creates Questions

Nicholas Johnson

July 8, 2005

And see earlier: Nicholas Johnson, "Rain Forest Hires Rain Man," June 23, 2005



As predicted by the local papers on June 23, 2005, rain forest promoters did indeed sign a "memorandum of understanding" with KUD, in the person of John Best. Adam Pracht, "Rain Forest, Group Set Deadlines," Iowa City Press-Citizen, July 7, 2005; Zack Kucharski, "Deal Sets Rain Forest Opening," The Gazette, July 7, 2005. (See Nicholas Johnson, "Rain Forest Hires Rain Man," June 23, 2005, for additional details and links to the earlier stories.)

According to the stories, cited and linked above, the facts seem to be as follows:

(1) The project must raise $90 million by October 31, 2006, for construction to begin.

(2) KUD will be paid $820,000 for "pre-construction work" (presumably between now and October 31, 2006, and whether construction ever occurs or not).

(3) KUD's primary undertakings "include coordinating architects, engineers and designers; producing the final schematic design and construction documents; overseeing the actual construction and possibly arranging financing."

(4) In the event construction takes place KUD will be paid $5.5 million over four years.

(5) KUD's John Best will oversee a 12 person group working on the project.

(6) If construction is undertaken, KUD will guarantee an "on time on budget" project. If not completed by the May 1, 2009, deadline KUD will refund to the project  $500,000 for every month it goes beyond that date.

(7) The "construction budget" will be $160 million (not including the $27 million of land from the City of Coralville).

KUD in general, and John Best in particular, have a track record of on budget, on time delivery of the construction projects they've supervised.

On the one hand, it is reassuring to have an experienced partner like KUD finally involved. On the other hand, while there should have been prior concerns expressed about the promoters' construction competence, there were so many other, preliminary, issues that, aside from the risks of cost overruns there was very little focus on construction as such.

So the arrival of KUD, as helpful as it is, tends to relieve anxieties that were not formerly expressed. In the community's (and nation's) dialogue about the Coralville rain forest there has been an unspoken assumption that professional, experienced architects and contractors could design and build such a project. That was not the problem; and now it is even less so.

And so most of the prior concerns are still with us. They include:

Focus. Once this structure is designed and built, what's going inside, and why? Have the rain forest's promoters and board members come to resolution on this? It would seem to be a set of questions more appropriate for the client than the contractor. But has KUD assumed responsibility for this as well?

Promoters have left us wondering what their project will turn out to be. A tourist attraction? A teacher training facility? A "world class" scientific research facility? Environmental conservation demonstration projects? (Not incidentally, some if not all of the possible uses would presumably have some impact on the design of at least the interior of the structure, if not the exterior as well.)

What is the current status of Ted Stilwill's early proposals for teacher training and education programs? See Adam Pracht, "Rain Forest Education Plan Outlined; Finances, timeline still in flux," Iowa City Press-Citizen, April 21, 2005.

What ever happened to Sandra Hudson's explanation that it is a “misconception” to think of the project as a tourist attraction since “the primary intent is scientific research and education"? Is it still? Sandra L. Hudson, "'Rain Forest' Serves Environment," Iowa City Press-Citizen, March 23, 2005.

If the project is successful in raising money from major corporations (which prior stories have indicated was one of the promoters' hopes; see, e.g., Adam Pracht, "Rainforest Discord Seen in E-Mail," Iowa City Press-Citizen, October 30, 2004) to what extent will corporate logos, advertising and marketing efforts dominate the theme, purpose and appearance of this "non-profit" project?

Construction budget details. What is meant by "construction"? Apparently it does not include land. How about parking lots? Does it include the aquarium? The IMAX? The K-5 school? Exhibits? Gift shop? A "turn-key" job, ready to open its doors and admit visitors? Or is the $160 million just for the exterior structure? Once a $300 million project, then $225 million, then $180 million and now $160 million, it's still not been revealed what the amount will cover. If the details have been worked out and agreed upon, and are included in the $160 million figure, it would be politic to let the public know what they are. This is, after all (at least so far), primarily the public's money that's being spent.

The $50 Million. Speaking of the public's money, what's happening to the $50 million? Presumably this was appropriated by Congress for construction costs, not promoters' pre-construction salaries and expenses. And yet there is some evidence that seems to be what the early draws on the account have gone for. See Adam Pracht, "Government Monitors Use of $50 Million Grant," Iowa City Press-Citizen, March 12, 2005.

That's one issue. Another is basic math. If the construction budget is $160 million, and Nancy Quellhorst says they have only $90 million to go to reach that number, presumably that means she has $70 million in the bank somewhere. ("The agreement also calls for the project to raise $90 million by Oct. 31, 2006, so construction can begin, Quellhorst said." Zack Kucharski, "Deal Sets Rain Forest Opening," The Gazette, July 7, 2005.) If some-to-much of Ted Townsend's $10 million has been used over the last nine years, the $50 million is being dipped into, the land isn't being counted, and the anonymous public utility's contribution may well take the form of a discount on future utility bills (thereby shifting costs to homeowners) (a) how do we get to $70 million, and (b) where are the ongoing salaries, expenses, the $820,000 for KUD, and whatever undisclosed amount Gonser, Gerber is to be paid coming from?

