The process and the law

Acquiring property at a former military base: The process and the law

Gsottschneider, Richard K

The reduction in United States military forces has resulted in an increased number of base closings nationwide. While many of these bases have excellent facilities suitable for a variety of different uses, most real estate professionals and developers do not understand the complex process or laws which influence the acquisition of property at a closed military installation. Also, the federal government originally had unrealistic expectations of market value when it planned the closure of these bases. Current efforts are underway to soften these expectations and to improve communications.

This article briefly outlines the process used to plan for the redevelopment of closed military facilities. It also discusses the key players involved in the reuse of a base, the relevant laws and the opportunities former military bases represent to real estate professionals and their clients.

BACKGROUND

Since 1988 over 200 military bases across the United States have been designated for closure by the federal government. Also, realignment, which may involve closing a portion of a base, has been recommended for an additional 152 military facilities. Not since the period from 1964 to 1977, when almost 100 military bases were closed, has the country experienced such a major retrenchment of federal real estate holdings.

This current round of military base closings was initiated in 1988 with the enactment of Public Law 100-526. The law created the Secretary of Defense’s Commission on Base Realignment and Closure (BRAC) and charged the commission with preparing a list of domestic bases for closure and realignment. In 1988, under BRAC, 86 military bases were recommended for closure and 59 were designated for realignment.

In 1990, Congress enacted Public Law (PL) 101-510 which created an independent five-year Defense Base Closure and Realignment Commission. Under this new law the commission was required to conduct public hearings to review a list of base closures and realignments recommended by the secretary of defense and to review any proposed changes the commission might make in the list. In addition, PL 101-510, which is entitled the Defense Base Closure and Realignment Act of 1990, required the commission to meet in 1991, 1993 and 1995 to consider additional base closure recommendations prepared by the secretary of defense. Currently the commission is working on the 1995 closure list.

In 1991, the commission recommended 34 base closings and 48 realignments. The 1993 commission recommended an additional 130 bases for closure and 45 for realignment. Once military bases have been officially designated for closure, the federal property disposal process is initiated. While the process has been criticized by some as cumbersome and excruciatingly slow, understanding of the requirements of federal laws and regulations is necessary for those interested in acquiring property at closed military facilities.

MAJOR PLAYERS

Several organizations play a major role in any public or private sector effort to acquire property at a former military installation. Historically, the General Services Administration (GSA) has been the federal government’s real estate arm. Over the years, in accordance with the Federal Property and Administrative Services Act of 1949 and the Surplus Property Act of 1944, the GSA has developed procedures and regulations for the disposal of federal property. Under existing GSA regulations, the disposal of surplus federal property follows a specific path. First, surplus federal property is made available to federal agencies including other branches of the military; if a property is not selected by a federal agency, then it is made available for acquisition to state, county and local governments. Property not acquired directly by a governmental organization is offered for sale through a sealed bid or public auction.

Under the Defense Base Closure and Realignment Act of 1988, GSA authority for disposing of property at closed and realigned military installations has been delegated to the secretary of defense. This new law requires that property be disposed at “fair market value”, but the federal/state screening process of surplus property still is followed. All proceeds from the sale or lease of property must be deposited in a special base closure account that can be used for expenses associated with closing military installations across the country. It should be noted that this provision is a significant change from base closure procedures used in the 1960s and 1970s when many closed military bases often were turned over to local and state governments for as little as $1.

A third major group involved in the redevelopment of closed military facilities are local and/or state reuse organizations. Most of these groups are financially supported, in part, by funding from the Office of Economic Adjustment (OEA), an agency of the Department of Defense. With OEA funding and assistance, communities impacted by base closings are involved in preparing plans to reuse the buildings and land at former military installations. Many of these organizations also become involved in marketing base facilities to developers or companies interested in creating new employment opportunities. These organizations also have access to specialized resources and information (such as existing operating/maintenance costs and building specifications) that may be useful for a developer considering property acquisition.

UNDERSTANDING THE PROCESS

Before attempting to acquire property at a former military base, it is necessary to understand the process and legal requirements involved in transferring property from the federal government to a new owner. While the existing process is lengthy and complex, changes are being proposed to make the process more realistic.

Most bases designated for closure or realignment will undergo an extensive reuse planning and evaluation effort. However, often more than one organization is involved in planning for the facilities reuse. For example, Public Law 101-510 requires that the provisions of the 1969 National Environmental Policy Act (NEPA) apply to all property disposed at closed or realigned military bases. As a result of this provision, the military department that oversees the operation of a closed base must prepare an Environmental Impact Statement (EIS). The EIS, which can take from 12 to 24 months to complete, must identify existing conditions at the base and address possible environmental impacts associated with reusing the facility over a 20-year period. The findings of the EIS also provide the basis for a Record of Decision (ROD) which outlines the property’s preferred disposal and reuse.

