JUST THE THOUGHT OF PREPARING A GOVERNMENT PROPOSAL, much less winning the contract and working for several years within a bureaucratic system to see it built, makes most private-venture builders and developers cringe. Build boring homes for a penny-pinching military agency? No, thanks.
That perception, however, is slowly giving way to a new model in which developers, builders, and trade contractors have a chance to thrive instead of suffocate under Pentagon paperwork and barrack-like design directives. As the Department of Defense (DoD) continues to retool its forces and, in turn, realign and modernize the installations where it trains and lives, the military is also changing how it approaches the private sector as a development, construction, and property management partner.
Consider the Naval Training Center (NTC) in San Diego. One of the first major military installations affected by the DoD's base realignment and closure (BRAC) process that began in 1988, the NTC has been transformed into a master plan of mixed uses, historic districts, and modern civilian and military housing.
While a large portion of the base is being developed by private entities per a reuse plan administered by the city after it purchased the property from the Pentagon following the base's closure in 1993, other sections test the Navy's Public/Private Venture (PPV) program to upgrade, expand, and privatize housing for military families still stationed in the area.
Next year, the Pentagon will submit recommendations for another round of base closures, which are anticipated to at least equal the nearly 100 realignments from four previous BRAC rounds. Meanwhile, the DoD directed its armed forces to remodel or build 170,000 housing units by 2008, only about half of which are currently under contract.
Such policy is especially significant in the West, which contains nearly 35 percent of the Pentagon's 5,900 military installations nationwide. California alone accounts for about 5 percent of the domestic total, with 322 installations, of which 18 have a replacement value of more than $1.5 billion. No other state in the Union has more than six such “large” bases on the BRAC scale. The DoD lists nearly 6,000 installations nationwide, the vast majority of them valued at less than $800 million, “small” by BRAC standards.
The DoD will consider all of them as it prepares a BRAC list for congressional review in mid-2005. Several of those spared will be slated for housing upgrades and expansion to accommodate reassigned personnel.
“The military has provided new methods for fulfilling [military] housing needs and has made [the process] more friendly to private-sector developers and builders,” such as encouraging market-driven design, contracting property management deals, cutting red tape, and streamlining specifications, says Robert Harris, director of military housing for the NAHB Research Center in Upper Marlboro, Md., which has consulted with every branch of the military regarding future housing needs. “There are opportunities for a full range of building services.”
Achieving Closure When the Pentagon received approval to close the 551-acre NTC in San Diego in 1993, Walter Heiberg took notice. As senior vice president for The Corky McMillin Cos. in National City, Calif., he watched as the Navy and the city of San Diego developed a reuse plan to help replace the jobs and tax revenue lost from the base's closure.
Four years later, after the city had negotiated a no-cost conveyance with the Pentagon for the majority of the NTC property, the $100-plus million, reuse plan went out to bid. McMillin was among five groups competing to execute the plan, which specified the number of homes, hotel rooms, commercial space, park sites, and historic buildings—if not their specific design or use—for the former NTC site. “It was our job to implement it, not change it,” says Heiberg of the reuse plan presented in the Request for Proposal.
Today, McMillin's 360-acre Liberty Station project is approaching build-out, including about 80 percent of the housing among three distinct neighborhoods of attached and detached homes. It rivals the progress made at Baldwin Park in Orlando, Fla., also the site of a former NTC installation, among other successful base redevelopments.
Rather than hindering the company's ability to profit from Liberty Station, Heiberg says the reuse plan for the NTC ensured that McMillin could deliver a market-driven product. With the city an active redevelopment partner, title to the housing and commercial sectors, and a 66-year lease on the rest of the parcel, McMillin also secured financing more easily than perhaps it could on a truly private venture of such magnitude and diversity.
And once the Pentagon transferred ownership to the city, the Navy was all but an invisible partner in the development process. “It only becomes involved if we want to make changes outside the scope of the reuse plan, or if we find things they didn't clean up,” says Heiberg.
