7

Economic Deuelo~ment

Conveyances

What is an Economic Development Conveyance (EDC)?

Who is eligible to apply for an EDC?

What must an EDC application contain?

What criteria are used in evaluating an EDC application ?

How are the terms and conditions for payment determined?

What justification is necessary to receive a discounted EDC?

What financing options are available for an EDC?

Are there exampies of successful uses of an EDC?

Section 7.1

Section 7.1

Section 7.2

Section 7.3

Section 7.4

Section 7.4

Section 7.4

Section 7.5

7.1 INTRODUCTIO N

7.1.1 A new authority: an additional tool for communities

Following the July 1993 announcement of the President’s program to revitalize

base closure communities, Congress created a new property conveyance

authority, desiomed specifically to ease the economic hardship caused by base

closures. Section 2903 of Title XXIX gives the Department of Defense the

authority to transfer property to Local Redevelopment Authorities, for

consideration at or below estimated fair market value, to spur economic

redevelopment and job creation. This tool is referred to as the “Economic

Development Conveyance.”

7.1.2 Philosophy behind an EDC—Keys to success

Property at a closing military installation can be a valuable resource to a

con-urnmity’s future economic development. While some bases in their current

condition represent a valuable and marketable asset today, many bases will

require substantial infrastructure investment to be reused in the private real

estate market. With appropriate investment of time and money, they can become

a valuable asset. The EDC was created to facilitate property transfer for

community economic recovery while obtaining fair-and reasonable compensation

for the Federal Government.

December 1997 7-1
Economic Development Conveyances

What k an EDC? II

When should an

EDC be used?

●

●

●

●

●

●

●

●

Job creation and rapid property transfers are the main goals.

Work with the community to reach these common goals.

Remember that quicker property transfers will benefit the Government through

savings of protection and maintenance expenses. Waiting for the highest

theoretical price for property may result in lower present value, or nothing at all.

Focus on reaching agreement on realistic market trends. Due to the wide range of

conditions existing in affected communities, appropriate market trends could

result in estimates of fair market value ranging from zero to hundreds of millions

of dollars.

Encourage the community to take as much property as can be justified as part of an

EDC. The EDC parcel should include a variety of properties, some of which may

not be of immediate value without improvement, and some of which must be used

to leverage financing for needed improvements.

Look at community investment and risk. The more the community is investing in

the overall development, the more they are contributing to the overall value. The

less the community is investing, the higher the risk for the Federal Government

and the more the Government is contributing to the overall value.

Look at the financial resources of the EDC applicant. Be wary of undercapitalized

entities, because without proper capital, the development may not be able to

support the necessary investments to create and maintain job generation.

Remember that the EDC is a new tool, specifically designed to allow for flexibility.

There is no single way to structure an EDC or a cookie&tter answer that applies

in all cases. Keep in mind you are not bound by typical GSA rules for valuation or

payment terms and conditions. This new authority should be used in creative and

innovative ways!

?.1.3 Definition of an EDC

An EDC was created as a new method for transferring real property to an LRA to

help spur local economic development and job creation. An EDC may be with or

without initial payment at time of transfer and may be at or below the estimated

fair market value of the property. Terms and conditions of payment to the

Department of Defense are fully negotiable. These negotiations should be fair

and reasonable to both parties and strike a balance between compensation to the

Federal taxpayer and the need for the EDC to spur redevelopment and job

creation.

7.1.4 Appropriate uses of an EDC

The EDC should be used when an LRA wants to obtain property for jobgenerating purposes, and the uses proposed by the T&4’s redevelopment plan

cannot be accomplished under the other Federal property transfer authorities.

While the primary use of the EDC must be for long-term job creation and

7-2 December 1997
DoD Base Reuse Implementation Manual

economic redevelopment, the inclusion of other properties that facilitate this goal

(e.g., housing for factory workers) may be acceptable.

Other such Federal property transfer authorities include the Federal Property

and Administrative Services Act (FI?ASA) of 1949 (40 U.S.C. ~ 471 et seq.) and

public airport conveyance authorities (49 U.S.C. ~~ 47151-47153) that allow for

transfers of property to units of government or non-profit institutions that

maintain the use of property for various public purposes including, but not

limited to, parks, public health, education, aviation, historic monuments, and

prisons. DoD will not supplant these existing public benefit transfer authorities

with EDCS and will work to ensure transfers of property under public benefit

transfers are in accordance with the sponsoring Federal Agency regulations. The

FI?ASA also allows for negotiated sales at fair market value to eligible public

entities for public purposes or direct sales through a public bid process. (See

Federal Property Management Regulations and sponsoring Agency regulations

in Appendix E.)

Utility distribution systems and transportation networks form an integral part of

infrastructure, which will often serve new development in the creation of jobs.