In addition to the reuse planning undertaken to prepare the EIS, the local reuse organization also is involved in completing a plan to redevelop the closed military facility. This effort usually takes six to nine months and is financed, in part, by OEA. The planning effort enables the community or region impacted by the base closure to assess the types of economic activity and land uses appropriate for the former military facility. Also, a strategy for implementing the reuse plan usually is identified. In many instances the reuse plan provides a basis for enacting zoning and other land use regulations necessary to manage the site’s redevelopment.

It is very important that the local reuse plan be prepared concurrently with the EIS, or even before the EIS. This will ensure that local reuse plans for the property are evaluated in the EIS. In one of the first bases closed under BRAC in 1988, an environmental group contended that the final EIS did not adequately address possible air quality impacts associated with the reuse plan adopted by the redevelopment organization. Subsequently, a lawsuit was filed challenging the adequacy of the EIS. Although the lawsuit, which is still under litigation, has not halted redevelopment efforts, some observers say the lawsuit has created a sense of uncertainty which has delayed potential tenants from acquiring property at the former base.

As noted earlier, any property determined to be surplus to the needs of the Department of Defense (DoD) will undergo a screening process prior to its actual disposal. It is first screened by other DoD agencies and federal departments to determine whether there is a demonstrated need to keep the property under federal control. At the same time, under the terms of the McKinney Act, the property is made available to organizations which provide housing for the homeless. At those bases where a substantial number of housing or dormitory type rooms exist, efforts should be made early on to work with local and regional organizations that provide shelter for the homeless. This will likely avoid confrontations later in the redevelopment process that could delay the reuse of the facility.

Any property remaining after federal review is made available to state and local governments. These governmental organizations have several options for obtaining property at a closed military base. A commonly used approach involves the public benefit conveyance of property used for such purposes as aviation, recreation, wildlife conservation, education, public health or historic preservation. While the property can be transferred at little or no cost under this arrangement, there are usually specific deed restrictions regarding the property’s use and future disposition.

Another approach that state and local governments can use to acquire surplus military property is referred to as a negotiated sale. While property under this approach has to be purchased at fair market value, based on the findings of a professional appraisal, the property can be used or resold without deed restrictions for a variety of industrial, commercial and residential uses.

Any remaining property is made available to public and private organizations through either a public auction or sealed bid sale. It is important to recognize that while federal government operations do not have to comply with municipal regulations, any property disposed of in this manner is subject to local land use controls such as zoning. Consequently, the future use of the land acquired by public auction or sealed bid sale will most likely be regulated by the local government.

The actual disposition of property at a closed military base may not occur for a significant period of time after the official closure of a facility. In fact, to date very few properties have actually been formally transferred because of either financing, market or environmental issues. In particular, the environmental restoration requirements have made the actual disposition of property more complicated. A recent precedent has been set at Pease AFB in New Hampshire where 1,700 acres of land adjacent to a superfund site were transferred from the federal government to the state designated development authority via a 55-year lease. A unique indemnification law, whereby the federal government formally accepted responsibility for the site, was a key ingredient in this conveyance. However, the federal government has been unwilling to provide this same level of indemnification of other bases.

During the interim period between closure and disposal, the military department in charge of the base will retain a caretaker organization to provide security, fire protection and overall maintenance of buildings and grounds. Recently, various local regional reuse groups have been hired as caretakers.

RELEVANT LAWS

There are a number of federal laws that impact the redevelopment of former military installations. While some of these laws apply specifically to the federal property disposition process, others are part of an increasing number of environmentally related statues that impact many large public and private development projects.

As noted earlier, the Defense Base Closure and Realignment Act of 1990 requires compliance with the provisions of the National Environmental Policy Act (NEPA). Since the closure or realignment of a military base is considered a significant action, an EIS must be prepared. While the EIS process requires a significant amount of time and can delay the transfer of land from the federal government, the EIS document usually provides real estate professionals and developers with useful information about a base. For example, an EIS can contain information about the location of possible hazardous waste sites and sensitive environmental areas, regional traffic trends and data about important social/economic factors.

Although the authority for the disposal of property at closed and realigned military bases has been delegated to the Secretary of Defense, the DoD must comply with all regulations developed by GSA under the Federal Property and Administrative Services Act of 1949. However, many communities in the early rounds of recent base closures have criticized various aspects of the 1949 Act. For example, the act requires approval by a congressional oversight committee for the transfer or sale of any surplus federal property with a value in excess of $100,000.

The Property and Administrative Services Act also regulates the option of a community that acquires surplus property under a negotiated sale to resell property. Many redevelopment organizations feel this requirement severely limits their ability to transfer buildings and vacant property to a subsequent buyer that would create new employment opportunities. A number of reuse organizations have indicated they would like the authority to acquire property at a closed military base and then flip it to a private business. Currently a so-called pass-through sale is permitted only if a local or state governmental agency acquires the property through a negotiated sale and then makes substantial improvements to the property after acquisition. These improvements could involve such actions as the construction of new sewer lines or the demolition of obsolete buildings. Because a significant investment was made to improve the property after it was acquired from the federal government, a portion of the property could be sold to a third party.