Pre-opening budget. (a) If the salaries of John Best, David Oman, Nancy Quellhorst and Ted Stilwill, among others, along with other ongoing expenses of the project are not considered "construction costs" (as I believe they should not be) where is that money coming from? (b) Presumably there will be substantial pre-opening public relations and marketing expenses -- if it is to be a tourist attraction and if anything like the 1.1-1.5 million visitors a year can be expected to part with the admission fee. How will they be covered?

Operating costs and cash flow. Whatever it turns out to be -- tourist attraction, research center, teacher training facility, or something else -- once completed the project will need a perpetual flow of enough cash to cover costs. This rain forest undertaking is not about raising enough money to build a facility. That's only the beginning. The real, long term financial hurdle is the creation and maintenance of an adequate, ongoing cash flow. Where promoters go to obtain guarantees of such funding depends, of course, on what the project turns out to be. Each possibility raises its own concerns. (a) There are reasons to question promoters' generous projections of a million or more visitors a year. (b) Sustaining research with a continuing flow of grants is no easy task. (c) Nor is finding enough money in the small pots of limited education dollars to fund a teacher training program.

"The elephant in the rain forest." Assume Quellhorst is correct. All the costs except for construction are covered, and construction will be as well once an additional $90 million is found. So far as has been revealed to the public, for the past 18 months not one additional dime has been raised from government, the corporate sector, foundations or wealthy individuals. That is "the elephant in this rain forest." Certainly KUD's association with the project is a positive. But as noted earlier, there is no evidence that the reluctance of potential funders to come up with $90 million was because they lacked confidence a contractor could be found to build the structure. Obviously, without the $90 million (or more) the construction will not even be started. Reports of the memorandum of understanding indicate that, at that point, the deal is off. John Best and KDD walk away with their $820,000; other staff have been paid that much and more; and 15 months from now we're back to square one.

"Possibly arranging financing." Newspaper accounts indicate that KUD's responsibilities include "possibly arranging financing."

At the outset, this raises some questions about the current status of Gonser, Gerber, Tinker & Stuhr [http://www.ggts.com/].

On April 21, 2005, the Press-Citizen reported that, "Quellhorst said several months ago the project moved to its third stage of fund-raising by hiring professional development firm Gonser, Gerber, Tinker & Stuhr of Chicago. She said project officials planned only to move to a professional fund-raiser to fill in the final funding gaps. That means even though project officials haven't announced it, they're expecting enough donors to come through to pay for most of the project. . . . The development firm has successfully helped 95 percent of clients reach fund-raising goals, Quellhorst said, and has dealt with projects of more than $100 million before. She declined to say how much the project was paying the firm." Adam Pracht, "Rain Forest Education Plan Outlined; Finances, timeline still in flux," Iowa City Press-Citizen, April 21, 2005.

Has Gonser, Gerber been fired? Is it still the primary fund raiser for the rain forest project? Is it now a partner in this assignment with KUD? And, not incidentally, how much is it being paid? None of these questions were addressed with the announcement that KUD will be "possibly arranging financing."

Much turns on the meaning of that phrase.

From the Web sites of KUD's parent corporations, Kajima Corporation and Kajima USA, it appears that KUD is but a part of a conglomerate of synergistic enterprises that include:

Kajima Associates Inc. (KAI): Architecture, Interior Design and Engineering

Kajima Construction Services, Inc. (KCS): General Contracting, Construction Management, Design/Build, Process Equipment Installation, Owner’s Rep Services

KUD International LLC: Program Management, Public/Private Ventures, Project Finance Planning and Structuring, Program Management

Commercial Developments International, Inc. (CDI): Asset Management, Real Estate Advisory Services, Commercial Development

IDI, Inc.: Warehouse/Distribution Facilities, Build-to-Suit Development, Speculative Development

This is a powerful, and profitable, combination of skills and services.

Kajima USA says of itself, "With over 160 years of experience and over 13,000 employees around the world, Kajima Corporation is a global leader in the design, construction and real estate development industries. Traded publicly on the Tokyo and London exchanges, Kajima reported nearly $15.5 billion in revenues in 2002 (year ended March 31, 2002) and is ranked as the fourth largest global contractor in the world."

In discussing the available "Program Management Services" of KUD it explains, "With the backing of our parent company, Kajima Corporation, we are able to offer a level of financial strength unparalleled in the development industry. Kajima is one of the largest real estate services companies in the world with offices in over 30 countries. Financial companies recognize our expertise and track record, having worked closely with Goldman Sachs, Merrill Lynch, Chase Securities, Prudential Securities, Morgan Stanley, and Teachers Insurance."