Where other disposal authorities are not appropriate, these systems may be

considered for inclusion in an EDC application.

7.1.5 Eligible EDC recipients II Who is eligib/e to

An LRA officially recognized by the Secretary of Defense through OEA is the apply for an EDC?

only entity eligible to receive property under an EDC. The LFL4 maybe a State or

local government or an authority or instrumentality established by a State or

local government that is responsible for directing implementation of the

redevelopment plan. It should have broad-based membership, including, but not

limited to, representatives from those jurisdictions with zoning authority over the

property. Consequently, applications submitted by entities other than LRAs will

not be considered.

7.2 A PPLICATION P ROCEDURE S

An application must be prepared by the LRA as its formal request for property

and to assist the Military Department in satisfying its statutory obligations under

Title XXIX. Although it is the LRA’s responsibility to prepare a complete

application to justify both the use of the EDC as the transfer method and the

specific terms they offer, the Military Department should assist them with

developing the application. A great deal of the information necessary for an

application is readily available to the LRA through the community planning

process and supported through existing DoD technical and financial resources.

To the extent information that would assist in redevelopment planning is

available from existing studies, it should be made available. In general, the

process should be a cooperative effort in furtherance of the goal of the Military

Department to rapidly transfer property and the desire of the LRA to receive the

property for long-term job creation.

Beyond the standard planning information, LRAs should incorporate a

business/operational plan into their overall base reuse planning. This effort will

assist LWS in identifying necessary implementation resources and establishing a

community-based proposal for the Military Department’s consideration. This

December 1997 7-3
Economic Development Conveyances

business/operational plan will form the basis for community negotiations on the

purchase price for the property, Accordingly, the Military Departments should

share market trends underpinning their appraisal as soon as they are available

and the LRA should strive to include this data in its analysis.

Before an application is prepared, the LRA should meet with the Military

Department, the BTC, and the OEA Project Manager in a pre-application

workshop to discuss: property acquisition alternatives; the requirements of an

EDC application; the timetable for Military Department actions; and the LRA’s

timetable and needs to ensure that an adequate planning effort is undertaken.

When should an II 7.2.1 Timing of the EDC application

application be Before an EDC application can be submitted, the LRA must adopt a

made? redevelopment plan (see Section 3.4.2, Contents of the redevelopment plan) that

will be included in its submission to HUD as well as provided to the Military

Department for consideration in its review under NEPA. The Military

Department responsible for the property shall then establish a reasonable

timeframe for submission of an EDC application. The timeframe should not

extend past one year from the submission of the redevelopment plan or the

closure date for the installation, whichever is earlier. These timeframes should be

communicated to the LR4 in writing. If an application is not made within the

timeframe established by the Military Department or the LlV4 no longer desires

to apply for an EDC, disposal may proceed under alternative methods including

a negotiated or public sale of the property. The LRA always has the option of

acquiring property under the FPASA, and thus it may not be necessary to

complete an application for an EDC within the stated timetables.

How much property 7.2.2 Amount of property included in an EDC

should be included The EDC should be used by LRAs to obtain large parcels of the base rather than

in an EDC individual buildings. The income received from some of the higher-value

application ? property should be used to offset the maintenance and marketing costs of the less

desirable parcels. While the LRA is not permitted to select orLIy high-value

facilities for the EDC parcel, they will not be required to take more property than

could be supported by the long-term redevelopment efforts. Generally, there

should be only one EDC application per installation, so the size of the EDC parcel

should be carefully selected. At the L&4’s discretion, personal property maybe

requested as soon as it is available for disposal through a separate EDC

application.

7.2.3 Contents of the application

The application should explain why an EDC is necessary for economic

What must an EDC II redevelopment and job creation. The application does not need to be overly

application contain ? complex, nor does it require a great deal of new information. In most cases the

information should have been gathered as part of the overall planning process.

Since this process was designed as a flexible tool to meet individual ~acts and

circumstances, there is tzo requirement fhat all applications look the same. The

Military Departments and the community should work together to aqee on the

types of information needed to properly evaluate an application.

7-4 December 1997
DoD Base Reuse Implementation Manual

The application should contain the following elements:

. A copy of the adopted redevelopment plan.

● A project narrative including the following:

— A general description of property requested.

— A description of the intended uses.

— A description of the economic impact of closure on the local communities.

— A description of the financial condition of the community and the

prospects for redevelopment of the property.

— A statement of how the EDC is consistent with the overall Redevelopment

Plan.

. A job generation schedule, including a description of how the EDC will

contribute to short- and long-term job creation and economic redevelopment

of the base and community. The projected number and type of new jobs it

will assist in creating should be estimated.

