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Reuse and Redevelopmentof Business Sites and Facilities

A presentation by Lee Smith, PresidentElesco Limited

To theNorthwest Economic Development Course

Central Washington UniversityEllensburg, Washington

August 20, 2014

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Issues Discussed in this Presentation

Site and/or building issues – what do you have to work with?

Market opportunities analysis – what are your alternatives?

Objectives – what do you want to accomplish?

Regulatory and planning issues – what is allowed?

Economic / financial issues – can you make it work?

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WHO AM I?Managed economic development agencies in Portland,

Colorado Springs, Tucson & Seattle.

Managed corporate real estate services for international industrial / commercial real estate company.

Formed CASI in 1986 to provide consulting services for corporate real estate asset management.

Formed Elesco in 1989 to add consulting services for public-sector economic development.

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Types of Properties that Have BeenReused/Redeveloped

Forest products mill sites Grain elevators and silos Canneries and wharf facilities Special purpose manufacturing facilities Obsolete warehouses Hospitals, schools, institutional facilities Odd stuff – missile silos and torpedo factories

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POPE & TALBOT LUMBER MILLOAKRIDGE, OREGON

Reuse and Redevelopment of a ±170-acre former sawmill site and buildings.

Reuse was planning and development of an industrial / business park with extensive public and recreational amenities.

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CARNATION MILK PLANTSUNNYSIDE, WA

Reuse and Redevelopment of a ±33,000 sq. ft. facility built in 1941 to manufacture canned milk products.

Maul Foster Alongi, Inc. conducted theenvironmental assessment and remediation plan.

Reuse focusing on single-user food processing plantor multi-tenant Mercado complex.

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LOOK AT THE WHOLE PROPERTY

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What we build todaymay be obsolete tomorrow

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SITE AND/OR BUILDING ISSUESThree Types of Obsolescence

Functional Obsolescence: Occurs when a property loses value due to its architectural design, building type, size, outdated amenities, local economic conditions, changing technology, manufacturing processes.

Economic Obsolescence: Occurs when a property loses value because of external factors such as shifts in markets, resources, transportation. Example is obsolete sawmills due to constraints on timber resources. Also high costs to meet regulatory or environmental upgrades.

Structural Obsolescence: Occurs when a property loses value due to physical deterioration or deferred maintenance that is too costly to repair.

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IF YOU BUILD IT, WILL THEY COME?

Stephen R. Covey – Begin with the End in Mind

You need more than goals-----

You need reasons----be able to answer the question

WHY?

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Community Reasons for Reuse/Redevelopment

Turn Non-Performing Properties into Economic or Community Assets

Convert a blighted area or facility into a community asset Generate new employment Add new land/facility supply if other resources are limited Develop a new revenue source Increase tax base Maybe provide product at lower cost Protect and preserve a historical or “heritage” site

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Developer Reasons for Reuse/Redevelopment

MAKE A PROFIT

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Or At Least Don’t Go Broke!

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Developer Issues

Environmental – Brownfields vs. Greenfields• Minimize liabilities – NFA Letter

Suitability for reuse or redevelopment• Structural, functional adaptability• Regulatory issues – is rezoning possible?

Ability to meet the needs of today’s market• Location, size, shape, market acceptance

Costs•Financial feasibility

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REASONS FOR DEVELOPING THE SITE

1. Location for development of Indian-owned businesses, Tribal or individual. Emphasis on government contracting and SBA 8a incentives

2. Location for joint ventures with local manufacturers

3. Location for recruiting non-Indian primary businesses

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Steps in the Reuse/ Redevelopment Process

Project Initiation – Deciding whether to take on the project

Preliminary Project Feasibility – Resolving the First ThreeIssues

Project Planning and Financing

Project Implementation

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Public/Private Partnership to Resolve Issues while Achieving Community Objectives

Public Sector Roles

Private Sector Roles

Non-Profit Sector Roles

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Project Initiation Private Sector Participation: ? DEVELOPMENT PROCESS---------------------------------------------------------------------------------------------------------------------------

Public/Quasi-Public Sector Participation-------------------------------------------------------------------------------------------------------- Funding of Studies Staff Support Background Studies

Real Estate Developer

Building/Property Owner

Public Agency

Non-Profit Quasi-Public G roups

Existing Building(s)/Property Owned, Option to Buy, Interest

Development Objectives

Assemble Development Team Preliminary Overview Evaluation

Option Property

Option Expire

Sell Property

Non-Economic Public Use

Who are the Players?

