CenterPoint sets the standard for redeveloping decommissioned military bases
by Mike Fickes

There is a certain security and predictability in owning and managing stable properties that makes some publicly traded real estate companies hesitant to pursue complicated, large-scale development projects. Traditionally, REITs have shied away from the challenging and time-consuming process of redeveloping decommissioned military bases. However, an increase in base closures and the federal government’s desire to preserve the local economies has made this prospect more appealing, and, for at least one REIT, more profitable.

The opportunities are out there. Imagine 2,200 acres of land a few miles from one of the nation’s busiest urban centers, complete with access to two major railroad routes, an interstate highway and a state highway providing train, car and truck access. Add to that the cost of the land was priced well below market value. This ideal development opportunity—the former Joliet Arsenal—is one of dozens of acre-rich sites near large cities that have come to market in recent years.

Between 1988 and 1995, the federal government decided to close 97 major military bases around the country. Many offered excellent locations, low land costs and communities eager to push forward on new development to replace the jobs lost when the bases closed.

The government’s original approach to closing military bases, governed by the Base Realignment and Closure Act (BRAC) of 1990, proved “slow, bureaucratic and penny-pinching,” according to a plan to streamline the process put forward by President Clinton in 1993. Disputes over fair market value tied up the property transfers, while Pentagon red tape slowed the leasing process.

The Clinton plan aimed to remedy these problems by putting job-centered economic redevelopment first; instituting fast-track environmental cleanup plans; providing transitional assistance for workers and communities in affected areas; appropriating larger economic planning grants related to the transfers; and assigning transition coordinators to oversee the efficiency of the process.

Congress liked Clinton’s plan and enacted the Base Closure Communities Assistance Act of 1994. Perhaps the most important part of this legislation authorized the conveyance of property at below fair market value to local redevelopment authorities, if the property was to be put to a use that would generate jobs.

Developing Possibilities

Between 1994 and 1998, the Department of Defense completed 35 military base property conveyances (transferring of the ownership title). By 1999, 27 of these properties had undergone subsequent development, according to the Department’s web site, www.defenselink.mil.

For example, Bergstrom Air Force Base in Austin, TX, ceased operations in 1993, amidst reports that the closure would cost the region $400 million a year. Today, however, the site boasts the new Austin-Bergstrom International Airport and two office buildings. Analysts estimate the development will produce a total of 16,000 new jobs by 2012.

When Fort Devens in Ayer, MA, closed in 1996, the state purchased 3,040 acres from the federal government for $17.9 million. By 1999, the state had sold 100 acres to developers who turned that land into 1 million square feet of office, warehouse and manufacturing space. Gillette now occupies an $18 million warehouse and distribution facility as well as a $50 million manufacturing plant on the site.

In 1996, the City of Kettering, OH, acquired the 164-acre Gentile Defense Electronics Supply Center, which closed in 1993. Today, Banc One occupies approximately 400,000 square feet of office space on the property and employs a couple thousand people. The Defense Finance and Accounting Service has built offices for 520 people on the site and other offices house a printing company and a county department.

RE(IT)development

Real estate operating companies carried out the lion’s share of development work at these 27 sites. For example, California-based Catellus Development Corporation has two such projects in the works. The company is redeveloping the former Glenview Naval Air Station in Glenview, IL, as well as the former Alameda Naval Station in Alameda, CA.

While real estate operating companies are actively seeking out military base redevelopment projects, REITs have been hesitant to enter that market. According to Illinois-based CenterPoint Properties Trust executives, their company may be the only REIT to take on the redevelopment of a military base when it acquired the rights to develop a major industrial park at the former Joliet Arsenal, 40 miles south of downtown Chicago.

Interestingly, the Joliet redevelopment plan, including the substantial role played by CenterPoint, “is probably the best model for a private-public partnership on how to reuse and reclaim former BRAC sites,” says Ben Fallon, a spokesperson for Congressman Jerry Weller (R-IL).

Collaboration, the Model for Success

The redevelopment of former military bases begins with the conveyance of property to a local public authority. Overall, the Joliet Arsenal spanned approximately 22,000 acres. The federal legislation that conveyed the property set aside 17,000 acres for a national preserve called Midewin Tall Grass Prairie. Another 3,000 acres went to the Veterans Administration, which is developing the Abraham Lincoln National Cemetery. Jim Edgar, then Governor of Illinois, assembled a group of political and business people called the Joliet Arsenal Development Authority (JADA) to take possession of the remaining property and oversee its development.

The preserve and cemetery dispositions left approximately 1,850 acres for private development. JADA envisioned a major industrial park for this property. About 1,000 acres of the development land had been designated a Superfund site due to Chemical contamination stemming from the Army’s manufacture of TNT. The Environmental Protection Agency (EPA) designates Superfund sites in uncontrolled or abandoned places where hazardous waste disposal may affect local ecosystems or people. The EPA sets guidelines for and monitors the cleanup of these sites. Responsibility to clean up the Joliet site remained with the Army.

CenterPoint learned of the availability of this acreage in 1997 and set out to acquire it. The financial negotiations went smoothly. Perhaps because of the Superfund site, CenterPoint negotiated a price well below market value. Company executives declined to reveal the actual numbers.

Issues beyond price proved more difficult to manage, however. “We had to negotiate a memorandum of understanding with the Army involving the Superfund site,” says Michael Mullen, chief operating officer with CenterPoint. “This understanding included the methods they would use for remediation as well as a schedule.”

Mullen’s team also negotiated an indemnification agreement to protect the company if further remediation became necessary. In addition, if the Army fell behind schedule, provisions in the agreement permitted CenterPoint to undertake the cleanup work and receive reimbursement from the Army.