● A business/operational plan for the EDC parcel. This plan presents a

blueprint for LRA implementation of the redevelopment plan, including the

financing, management, and municipal service requirements for reuse. The

oved analysis will depict how the recognized obligations will be met along

with the following:

— A development timetable, phasing schedule, and cash-flow analysis.

— A market and financial feasibility analysis describing the economic

viability of the project, including an estimate of net proceeds over the

projected development period, the proposed consideration and payment

schedule to the Department of Defense, and the estimated fair market

value of the property.

+ A market analysis should explore the current availability and

absorption of the type of property proposed in the EDC parcel and a

projection of future demand for similar property. To ensure some

connectivity between the business plan and the Military Department’s

appraisal efforts, the LRA’s business planning activity should be

scheduled so that it may incorporate market trend data from the

appraisal.

+ See Table 7-1 for a potential format for a project pro-forma as a way of

addressing this requirement. In this instance, the pro-forma reflects a

predominately commercial development. Remember that each

application is likely to be different and may not need to go into the .

same detail as the model provided.

December 1997 7-5
Economic Develo~ment Conveyances

— A cost estimate and justification for infrastructure and other investments

needed for the development of the EDC parcel. For example:

+ The estimated costs for improvements and a description of the need for

that level of investment should be offered. This could include a

description of the alternatives explored and the cost/benefit analysis of

that type of investment. For example, if the LlU4 plans on creating a

new park as a centerpiece for an office complex, contrast the costs and

benefits of creating a $1 million park versus a $10 million park.

+ A description of the income that maybe generated from that

investment. For example, if $10 million was needed to expand the

water and sewer system, estimate the income received from the new

customers at the base that could pay for a portion of the new

REVENUES

+ Gross Rent

+ Other Income

+ Tenant Contribution

= Gross Income or Gross Rent

- Vacancy Contingency

_% Vat. Rate x Gross Income

= Effective Gross Rent

(or Gross Collections)

Operating Expenses

Insurance ($~.s.f.)

Maintenance & Structural Repaira

($_p.s. f.)

Management Fees

Property Taxes ($~.s.f.)

Misc. Operating Expenses

Reserves

- Total Operating Expenses

= Net Operating Income

- Debt Service (Annual Principal &

Interest)

- Debt Service

= Cash Flow Available for Distribution

CASH-ON-CASH ROI

gash Flow Available for Distribution

Original Equity Investment

Symbols

+ G. RENT

+ O. INCOME

+ T. CONTB.

= G. INCOME

- VAC

= EGR

- OPR. EXP.

= NOI

- DIS

- Dls

= CF

E

EQ

RI YR2 YR3 YR4 YR5 YR. WI. YR. YR. YRII

—

—

—

—

—

—

—

70

.

—

—

—

—

%

.

—

—

—

—

—

‘x

.

Table 7-1. Pro-Forma Developer Spreadsheet for Cash F/ow Analysis

7-6 December 1997
DoD Base Reuse Implementation Manual

— Local investment and proposed financing strategies for the development.

4 This is probably the most important part of the application because it

provides the basis for the M&ary D~partment’s ~~termination as to the

project’s feasibility. The LRA should describe how it will finance the

project; e.g., through taxes, bond financing or partnership with private

sector interests. This may include a statement from bond counsel or

potential financial investors of their interest in assisting the overall

development. In instances where the business plan analysis results in

marginal values, detailed information on the source of any public or

third party funds should be provided.

● Ft. Devens, hfass.+n January of 1994, the State of Massachusetts passed

landmark legislation creating the Devens Enterprise Commission to guide the

redevelopment of the former Ft. Devens. With this legislation, the State provided

$200 million in bonding capacity for the Massachusetts Government Land Bank to

use to fund the redevelopment efforts.

● NAS G/en view, ///.-Even before the base was closed, the Village of Glenview

obtained the authority to issue $60 million in bonds for the specific purpose of

makmg infrastructure improvements to NAS Glenview. The repayment of the

bonds will be derived from the increase in property taxes the Village will receive

once the base is transferred and placed on the tax rolls.

● A statement describing why other Federal property transfer authorities-such

as public or negotiated sales and public benefit transfers--cannot be used to

accomplish the economic development and job creation goals.

● A statement including the amount and form of the proposed discounted

consideration, a payment schedule, the general terms and conditions for the

conveyance, and the projected date of conveyance. If a transfer is requested

for less than the community’s estimated value, an analysis justifying the

discount shall be provided.

. A statement of the M’s legal authority to acquire and dispose of the

property.

Additional information may be requested by the Military Departments to allow

for a better evaluation of the application.

7.2.4 Valuation

A key to a successful EDC is a proper and realistic valuation of the property. This

must be done in a cooperative fashion, with both the LRA and the Military

Department using realistic market trends that are right for the local marketplace.