(All of the above found within the contents at http://www.kajimausa.com/about/frm_about.html.)

However impressive this range of core competencies may be, none sound like "fundraising" in the conventional sense.

"Project Finance Planning" could simply mean something that is suggested by the newspaper accounts: before construction begins KUD must be assured that the client has the money in hand, following which KUD will keep the accounts, and pay the contractors and sub-contractors, and will "project manage" the cash flow to see to it that the money is available when it is needed. Working with "financial companies" could simply mean handling the detail work on the client's behalf, arranging for IPOs, the issuance of stock, short term loans, or floating bonds for corporations that are sufficiently well positioned financially to make that feasible.

On the other hand, consider this description of KUD's role in the financing of an aquarium in London, ironically posted to the Web by an opponent of a KUD project:

Friends of Animals Support New London Coalition's Intervention to Stop Proposed London Aquarium

June 08, 2004

Darien, Connecticut and Preston, England — Joining activists in Britain, Friends of Animals will urge London's Mayor, The Zoological Society of London, and U.S.-based developers, to halt plans for their plans for the proposed Silvertown Quays Aquarium.

* * *
The lead developer is KUD International, with offices in New York and Santa Monica. KUD will pay for the $200-million aquatic display from the profit it makes from developing the surrounding housing. The London Development Agency has deeded the land to KUD. By mid- 2006, KUD plans to finish the first phase of the project, including the marine display and 150,000 square-foot mall. [4] Roger Vincent, "London Chooses Santa Monica Firm; KUD International will develop Silvertown Quays, a $1.2-billion housing, retail and aquarium project" The Los Angeles Times (30 Oct. 2002).

 Friends of Animals, at http://www.friendsofanimals.org/news/2004/june/stop-proposed-london-aquarium.html

So, is there a possibility the entire rain forest project could be transferred from its non-profit "Iowa Child Foundation" status to a for-profit enterprise owned and operated by KUD? It is not clear where enough Iowa land could be found for an Iowa taxpayer gift to KUD sufficient to warrant its taking over the rain forest project. But, given KUD's record, it may very well be creative and innovative enough to come up with something.

Thus, "possibly arranging financing" remains the great and crucial unknown. Of course, as noted in "Operating costs and cash flow," above, as difficult as raising the money for the structural construction may be, it is the ongoing operating costs once it is built that are the even larger challenge. And unless KUD is to become the "owner" and potential beneficiary of the rain forest's "profits" its responsibilities presumably stop once the structure is built.

Falling behind schedule. As detailed on Nicholas Johnson's Coralville Rain Forest Web site, http://www.nicholasjohnson.org/IaChild, under the "Falling Behind Schedule" heading/link, aside from the fact the project has been around for nine years, it also has a record of consistently failing to meet promised delivery dates -- from the "groundbreaking" scheduled for the "autumn" of 2004, to the revised Web page, to the opening of the Coralville office.

Some local officials' patience is wearing thin. ("On Nov. 11, 2004, Gill called on the city to ask for a funding announcement from the project in 60 days, after which the city's $10 million of land and planned infrastructure would go to a different project. . . . Now, another two months past Gill's deadline, he said the city council should decide priorities and push for action even before the Marriott breaks ground." Adam Pracht, "Councilors in the dark on rain forest progress," Iowa City Press-Citizen, March 12, 2005. And see, Editorial, "Council Right to Expect Some Results," Iowa City Press-Citizen, March 17, 2005.)

The Press-Citizen's report of the KUD agreement was headlined "Rain Forest, Group Set Deadlines." It begins, "[The] . . . rain forest project now has important benchmarks, including a guaranteed completion date . . .. If The Environmental Project meets its fund-raising goals by Oct. 31, 2006, project vice-president Nancy Quellhorst said KUD International would guarantee a May 1, 2009, completion." Adam Pracht, "Rain Forest, Group Set Deadlines," Iowa City Press-Citizen, July 7, 2005.

It's not clear what this means. How do these "deadlines" differ from those that have preceded them? Is this little more than a dramatic public relations ploy to prevent the ax from falling for yet another year? Or is this a real commitment that, if the additional $90 million is not raised by October 31, 2006, the project will, after a decade's unsuccessful effort, fold its tent and close down? Is KUD willing to grant the project an extension on that "deadline"? Or does it take a walk November 1 if the money is not in the bank?

If, in fact, the $50 million pool of federal money can be gradually drained to pay project officials and KUD those extensions can go on for some considerable time -- even at $820,000 a year for KUD and nearly as much for project officials.

Bottom line? Unless Kajima and Kajima USA's representations are grossly exaggerated, KUD's association with the rain forest project is a clear plus. That association does not, however -- at least so far -- resolve the questions, issues and concerns that continue to swirl around the project.