Diamond in the Rough
- Oct 09, 2013
What do you do if you’re a developer and want to get your hands on a profitable piece of real estate in a desirable but federally owned location?
One answer: Buy or lease it from the U.S. military through an enhanced use lease.
An EUL is a partnership between a specific military branch (the Army, Navy or Air Force) and a public entity or private developer to create a mutually beneficial commercial project
on federally owned real estate.
As the federal government grapples with fiscal challenges galore, including a budget deficit that is projected to hit $744 billion by fiscal year 2014, it is more than happy to renounce some of its underutilized land. And with development picking up as the economy recovers and companies begin to increase their hiring, there is demand for desirable properties. The result: The military branches are putting their unused real estate up for bid in turn for a profit.
The U.S. Department of the Air Force recently put 38 acres of its land on Nellis Air Force Base, adjacent to the city of Las Vegas, out for bid. It held an Industry Day for private entities on Aug. 20, giving them a chance to state their case and potential site plans that keep it compatible with the surrounding area.
“We don’t want tattoo parlors; probably pole dancing is not one of our better things; I don’t think you’ll be able to gamble in this section,” said Brian Brown, chief of the strategic asset utilization division for the Air Force Civil Engineer Center, who is in charge of EULs. “Otherwise, we’re open to anything that doesn’t interfere with our mission.”
Although Nellis is described as a “very active,” base, the parcel of land in question has been unused since a housing building was razed in 2011 as part of an environmental clean-up. Finally this year, the military branch is ready to lease the land to an appropriate developer at fair market value or for an in-kind consideration.
“The Air Force is strapped for money, we’re strapped for facilities, we’re strapped for infrastructure and we’re looking to the business world for third-party financing to see if we can bring resurgence to some of the installations and the community,” Brown added.
In return, developers get to grab well-located land, usually in an urban location, adjacent to population centers. “The current climate would encourage developers to look for urban infill projects, and since the government owns a lot of land in cities around the country that are more urban than suburban, those present opportunities to make land more valuable (to developers),” said Ramsey Meiser, the senior vice president of development at Forest City Enterprises Inc. who is in charge of The Yards, an urban mixed-use waterfront neighborhood project in Washington, D.C., that used to be part of the 200-year-old Washington Navy Yard. Today, 14,000 daily workers remain at the downsized military installation adjacent to the site, although its functions are now administrative and ceremonial.
Forest City signed a development agreement with the General Services Administration in 2005 after being awarded the excess land and buildings on the site. The real estate company has been buying the property on a parcel-by-parcel basis, with four purchased thus far. The multi-phase build-out is expected to take 15 to 20 years and ultimately involve 20 to 30 buildings, according to the company’s master plan. So far, it has built Foundry Lofts Apartments, which features 170 units with 10,000 square feet of retail at street level.
“In our case, we considered this a great piece of real estate, adjacent to Capitol Hill. It’s riverfront in D.C., one of our core markets,” said Meiser. “The company likes to pursue urban, mixed-use redevelopment opportunities, and this had a lot of great attributes for us, worked within what we were looking for at the time.”
The local government also benefits from such arrangements, since federally owned buildings are usually exempt from taxes but go on the local tax roll once they change hands.
The benefits, though, do not come easily to interested developers. Negotiating and dealing with the federal government can be difficult. For instance, it is not always easy trying to find out what agency to go through, whom to speak with or how to go about an inspection of a property in which a developer is interested.
The process can also be time consuming, since the land can be contaminated, requiring environmental remediation. The Washington Navy Yard, for instance, was named a Superfund site in 1998.
“If it was a military base, there could be hazardous waste on the site, and that can be an issue,” said Maureen McAvey, a resident fellow at the Urban Land Institute.
But developers willing to make the effort can find it well worthwhile. “This is an opportunity for them to take time and secure locations on military installations that wouldn’t otherwise have been available for development or investment,” said Bryan Thomas, vice president of the public institutions practice at Jones Lang LaSalle Inc., who is marketing the 38-acre land site at Nellis Air Force Base.
Read this article in its original format in the October 2013 issue of CPE.