Title XXIX requires that the Secretary of the Military Departments determine the

estimated fair market value of the property before conveying property through

December 1997 7-7
Economic Development Conveyances

.

an EDC. The estimated fair market value should be expressed as a range of

values based on the intended land uses outlined in the redevelopment plan.

The Military Department should begin its appraisal as soon as possible following

submission of the final redevelopment plan, ensuring the effort is underway

within six months from the final plan submission. A copy of the appraisal

instructions or scope of work shall be provided to the LRA at the earliest possible

time. Once the appraisal is underway, market trends shall be provided

iteratively to ensure the community’s analysis benefits from the effort. To ensure

some connectivity between the business plan and appraisal efforts, OEA shall

inform the Military Department when it has approved community planning

assistance for a business plan. Similarly, LR4 business pla.nning activity should

be scheduled so that it may incorporate market trend data from the appraisal in

its analysis.

● Market trends — Market trends provide a linkage between the community’s

business plan and Military Department’s appraisal. As such, both efforts

should strive for the inclusion of similar data in their respective analyses.

When designing specific market trends, the following factors should be

considered:

— Escalation and market absorption rates for the different types of land use

in the local redevelopment plan

— Base rental/sale income at the base year for types and classes of property

and a rate of inflation

— Cost of infrastructure improvements needed to meet State and local codes

and meet market demands to arrive at the target rent/sale price

— Maintenance costs before sale/lease

— Applicable discount and capitalization rates

— Developer’s profits

● In most cases, because of the lack of comparable sales for properties the size

and complexity of EDC transactions and the physical obsolescence of many

military buildings, a standard real estate appraisal using the comparable or

cost approach to value should not be used. The income approach to valuation

will probably be the preferred approach. The elements of the income

approach, projecting net operating income based on market trends and

selecting a capitalization rate, can be used as part of the process in

determining value for an EDC, and will nomally be a central element in the

business/operational plan. Fair market value should be estimated in terms of

its present value, not its value after development. Therefore, the valuation

process should identify current and projected market rents for the uses

defined in the Redevelopment Plan or create rental income trends to be used

in determiningg the estimated fair market value. The capitalization rate chosen

should also be a function of rates of return in the present-day marketplace

7-8 December 1997
DoD Base Reuse Implementation Manual

adjusted for risk. The estimation of fair market value then becomes a function

of the economic value, derived from the projected net operating income and

the capitalization rate using present-day market and absorption trends. The

estimated fair market value then is the economic value minus the cost to cure

the physical and infrastructure obsolescence of the base to make the space and

land usable in present-day market conditions.

GROSS ANNUAL REVENUE

Gross Building Area 600,000 sq. ft.

Net Leasable Area 600,000 sq. ft. X 8570= 510,000 sq. ft.

Annual Rent/Sq. Ft. $7.00

Annual Income at 100?!0 Occupancy $3,570,000

Vacancy Factor (10%) -357,000

Gross Annual Revenue $3,213,000

Total Operating Expenses –1,120,000

Net Operating Income $2,093,000

ECONOMIC VALUE

Capitalization Rate 15%

Net Operating Income $2,093,000

Economic Value $13,953,333

CAPITAL INVESTMENTS (cost of cure)

Building Renovation (C? $9.00/sq. ft.) $5,400,000

Demolition 600,000

Infrastructure Repair/Replacement 6,200,000

Total Cap”tal Investment $12,200,000

ESTIMATED FAIR MARKET VALUE

Economic Value $13,953,333

Total Capital Investment -12,200,000

Estimated Fair Market Value !$1,753,333

7.3 APPLICATION REVIEW AND APPROVAL

7.3.1 Authority to approve an application II Who will approve or

After receipt of an application for an EDC, the Secretary of the Military deny an EDC

Department will determine whether an EDC is consistent with the criteria stated application ?

in the regulation and is appropriate to spur economic redevelopment and job

creation. The terms and conditions proposed will be examined to determine if

the offer is fair and reasonable. The Military Department may also consider

information independent of the application, such as views of other Federal

Agencies, appraisals, caretaker costs, and other relevant information.

Upon receipt of an application, the Secretary should establish an estimated time

period within which the application will be reviewed and inform the L.RA of the

time period.

December 1997 7-9
Economic Development Conveyances

7.3.2 Criteria used to evaluate an application

What criteria are

II

The following criteria and factors will be used, as appropriate, to evaluate the

used in evaluating proposed terms and conditions of the EDC, including price, time of payment, and

an EDC application? other relevant methods of compensation to the Federal Government. These\actms

are not a checklist and tkr~ore there is no requirmt that all elements be met. Instead,

these factors are meant to serve as guidance for decision makers.

. Adverse economic impact of closure on the region and potential for recovery

after an EDC.

— The greater the impact of closure, the greater the need for assistance.