Many local redevelopment organizations have attempted to use real estate brokers in marketing specific buildings and sites at closed bases. Federal regulations, however, prohibit the payment of commissions by the federal government for the sale or lease of federal property. These regulations do not preclude the payment of commissions by some other entity. Recently, several local redevelopment organizations have established a fund within their agency to pay commissions to real estate brokers that assist in the sale or lease of federal property at a closed military base in their community. This approach is generally viewed as a “win-win” opportunity by both the local reuse organization and real estate brokers, since marketing efforts are improved while marketing costs are controlled. However, the total proceeds from the sale or lease transaction goes back to the federal government.

DEVELOPMENT OPPORTUNITIES

Despite the number of hurdles that must be overcome, closed military bases offer real estate professionals and their clients a number of interesting development opportunities. For example, prior to the actual disposal of property at a former military facility, existing buildings that are no longer required for a specific military mission can be leased to a private business. The interim leases can even be negotiated and implemented prior to the closure of a base. At Chanute Air Force Base in Rantoul, Illinois, a local window manufacturer leased a building for a new production line in 1992, even though the base was not scheduled to close until September 1993.

Approval of an interim lease is a complex process. The lease has to be reviewed by a number of DoD officials and an environmental assessment may be required. In some instances, where the level of private sector use is extensive or the environmental impacts are severe, an EIS may also be required. The requirement for an EIS, however, could effectively negate any advantage of the interim lease.

To date, the interim lease process has had only limited success. Some interim lease applications have required more than a year to approve, which is generally too long a time period for most businesses. This lengthy approval process is primarily due to delays in legal and environmental reviews. However, recent legislative efforts have focused on streamlining the interim lease process, with the goal of reducing the maximum time for approval to six months.

Interim leases have a number of factors which limit their appeal to the private sector. First, under the Federal Property and Administrative Services Act, DoD can write these leases for a maximum period of only one year. In addition, interim leases usually have a 30-day cancellation policy. Finally, federal regulations prohibit the tenant from directly purchasing the leased facility in the future. The combination of these factors makes it difficult for most private companies to justify investing in a building they may not be able to occupy in the longer term.

Any business wishing to acquire property at a closed military base must remember two important points. First, a private business cannot negotiate directly with the federal government to acquire property. Second, while a private business can acquire federal property directly through the bid or auction process, it runs the risk of losing the property to a competing bidder.

However, other options are available. For example, since a community reuse organization is considered a governmental entity, it can acquire a specific parcel at a closed base through a negotiated sale or a protection and maintenance agreement. This organization can then lease the property to a private business with the option to buy. Since federal regulations prohibit pass through sales to limit the possibility of the local organization making an excess profit, it is likely the lease will have to remain in effect for three to five years. At the end of this period, the reuse organization can sell the property without paying a penalty to the federal government.

CURRENT LEGISLATIVE INITIATIVES

In August 1993, Congress passed the Pryor Amendment which is intended to streamline the transfer of title of former military bases. Currently, Department of Defense (DoD) officials are seeking to write regulations to implement the new law. While these regulations have not been finalized, the following issues are being addressed.

* The potential for a less than fair market value conveyance of property and in certain cases, an outright gift of the property to a state or local development authority.

* The potential for property transfer in phases, to reflect market reality and the ability of a community to absorb the operating costs of the facility.

* The potential for a joint venture, recognizing that the absorption and redevelopment of many former military installations may take 20-40 years.

The redevelopment of closed military installations represents an unique opportunity for individuals involved in real estate development. To capitalize on this opportunity, developers and knowledgeable real estate professionals must work quickly to clearly define what they can offer affected communities. It is important to understand this is not a typical real estate project. Creativity and perseverance will be required to redevelop facilities at a closed military base. A successful developer must fully understand both the laws and the established procedures used in redeveloping close military facilities.

Richard K. Gsottschneider, CRE, is president of RKG Associates, Inc. During the past 15 years he has been involved, both nationally and internationally, in projects including market research and real estate development feasibility, project marketing, project financing and real estate appraisal.

Jimmy E. Hicks is vice president for planning and a principal in RKG Associates, Inc. Along with serving as an expert witness in court cases involving land use planning and development, his other areas of expertise are in municipal planning, fiscal impact analysis, economic impact analysis, preparation of environmental impact statements, capital improvements budgeting and the preparation of land use ordinances and regulations.

Jeffrey S. Donohoe is senior project manager, RKG Associates, Inc. He has performed extensive reuse planning at four former air force bases including facilities analysis, land use planning, financial feasibility, project budgeting and market feasibility. He also has conducted appraisal assignments primarily in commercial and industrial sectors in addition to income properties and major residential subdivisions.

Copyright American Society of Real Estate Counselors Apr 1994

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