EDC makes $75M pitch to Curt Schilling

State economic-development officials are hiring consultants to review the benefits and the risks of helping Curt Schilling’s 38 Studios LLC relocate to Rhode Island.
It’s a move that could pay off big for a state still mired in double-digit unemployment and for the video game firm, too. But it could also leave Rhode Island responsible for millions of dollars in revenue bonds if the firm owned by the former World Series MVP strikes out in its bid to become a player in the burgeoning video game industry.
Schilling’s firm, now in located in Maynard, Mass., would bring as many as 458 new jobs by 2012 to Rhode Island, paying an average salary of $72,500 and resulting in as much as $93.9 million in direct and indirect annual revenue to the state, according to plans the firm recently presented to the R.I. Economic Development Corporation board.
The EDC board at its June 14 meeting subsequently “approved preliminary authorization for the EDC staff to develop a term sheet offering up to $75 million in revenue bonds to assist 38 Studios to relocate and expand their business to Rhode Island,” EDC chief Keith W. Stokes said. Stokes declined to set a timeframe on when the EDC board would consider final approval.
State support would come, Stokes explained, in the form of $75 million in revenue bonds that the EDC would issue from the newly established $125 million Job Creation Guaranty Program, recently created by the legislature.
A group of investors, led by Wells Fargo, would purchase the bonds and 38 Studios would be responsible for paying back Wells Fargo and other investors. “We would be the guarantor,” Stokes said. “So, if there is a default, it would come to the state.”
The point of the state guarantee is to help a company obtain private financing. “Our goal is not to replace banks. Our goal is to induce banks and private equity investors to invest in either existing or prospective companies,” Stokes said. “This is no different from the hundreds of companies we have helped with hard-asset financing through the Industrial Recreational Building Authority.” While the process may be the same, what is different is the $125 million in soft-asset loan guarantees for companies in what Stokes called the “knowledge and creative economy industries,” such as software engineering firms, digital media companies and businesses in the graphic arts or life sciences. These businesses usually have assets that “tend to be intellectual property,” he noted, and so do not qualify for hard-asset financing such as that offered by the building authority.
Stokes, a longtime member of the EDC board and former executive director of the Newport County Chamber of Commerce, said the EDC in 2009 sought legislative approval for a soft-assets financing program, so the idea is nothing new.
When asked why Schilling’s firm cannot obtain its own financing without the state’s help, Stokes replied: “Well, he has. You’re assuming that [38 Studios] is looking for its entire financing through the state. It is not. There has been a tremendous amount of personal and private equity invested in the company and the program.”
Asked why it made sense for one company to receive 60 percent of the $125 million in guarantees authorized by lawmakers, Stokes said the EDC’s evaluation is based on three main questions: Can the obligator pay back the debt and so avoid financial exposure to the state? Will the company create “high-skilled, high-waged jobs?” Does this investment become a nexus to draw other high-skilled wage cluster industries to the state?
In the material Schilling and Wells Fargo presented to the EDC board is extensive information about the benefit of building clusters of similar industries in one location. In the video game industry, there are clusters already in the West, the South, the Midwest and the East (comprising New York, Massachusetts and Montreal), as well as Boston.
Schilling’s firm is interested in forming a cluster based in Providence, working with such entities as Rhode Island School of Design, Brown University, the University of Rhode Island, Hasbro Inc. and GTECH Corp. Stokes revealed that “a significant number” of 38 Studios’ 180 current employees are RISD graduates. Asked if 38 Studios would locate in the former Jewelry District, Stokes said only that the firm is considering various sites in Providence and wants to be as close to downtown as possible. Rep. Steve Costantino, chairman of the House Finance Committee and a candidate for mayor in Providence, sponsored the legislation creating the $125 million loan-guarantee program. He said he had heard that 38 Studios was interested in moving to Rhode Island, so he set the guarantee ceiling at $125 million specifically to allow other businesses to take advantage of the funding, too.
Costantino said he “insisted that performance standards in terms of wages and job numbers” be included in the bill, putting pressure on EDC “to do as much due diligence as possible.”
As another financial incentive, 38 Studios as a video game developer would be eligible to take advantage of the state’s Motion Picture Production Tax Credit, which provides 25 percent off production costs incurred in Rhode Island, according to the state film and television office. Stokes did not know if 38 Studios would take advantage of the film credit and the company did not immediately respond to e-mailed questions from Providence Business News.
Stokes believes 38 Studios could prove to be a golden opportunity for the state, “If we go through the proper underwriting process to mitigate risk,” he said. “And we have to see a clear return on our investment and the company has to demonstrate unequivocally its ability to pay the note” even if its video games do not sell.
Schilling’s company, according to the information given to EDC, is looking to develop state-of-the-art, multiplayer, online games. In some cases, playing such games, which can support hundreds of players from around the world simultaneously, is free, but in other cases fees are assessed.
Revenue is more likely to come from software sales, the EDC said in a fact sheet prepared for the June 14 meeting, because the games, dubbed Massively Multiplayer Online games, are not necessarily played on personal computers. •