. Extent of short- and long-term job generation,

— An EDC might create 1,000 construction jobs (short-term) and 3,000

permanent jobs in the community. An EDC that only produces short-term

job creation is not acceptable.

● Consistency with the overall redevelopment plan.

● Financial feasibility of the development, including market analysis and the

need and extent of proposed infrastructure improvements.

. Extent of State and local investment and level of risk incurred, as well as the

ability of the LRA to implement the plan.

— The more the community is investing in the overall development, the more

they are contributing to the overall value. The increased risk by the

community should be viewed favorably.

— Approved zoning demonstrates an important step toward successful

implementation of the plan and should be viewed favorably.

● Economic benefit to the Federal Government, including protection and

maintenance cost savings and anticipated consideration from the transaction.

— Saving of protection and maintenance expenses can be more valuable to

the Military Department than a (hypothetical) high sales price.

. Incorporation of other Federal Agency interests and concerns, and

applicability of and conflicts with other Federal surplus property disposal

authorities.

● Relationship to the Military Depatient disposal plan for the installation.

— If the LRA is not requesting the entire base through an EDC and/or public

benefit transfers, the Military Department should explore its ability to

dispose of the remaining parcels.

● Compliance with applicable Federal, State, and local laws and regulations.

7-10 December 1997
7.3.3 Approach for application review

● The LR4’s application will be the starting point for review of the proposed

EDC. However, the Military Departments and the LFL4 are encouraged to

work together before an application is submitted in order to ensure a quick

review and approval process. This review and approval process should be

fairly simple if both parties are open throughout the negotiations.

● The Military Department may request additional information from the LRA

and may use additional information. Any additional information used in

evaluating the application will be shared with the LRA unless doing so would

compromise national security.

● The Military Department should review information contained in the

application and ask the LRA for appropriate verification if needed for proper

evaluation.

. The Military Department will evaluate the proposed terms and conditions of

the EDC, including price, time of payment, and type of financing. If the

proposal is not deemed to be acceptable, the Military Department shouId

propose options for the LRA to consider.

In the event that an application is not approved and negotiations on an

acceptable application are not concluded, the Secretary of the Military

Department shall state the reasons for disapproval in writing.

An approved EDC application will be included in leasing documentation in the

event that the LR4 will obtain a lease in furtherance of conveyance (see

Chapter 5, Leasing for Reuse).

7.4 C ONSIDERATIO N

7.4.1 Guidelines for determining terms and conditions

In negotiating the terms and conditions of consideration with the LRA, the

Secretary of the Military Department must determine that a fair and reasonable

compensation to the Federal Government will be realized from the EDC. The

individual circumstances of each community and each base mean that the

amount and type of consideration may vary from base to base. The regulations

implementing EDCS give great flexibility to the Military Department to negotiate

with the LRA and arrive at an appropriate arrangement. A base’s value maybe

high or low, depending on its particular circumstances. The range of the

estimated present fair market value may be broad or narrow. The Department of

Defense is required by Title XXIX of the National Defense Authorization Act for

FY 1994 to obtain consideration within the estimated range of present fair market

value or to justify why such consideration was not realized.

As stated above, the EDC application must propose general terms and conditions

of the conveyance, as well as the amount and type of the consideration, a

payment schedule, and projected date of conveyance. After reviewing the

application, the Military Department has authority to enter into one of two types

of agreements:

What will be the

Service’s approach

in reviewing the

application ?

How are the terms

and conditions for

payment

considered?

December 1997 7-11
Economic Development Conveyances

What justification is

necessary to receive

a discounted EDC? II

● Consideration within the estimated range of present fair market value, as

determined by the Secretary of the Military Department. The Military

Department can be flexible about the terms and conditions of payment, and

can provide financing on the property. The payment can be in cash or in

kind, and can be paid at time of transferor at a time in the future. The

Military Departments have the flexibility to enter into agreements that specify

the form, amount and timing of consideration and ensure that consideration is

within the estimated range of fair market value at the time of application.

Such methods of payment could include partiapation in the gross or net

cash flow, deferred or triggered payments, mortgages, or other financing

arrangements. For examples of financing options, see” Section 7.4.3.

● Consideration below the estimated range of fair market value, where

proper justification is provided. If the Secretary of the Military Department

finds a discount necessary to foster local economic redevelopment and job

creation, the amount of consideration can be below the estimated range of fair

market value. Again, the terms and conditions of payment maybe flexible to

accommodate reasonable redevelopment requirements and will be negotiated

between the Military Department and the LR4.

The terms and conditions should recognize the time value of money, and should

offer incentives for early payment. If the consideration calls for payment at some

time in the future and accrual and payment of interest is not included in the

terms, it will be considered a discounted conveyance and proper justification

must be given.