The Navy was even more hands-off at Tustin Field, a 30-acre, 376-home parcel of the redeveloped Tustin Marine Corps Air Station in Orange County, Calif. “The only contact we had with the Navy was for an encroachment permit on a strip of land it still owned,” says Ken Nishikawa, vice president of planning and development for John Laing Homes, based in Newport Beach, Calif., which bought the land—at about $1 million per acre—from the city of Tustin's redevelopment agency after it gained ownership from the DoD and wanted to generate some cash flow. “It may be an anomaly among base closures,” he notes. The rest of the Tustin base is being sold off directly by the Navy, in some cases via online auctions.
As with the Liberty Station project, John Laing Homes had to adhere to the parcel's reuse plan outlined in the RFP process, which Nishikawa says helped the company pencil in revenues of $150 million as the project builds out by mid-2006. “We knew going in what we were dealing with,” he says, including a provision for affordable housing that was factored into the land price.
Despite successes and streamlined processes, base redevelopments aren't typically cash cows. McMillin's margins have shrunk as the developer uncovers additional redevelopment expenses (some of which will be reimbursed by the Navy or city) and fights lawsuits from a variety of special interests. “The economics work, but the focus is on providing a public benefit,” Heiberg says.
However, Liberty Station has helped the company venture beyond its suburban detached housing roots into commercial/retail and infill units, a growing market niche in land-strapped California.
Despite success, Heiberg says McMillin would “look twice as hard and twice as long” at other base redevelopment opportunities from the next BRAC round and would boost its budget to account for hidden costs and legal challenges. He also says that if the same project came up for bid today, only a quarter of the qualified development pool would step up to propose. “It's not the gold mine everyone thinks it is.”
Venturing Toward Privatization While BRAC redevelopment projects are decidedly best suited to large development entities, programs such as the Pentagon's Military Housing Privatization Initiative (MHPI) and the Navy's PPV efforts have opened the door to smaller developers, builders, trade contractors, and suppliers to revitalize, upgrade, or expand military housing construction and management.
For instance, while Liberty Station remade the NTC, a nearby project also redeveloped a part of the former base as a mixed-use community for families that remain part of San Diego's military contingency.
Half of the first phase of The Village at NTC, finished last year, is a 50-acre, 500-home neighborhood developed with and for the Navy by San Diego Family Housing, a team led by Clark Realty of San Diego.
By the end of the contract, the team will have designed and built 1,800 new homes, rehabbed another 1,000, and will manage more than 6,000 homes on 24 properties on behalf of its military partner. “It's so much more like a private development than a military or public job,” says Joe Schafstall, a development executive with Clark Realty. “The Navy has allowed us to operate based on how a private owner would.”
Though also guided by a plan, albeit far less detailed than previous military housing contracts, PPVs enable companies such as Clark to utilize its repertoire of real estate services and expertise instead of simply barrack building. The plan—and contract—also guaranteed several years of work for the team, which greased the funding wheels. “We had financing in place for the whole thing on day one instead of showing [a lender] the first phase of leases [to get more money],” says Schafstall.
Despite the opportunity to plug into a PPV on several levels, “The perceived bureaucracy and pursuit costs [in the six-figure range] can be a drawback to a smaller firm,” says the NAHB Research Center's Harris, “but there are opportunities to be part of a team that wins a contract.”
Others warn that the military, despite appearing to open up the process, still sides with firms that have a history of building for the DoD—a fact that no doubt helped Clark Realty win The Village. “They're pretty much going for companies they've done business with in the past, at least the principal developer,” says Bill Renner, the NAHB's director of single-family finance.
At the very least, such opportunities appear to be on the upswing as the current and next BRAC rounds combine with MHPI directives. “The military is looking for private-sector housing,” says Harris. “That alone no longer excludes a lot of interested parties.”
Battle Plan DON OWEN, DIRECTOR OF ECONOMIC REDEVELOPMENT for The Village at Glenview, a 1,121-acre redevelopment of the Naval Air Station (NAS) in Glenview, Ill., has the project five years ahead of schedule and about $400 million below budget. Here's why:
Resources For an update on the Pentagon's BRAC process and the MHPI initiative, including the 2005 round, go to www.defenselink.mil/brac.
For tips regarding military base redevelopments, tap into the expertise of the National Association of Installation Developers at www.naid.org.
For information about military housing opportunities, contact the NAHB's single-family finance department at 800-368-5242, x8597, or the NAHB Research Center at 301-249-4000 or www.nahbrc.org.
Learn more about markets featured in this article: San Diego, CA.