“The show-stopper in the negotiations involved our need for a significant easement through the National Preserve allowing us to run a 1.5 mile railroad spur to the west to connect the Burlington Northern to the site,” Mullen says. “Without this easement, we would not have done the project.”

In a separate transaction, CenterPoint purchased a 350-acre farm adjacent to the eastern boundary of the Arsenal, bringing the property total up to 2,200 acres. The farm provided access to the lead track of the Union Pacific Railroad and also to Illinois Route 53. The farm acreage extended the boundary of the property to the town of Ellwood, which enabled CenterPoint to negotiate an annexation agreement, qualifying the development for fire, police and other municipal services.

Further negotiations allocated responsibilities for infrastructure construction between CenterPoint and the Illinois Department of Commerce and Community Affairs (DCCA), the state’s economic development arm. “DCCA agreed to split the cost of much of the major infrastructure with us,” Mullen says. Those costs included miles of roads as well as new power and water utilities.

Preliminary Development

On Aug. 10, 2000, a bi-partisan council of Illinois public officials joined then Secretary of the Army Louis Caldera in transferring ownership of the 1,850 Joliet Arsenal acres to CenterPoint and work began. One of the nation’s largest private developments, the CenterPoint Intermodal Center will include up to 17-million square feet of distribution and manufacturing space in an industrial park and a major multi-modal rail-facility, which the Burlington Northern and Santa-Fe Railway Company will operate.

The first two months of development involved demolishing miles of barbed wire fences, thousands of electrical poles and dozens of water towers. CenterPoint coordinated this work with the Army Corps of Engineers, which required the company fill in 50 acres of wetlands. The company also worked with national and local historical preservation associations carrying out architectural digs across the site.

In early October 2000, the Army Corps of Engineers and the historical groups gave the green light. “We moved in with an army of earth-moving equipment,” Mullen says. “We had about 200 pieces of mining-caliber, earth-moving machinery with tires from eight to 12-feet high. The bulldozers were Caterpillar D-12s, which are about the size of a suburban house.”

Between October 2000 and October 2001, the heavy equipment moved more than 9 million cubic yards of material. The Hoover Dam construction project moved only 1.5 million cubic yards of material. When completed, the intermodal development will accommodate trains as long as 8,000 feet with 10,000-foot straightaway sections of track. Thanks to these lengthy spans, trains can enter the park traveling at 40 miles per hour and make high-speed turns.

Financing the Project

The total investment in the CenterPoint Intermodal Center may eventually top $1 billion. CenterPoint will invest approximately $650 million over the 12-year build-out schedule for the project. The company typically funds its projects with all proceeds from the sale of mature developments and a revolving credit line and plans to raise approximately $450 million in this way for the Joliet project. Another $125 million will come from a tax-increment financing plan provided by the municipality of Ellwood.

The state will contribute about $75 million for the construction of road, water and sewer facilities. The Burlington Northern will come to the project under a ground lease with CenterPoint and invest $140 million to construct the intermodal facility.

These investments combined total about $800 million. The balance will come from potential investors currently discussing opportunities with CenterPoint. For example, CenterPoint has applied for and received zoning approval for a power plant. Over the past year, company officials have met with many of the major power companies in the U.S. regarding such a project. Should a utility decide to build a plant, it will lease the ground from CenterPoint and finance construction on its own.

Market Responds Favorably

Situated only 40 miles from the crowded downtown Chicago market, the CenterPoint development has attracted an enthusiastic response from tenants.

The Burlington Northern will occupy 621 acres, about one-third of the site. Potential tenants are currently negotiating to take space that will encompass between 150 acres and 175 acres. Among these is Partners Warehouse, a distribution company, which has negotiated a 300,000 square-foot, build-to-suit deal with CenterPoint. Rent falls into the range of $3.10 to $3.50 per square foot, about average for industrial rents in the Chicago region.

To establish a market value for the property, CenterPoint has sold approximately 57 acres to DSC Logistics for $2.50 per square foot or about $10,000 per acre.

CenterPoint has also taken the initiative in establishing solid relationships with its neighbors. The company has donated 80 acres of its property for a National Forest, set aside 125 acres of wetlands to be protected, and given 15 acres to Ellwood for a municipal park.

Opportunities Looming

While the Joliet Arsenal redevelopment involved an enormous amount of work, compare it with the usual development opportunities in major markets today. CenterPoint began investigating the site in 1997 and made a deal three years later, in August 2000. Today, just 12 months after announcing the 12-year build-out plan, the company has made deals involving approximately 45 percent of its 2,200 acres.

Perhaps most importantly, there has been nothing but enthusiasm for the project from the local governments and communities that will be affected by it. The reasons: taxes and jobs. Closing a military base costs a community thousands of jobs. Redevelopment brings those jobs—and maybe more—back to the community. The CenterPoint development will create 8,000 to 12,000 permanent jobs and more than 20,000 union construction jobs. Upon completion of the 12-year build-out, the development will yield an estimated $27 million in property taxes.

Better yet, the store of decommissioned and as yet un-redeveloped military bases is about to be replenished. In August 2001, the Department of Defense submitted the Efficient Facilities Initiative of 2001, which would authorize the Secretary of Defense to recommend a new round of base closures to an independent commission by 2003. While specific numbers are unavailable in relation to this proposed legislation, the Department of Defense estimates a need to trim base capacity by 20 percent to 25 percent.

Do these and previous military base closures represent opportunities for publicly traded real estate companies? That depends, of course, on the company and its development interests. However, given the success CenterPoint has had, these decommissioned military base properties certainly give rise to opportunities for companies able to envision the possibilities.