7.4.2 Justification for discount

●

●

●

Where property is transferred under an EDC at an amount less than the

estimated range of fair market value, the Military Department shall prepare a

written explanation of why the consideration was less than the estimated

range of present fair market value.

The LRA is given an opportunity to make its case for a discount in its

application. The most important consideration for a discount from estimated

fair market value is job creation: an LRA must demonstrate that the discount

is needed to spur job creation. The LRA must show that it will immediately

put the property to productive use and, as a result, cannot afford to pay the

same price as a speculator would who would hold the property until the

market demand increased.

Proper justification shall be based upon the findings in the business/

operational plan contained in the EDC application. Development economics,

including absorption schedules and legitimate infrastructure costs, would

provide a basis for such a discount by demonstrating that without such

discount, the development would not OCCUI at htime. An inability to pay

at time of conveyance or to obtain financing would not be a proper

justification since payment can be deferred and terms and conditions can

be negotiated.

7-12 December 1997
DoD Base Reuse Implementation Manual

7.4.3 Rural bases

Any EDC approved by the Secretary of the Military Department for a base that is

not within a Metropolitan Statistical Area (MSA, as defined by the Office of

Management and Budget) shall be conveyed at no cost if the Secretary concerned

determines that the base closure will have a substantial udverse impact on the

economy of the cormrumities in the vicinity of the installation@ on tie prospect

for economic recovery. An LRA may be able to reduce the information

requirements for its rural application following consultation with the Military

Department. At a minimum, such an application must still include a job

generation schedule and a limited business/operational plan. In bases located

outside an MSA:

● A closure will be determined to have a substantial aduerse impact on the

economy of the communities in the vicinity of the installation if OEA has

made a determination under 10 U.S.C. 2391 that the closure is likely to have a

direct and significant adverse consequence on the community. The OEA

Project Manager can provide information about whether such a determination

has been made. Absent an OEA determination, a community will not be

eligible for a rural, no-cost EDC.

● The Military Department should work closely with the LFL4 to learn of the

local conditions affecting reuse and identify local economic indicators that

would substantiate a finding that the base closure will have a “substantial

adverse impact on the prospect of economic recovery.” The LRA will provide

such information in its application to assist the Military Department with its

determination.

7.4.4 Financing

The Military Department may negotiate any appropriate mechanism with the

LR4 that provides fair and reasonable compensation to the Federal Government.

The Secretary of the Military Department will review the compensation

arrangement to ensure that there is a reasonable prospect of payment.

CASH PAYMENT AT TIME OF TRANSFER

Cash payment at the time of transfer will generally happen for one of the

following reasons:

— The LlV4 finds a major or single user willing to make an initial cash

payment to the LRA.

— The LRA has a source of dollars with no repayment or with payment terms

more favorable to the project than the terms of the Military Department.

— There is the opportunity for significant up-side potential in the

redevelopment of the facility.

II

What financing

options are available

for an EM?

DEFERRED PAYMENT

— Note. Unless the property is being transferred at no cost or for a cash

payment at the time of transfer, there will be a Note between the Military

Deparbnent and the LRA. A Note is a promise to pay, at a future date, a

specific amount with specific terms. For example, a Note between a

December 1997 7-13
Economic Development Conveyances

Military Department and the LRA could be for a purchase price of

$4 million for the property with no payment due or interest accruing until

the fifth year after the sale, at which time the loan for the purchase price

would begin to amortize over a 20-year term at seven percent interest per

annum. The loan could be structured to require payment on a regular

schedule for the next 10 years, with a balloon payment at the end of the

term for the remaining unpaid balance of the loan.

The terms of the Note are negotiated between the parties based primarily

on the economics of the transaction and the capacity of the buyer to pay

the seller from project cash flow.

+ Deferred payment (in cash or in kind). A deferred payment is a

future payment that is normally defined in a Note between the LRA

and the Military Departmat. The Note will normally be secured by a

mortgage, deed of trust, or other acceptable security arrangement on

the property being financed, we two examples of completed EDCS

described in Section 7.5 demonstrate the range of possible deferredpayment arrangements. At Norton Air Force Base, the payment is

dependent on gross income or sale, with payment terms specified for

specific parcels.

Purchase Price $4,000,000

Payments, Years 1-5 None

Payments, Years 6-15 $377,571 yearly

Balloon payment due Year 15 2,651,905

Payment based upon 20-year anzoti”zation,

7% note $37’7,571

Principal reduction, Years 1-10 $1,346,095

Remaining balance $2,651,905

— Subordinated notes. Holders of subordinated notes are in a junior

position to another lender with regard to the assets being financed.