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Nez Perce Tribal Enterprises

Nez Perce Tribal Council

Nez Perce Governmental Agencies (Several)

Clearwater Economic Development Association

Northwest Intermountain Manufacturers Association

Great Northwest Railroad (GNWR)

State of Idaho – Various agencies

Port of Lewiston

What is Status of Site?

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68-Acres Owned by Nez Perce Tribe in Fee

Acquired from Potlatch Corporation

Currently vacant; some agricultural uses

Former sawmill operations

Packaging, warehousing, distribution

Adjacent to US Highway 95

Adjacent to GNWR Railroad – still operating

Adjacent to Clearwater River

Preliminary Evaluation

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Preliminary Decision

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GO WITH FURTHER SITE EVALUATION AND MARKET FEASIBILITY STUDY

COMPETING CONCEPTS LONGHOUSE GOLF COURSE

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ProjectFeasibility

Real Estate Developer Financial Institutions

Private Sources/Owners

Funding of Studies Staff Support Fund Raising

Liaison with Public Groups

MARKET AND ECONOMIC EVALUATION

SITE AND LOCATION EVALUATION

STRUCTURAL AND PHYSICAL EVALUATION

ARCHITECTURAL AND HISTORICAL EVALUATION

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Market IssuesTEMPLATE FOR MARKET ASSESSMENT OF INDUSTRIAL SITES

TARGET MARKETING STRATEGIES / ECONOMIC FEASIBILITY ANALYSIS

Step 1: Select the primary regional market

•Geographic location – Map showing location within regional context

•Transportation connections to market centers (highway, rail, air, barge, ocean shipping)

•Special features, e.g., seaport facilities, that offer connections to larger markets

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Market Area

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Market Area – Overlay NIMA

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Market IssuesStep 2: Describe and assess the primary regional market

•Population & demographic patterns, trends and forecasts

oGeographic patterns of population growth and densities

oEmployment, incomes, disposable incomes (compare to state)

•Economic patterns, trends and forecasts

oo Industrial mix defined by NAICS sectors

oo Sizes of industries

oo Employment and establishment growth trends

oo Geographic locations of industries within the primary market

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Market IssuesStep 3: Industry cluster analysis

•Group employment patterns by industry clusters

•Identify gaps / linkage opportunities

•Rank industries and clusters by location quotients (RCI), shift/share,

other techniques

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Market IssuesStep 4: Supply analysis – Assess competing industrial sites in the primary

market

•Established industrial sites / parks – services, sizes, occupants, available land, prices

•Current development of industrial sites / parks – types of planned uses, services, sizes, prices

•Planned development of industrial sites / parks – types of planned uses, services, sizes, prices

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Market IssuesStep 5: Demand analysis – Quantify future demand

•New businesses siting in the region

•Absorption rates

•Employment forecasts by sector – emphasis on industrial employment if appropriate

•Translate employment growth forecasts into building space and land requirements

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Market IssuesStep 6: Market share analysis

•Describe competitive position of target site within the regional market

Community business support capabilities

Site business support capabilities (infrastructure, access, services, etc.

•Describe competitive enhancement opportunities

Describe potential types of customers for the siteQuantity potential absorption rates

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Market IssuesStep 7: Target industry analysis and marketing selection

•Project trends of future employment / establishment growth by industry and / or clusters

•Identify linkage-based potential demand from existing industries

•Rank target industries / clusters based on market share and competitive position

•Add industries/clusters that are suitable for recruitment from outside markets

•Profile target industries and their site location requirements

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Site Issues Transportation and Access Highway Access Rail Access River Access Internal Connectivity

Utilities Potable Water Wastewater Stormwater Management Fire Suppression Telephone and Internet Site Power Natural Gas

Environmental Studies Regulatory Requirements and Constraints Implications for Future Development