Subordinated notes are also known as Second Mortgages and Junior

Lienholders. Being in a subordinated position means that in the event that

a foreclosure occurs, the junior Ikn.holder will be paid only the amount

available after the senior Iienholder has been paid. Payment of a note or

mortgage can also be subordinated and the position of the lien can be

moved to encourage additional investment. This is often termed a “soft”

second mortgage and could be used as an effective way to encourage

private investment to make the necessary infrastructure investments

needed at many closing bases. The lvf.ihtary Departments should be

willing to accept a subordinated position if doing so will help

redevelopment.

7-14 December 1997
DoD Base Reuse Implementation Manual

..

PARTICIPATION IN THE CASH FLOW AND PARTICIPATION IN RESIDUALS AND BENEFITS OF

SYNDICATION

— Partnership Model. When the Military Deparbnent receives its payment

from cash flow, the Department functions like a partner with the LIL4 in

the ownership of the property. Like any owner of real estate, the

Department would receive its return from cash flow. No specific payment

or return would be guaranteed to the Deparhnent. This is the highest-risk

involvement for the Department, but it also has the highest potential for

return because the Department shares in the up-side potential of the

development.

— Net Profit Model. When the Military Deparhnent receives payment from

net profits, it receives payment from the residuals of sales or refinancing.

The net profits of sales or refinance are typically called “net proceeds.”

Net proceeds are defined as all proceeds from a sale less repayment of

debt not being assumed by the buyer; normal costs associated with sale;

and pre-agreed-upon expenses or returns to the LRA. In terms of

refinancing, net proceeds represent the cash received from the issuance of

new debt and the payment of debt being refinanced.

— Syndication Model. Depending on the real estate market, current tax

laws, and Federal tax credits, the LFL4 may, at a point after the

conveyance, create a Limited Partnership for the purpose of generating

cash for the development with no financial repayment schedule. A

Limited Partnership is a partnership that consists of a General Partner—

usually the developer, and in this case, the LRA-and Limited Partners

who invest for return (cash flow) and tax benefits. The partnership is

managed by the General Partners, and the Limited Partners are passive

investors.

+ An LRA with a base that contains many old certified historic buildings

may consider the formation of or transfer to a series of individual

Limited Partnerships as a means of generating cash for investment in

the renovation or as repayment to the Military Department.

7.5 CASE STUDIES OF Two SUCCESSFUL EDCS

The following are case studies of how two successful EDCS were completed.

They are provided by way of example, and in no way should they be viewed as II Are there examples

the only appropriate terms for an EDC. Remember, there is no single way to of successful uses

structure an EDC or a cookie-cutter answer that applies in all cases. of an EDC?

7.5.1 Sacramento Army Depot

Sacramento Army Depot (SAAD) was announced for closure in 1991. Initially,

the reuse planning process was leading toward a reuse scenario in which a

majority of the property would be retained by the Department of Defense or

conveyed at no cost for public benefit purposes. These uses would bring no

revenue to the Army and in most cases would not contribute new jobs to the

community. In November 1994 the City of Sacramento, Calif., the recognized

LlU4, submitted to the Army an application for an EDC of 400 acres of SAAD,

following guidelines from the October 1994 final rule. Under the EDC, the City

December 1997 7-I 5
Economic Development Conveyances

will lease 1.8 million square feet of the site to Packard Bell Electronics, which is

projected to employ approximately 3,000 persons ~’ith an annual payroll of $60-

80 million. The secondary impact of Packard Bell’s activities is expected to result

in an additional 2,000-2,500 jobs.

The purchase price of $5 million is based on estimates of the fair market value of

the property, which ranged from $4.2 million to $6.2 million. In addition to the

payment to the Army, the City will contribute $1.4 million for on-site

infrastructure upgrades and $2.4 million for off-site improvements. Based on

terms of a lease-purchase agreement negotiated between the LR4 and Packard

Bell Electronics, $17 million in building improvements will be financed by loans

guaranteed by the City of Sacramento, with Packard Bell responsible for

repaying those loans over the initial years of site occupancy. Packard Bell will

pay a rental rate above the estimated fair market value, because the State of

California passed special legislation allowing SAAD tenants to receive State tax

credits that offset the higher occupancy costs. At Year 10, Packard Bell has an

option to buy the property they are occupying, which has now increased in value

because of improvement loans guaranteed by the LRA. The LRA has based their

$6.8 million second trust deed offer at Year 10 on the revenue expected from

Packard Bell’s purchase options.

Price:

Discount:

Financing:

● Duration:

● Pn”ncipal Payments:

● Secun”ty:

-Subordination:

-Partial Releases:

$5 million

370 per amum financing

10 years

Lump-sum payment of $6.8 million in Year 10

Army holds second-trust deed

Second trust may be paid early if tenant exercises

purchase option-befo;e Year 10

Lhility systems and personal property are being conveyed to the City along with

the real property. C&-tveyan~e o~ the utility systems confers responsibility to the

City for their improvement or transfer to utility companies while minimizing the

Army’s caretaker requirements. The personal property items generally fall into

three categories: furniture, computer equipment, and support equipment. The

furniture consists primarily of office furnishings that make the office areas useful,

and that were more cost-effective for the Army to transfer in place. Computers

were somewhat outdated with only nominal market value, but may be useful for

small companies or training. Support equipment will be used by the LRA to

maintain common areas and thus the Army will not need to maintain a caretaker

workforce.

7.5.2 Norton Air Force Base

Norton Air Force Base, located in San Bernardino, Calif., was announced for

closure in 1988. The Inland Valley Development Authority (IVDA), the

recognized LRA, requested approximately 580 acres at Norton AFB under an

EDC. This property comprises the vast majority of the remaining Federal

7-16 December 1997
DoD Base Reuse Implementation Manual

property at Norton AFB-the airfield and associated property were disposed of

as part of a public airport conveyance on January 19, 1994.

The IVDA provided a redevelopment plan with the potential for the creation of

1,000 jobs in the near term. The first interim final rules for EDCS, issued in April

1994, were used in evaluating the proposal. Based on the Air Force’s evaluation,

a Secretarial determination was issued to support the application. The Disposal

Record of Decision was supplemented to reflect the EDC.

The purchase price essentially reflects the estimated fair market value as

determined by an appraisal. The duration of financing (15 years) was initially

adopted from the terms of the EDC envisioned in the April 1994 interim final rule

and, although no particular duration is mandated by the latest version of the

rule, the period was acceptable to the IVDA and the Air Force. The terms of

payment were also based on the April 1994 EDC rule, which provided for a

607./40% split of the net profits. However, because it was perceived that the

accounting system required to verify proper application of expenses would be

too burdensome, the parties ultimately agreed to a split of gross rents. Two

additional terms were included to provide further assistance to redevelopment

efforts: the Aix Force agreed to subordinate its security interest to commercial

construction loans and established a mechanism for the IVDA to obtain partial

releases of property from the purchase-money lien that would encumber the

property. In addition, as directed by the EDC rules, the standard excess profits

covenant was incorporated into the transaction. Since this covenant has the

potential to stifle property sales, its duration was limited to three years, the

regulatory standard and perceived minimum.

Price:

Discounf:

Financing:

● Duration:

● Pn’ncipal Paymenfs:

● Secun’fy:

-Subordination:

-Partial Releases:

$52 million

0?0 financing

15 years

40% of gross rents for 15 years with a balloon payment of

any remaining debt due at the end of the 15th year (plus

incremental payments of 1007. of the proceeds from the

sales of the property)

Debt to be evidenced by a Promissory Note and secured

by a purchase money Deed of Trust

First Lien to be subordinated to construction loans only

with payoff of Air Force interest with take-out or

permanent financing

Partial reconveyances (free of lien) for payment of an

agreed release price or net sales price, whichever is

greater

These terms were found to be consistent with the intent of the EDC. In general,

they enabled the IVDA to obtain the property at no initial consideration and with

payment obligations tied directly to the success of their efforts. Furthermore,

assumhg a successful redevelopment effort, the terms encourage the IVDA to

“buy out” the Air Force’s interest as soon as economically feasible. Payments to

December 1997 7-17
Economic Development Conveyances

the Air Force of 40 percent of gross rents will likely exceed the debt semice

payments required if the property were financed through more conventional

means, which will make conventional financing attractive when a steady tenant

base has been established. Likewise, agreeing to subordinate only to construction

loans and requiring a buy-out when take-out financing is obtained should result

in incremental, but steady, partial reconveymces. All of which should contribute

to the Air Force’s receiving the purchase price before the 15th year.

Five documents are required to consummate the transaction: a contract

(purchase and sale agreement); promissory note; deed of trust; quitclaim deed;

and long-term lease in furtherance of conveyance. This array is necessary since

most of the property is undergoing environmatal remediation and 5ection 120

of the Comprehensive Environmental Response, Compensation, and Liability Act

precludes immediate deed transfer. The contract provides that the I’VDA must

take full ownership when the Air Force can make the necessary covenants, but

that the IVDA will enter into immediate possession under the long-term lease.

When the Air Force is able to transfer by deed, the quitclaim deed and deed of

trust will also be executed.

The long-term lease in furtherance of conveyance is similar to that used in other

public benefit conveyance transactions. It differs to the extent necessary to make

it consistent with the larger transaction, and includes a consideration (rents)

provision that mirrors the 60%/40% split indicated in the contract and provides

that all rents will be used to retire the debt evidenced by the Promissory Note.

From a payment perspective the transition from lease to deed should appear

seamless. And, the IVDA is not prejudiced by the Air Force’s inability to

immediately transfer the property by deed.

7-18 December 1997