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Project Planning & Financial Analysis Real Estate Developer Commercial Banks R.E.I.T.s Financial Institutions Mutual Savings Banks Pension Trust Private Industry Insurance Companies Business Organizations Syndications

Site Improvements Long-Term Public Leases State Created Bonding Agencies Grants and Loans Public Infrastructure Improvements Federal Program Funds Tax Abatements/Incentives Community Devel. Block Grants Revolving Funds

DEVELOPER KIT AND SOLICITATION (AS REQUIRED)

SCHEMATIC DESIGN FEASIBILITY ANALYSIS AND DEVELOPMENT PLAN

SECURE PUBLIC DEVELOPMENT APPROVALS

OPTION EXPIRE

SELL PROPERTY

NON-ECONOMIC PUBLIC USE

LENDERS PRESENTATION PACKAGE

SECURE FINANCING SECURE PROPERTY

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Partnership Options

Developer buys property and takes all risks

Private equity and private debt

Public regulatory support

Public agency acquires property, provides all financing, pays developer a fee for services

Fee paid regardless of outcome as long as developer performs

Shared risks

Public agency acquires property, gives developer option

Shared financial contributions, shared returns

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Hypothetical Development Costs for Recyclinga Warehouse to Flex/Office Uses

Acquisition Costs (60,000 sq. ft. x $10/psf) $ 600,000

Renovation/Construction CostsBuilding (60,000 sq. ft. x $10 psf) $ 600,000Site Improvements / Brownfield Mitigation 700,000

$1,300,000Indirect Costs

Architectural & Engineering Fees $ 117,000Legal, Accounting, Market Consultation 26,000Interim Financing for Acquisition & Construction 125,000

$ 268,000Contingency (4% of Project Costs) $ 86,720

Total Development Costs (rounded) $2,254,720

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Strategy #1

BUY DOWN THE COSTS

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Effects of Cost Buy-DownAcquisition Costs (60,000 sq. ft. x $10/psf = $600,000)

Costs after $300,000 CDBG Grant $ 300,000

Renovation/Construction CostsBuilding (60,000 sq. ft. x $20 psf) $ 600,000Site Improvements 700,000

$1,300,000Indirect Costs

Architectural & Engineering Fees $ 117,000Legal, Accounting, Market Consultation 26,000Interim Financing for Acquisition & Construction 125,000

$ 268,000Contingency (4% of Project Costs) $ 74,720

Total Development Costs $1,942,720

Equity requirement reduced from $466,000 to $210,220

Potential ROI increases to 33.3%

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STRATEGY #2

LOWER THE INTEREST RATES

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Effects of Lower Interest RatesStill at $10.00 per square foot rents

Gross Annual Revenues $ 495,000Net Income Before Debt Service $ 192,000Economic Value (CAP Rate = 10) $1,920,000Mortgage Loan Obtainable $1,440,000Annual Debt Service

6.5%, 30 Years $ 111,000Cash Flow Before Income Taxes $ 81,000Maximum Equity @ 15% ROI $ 540,000

Maximum Project Cost (Mortgage + Equity) $1,980,000

Essentially break-even on costs of $1,942,720

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STRATEGY #3

APPLY TAX INCENTIVES

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Effects of Tax Incentives/Abatements$10.00 psf rents; $25,000 annual tax abatement

Gross Annual Revenues $ 495,000Expenses minus $25,000 $ 278,000Net Income Before Debt Service $ 217,000

Economic Value at 10 CAP Rate $2,170,000Mortgage Obtainable (75%) $1,628,000Debt Service (8.5%, 30 Years) $ -151,000Cash Flow Before Taxes $ 66,000

Maximum Equity @ 15% $ 440,000Maximum Project Cost $2,068,000

Project “pencils” with surplus of $125,280

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Project Implementation

P u b lic In fra s tru c tu re Im p ro v e m e n ts Im p le m e n ta tio n

P R O J E C T M A N A G E M E N T A N D IM P L E M E N T A T IO N

P H Y S IC A L B U IL D IN G / S IT E R E H A B IL IT A T IO N

P R O J E C T M A R K E T IN G

P R O J E C T C O M P L E T IO N

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Flow Chart for Site Redevelopment

NEZ PERCE MANUFACTURING CENTER

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